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, 2010




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 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 12, 2010Common
      Stock, US$.001 par value per share
            
            30,256,000
      shares





TABLE
OF CONTENTS





PagePart
      I: Financial Information
            
            
            1Item
      1 -Financial Statements (unaudited)
            
            
            1Consolidated
      Balance Sheets
            
            
            1Consolidated
      Statements of Income and Comprehensive Income
            
            
            2Consolidated
      Statements of Cash Flows
            
            
            3Notes
      to Consolidated Financial Statements
            
            
            4Item
      2 - Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
            
            
            14Item
      3 - Quantitative and Qualitative Disclosures about Market
    Risk
            
            
            23Item
      4 - Controls and Procedures
            
            
            23Part
      II. Other Information
            
            
            25Item
      1 - Legal Proceedings
            
            
            25Item
      1A - Risk Factors
            
            
            25Item
      2 - Unregistered Sales of Equity Securities and Use of
      Proceeds
            
            
            25Item
      3 - Defaults Upon Senior Securities
            
            
            25Item
      4 – Removed and Reserved
            
            
            25Item
      5 – Other Information
            
            
            25Item
      6 - Exhibits
            
            
            25Signatures
            
            
            27







PART
I – FINANCIAL INFORMATION




Item
      1.
            Financial
      Statements





Orsus
Xelent Technologies, Inc. and Subsidiaries


Consolidated
Balance Sheets (Unaudited)


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





September
      30,
              2010
            
            
            December 31,
              2009ASSETSCurrent
      assetsCash
      and cash equivalents
            
            $
            4
            
            
            $
            374Restricted
      cash
            
            
            4
            
            
            
            4Notes
      Receivable
            
            
            -
            
            
            
            2,779Accounts
      receivable
            
            
            98,947
            
            
            
            81,130Trade
      deposit paid, net
            
            
            8,416
            
            
            
            5,875Other
      current assets, net
            
            
            28
            
            
            
            29Pledged
      deposit
            
            
            1,317
            
            
            
            1,290Total
      current assets
            
            
            108,716
            
            
            
            91,481Property,
      plant and equipment, net
            
            
            160
            
            
            
            178Deferred
      tax asset
            
            
            4,431
            
            
            
            4,095$
            113,307
            
            
            $
            95,754LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesShort-term
      bank loans
            
            $
            9,585
            
            
            $
            9,390Short-term
      loan payable
            
            
            314
            
            
            
            307Accounts
      payable
            
            
            18,294
            
            
            
            7,652Accrued
      expenses and other accrued liabilities
            
            
            4,630
            
            
            
            3,413Due-to
      Shareholders
            
            
            697
            
            
            
            611Income
      taxes payable
            
            
            5,991
            
            
            
            5,870Other
      taxes payable
            
            
            25,018
            
            
            
            21,423Liabilities
      for possible settlement to accounts payable
            
            
            4,268
            
            
            
            2,928Non-Current
      liabilitiesTrade
      deposit received
            
            
            1,902
            
            
            
            1,884Total
      liabilities
            
            
            70,699
            
            
            
            53,478Stockholders’
      equityPreferred
      stock, par value US$0.001; authorized 100,000,000 shares; none issuedCommon
      stock, par value US$0.001;authorized
      100,000,000 shares;Issued
      and outstanding 30,256,000 shares as of September 30, 2010 and December
      31, 2009
            
            
            30
            
            
            
            30Additional
      paid-in capital
            
            
            3,209
            
            
            
            3,209Unappropriated
      retained earnings
            
            
            1,042
            
            
            
            1,042Appropriated
      retained earnings
            
            
            31,778
            
            
            
            32,363Accumulated
      other comprehensive income
            
            
            6,549
            
            
            
            5,632Total
      stockholders’ equity
            
            
            42,608
            
            
            
            42,276$
            113,307
            
            
            $
            95,754


See notes
to consolidated financial statements.
  1


Orsus
Xelent Technologies, Inc. and Subsidiaries


Consolidated
Statements of Income and Comprehensive Income


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


(Unaudited)





Three months ended
              September
      30,
            
            
            Nine
      months ended
              September
      30,2010
            
            
            2009
            
            
            2010
            
            
            2009Net
      sales
            
            $
            5,907
            
            
            $
            19,125
            
            
            $
            19,971
            
            
            
            62,181Cost
      of sales
            
            
            5,474
            
            
            
            17,053
            
            
            
            18,466
            
            
            
            53,928Gross
      profit
            
            
            433
            
            
            
            2,072
            
            
            
            1,505
            
            
            
            8,253Operating
      expenses:Selling
      expenses
            
            
            21
            
            
            
            40
            
            
            
            83
            
            
            
            213General
      and administrative expenses
            
            
            70
            
            
            
            164
            
            
            
            212
            
            
            
            533Research
      and development expenses
            
            
            4
            
            
            
            4
            
            
            
            13
            
            
            
            32Depreciation
      and amortization
            
            
            6
            
            
            
            12
            
            
            
            21
            
            
            
            54Allowance
      for doubtful accounts
            
            
            -
            
            
            -
            
            
            
            (251
            )
            
            
            -Total
      Operating Expenses
            
            
            101
            
            
            
            220
            
            
            
            78
            
            
            
            832Income
      from operations
            
            
            332
            
            
            
            1,852
            
            
            
            1,427
            
            
            
            7,421Other
      income/(expenses)Interest
      expense
            
            
            (215
            )
            
            
            (270
            )
            
            
            (1,005
            )
            
            
            (758
            )Other
      (expenses)/income, net
            
            
            -
            
            
            
            -
            
            
            
            (1,252
            )
            
            
            17(Loss)/income
      before income tax expense
            
            
            117
            
            
            
            1,582
            
            
            
            (830
            )
            
            
            6,680Income
      tax (expenses)/benefitCurrent
      tax expense
            
            
            -
            
            
            
            212
            
            
            
            -
            
            
            
            868Deferred
      taxes benefit
            
            
            -
            
            
            -
            
            
            
            245
            
            
            
            0Net
      (loss)/income
            
            
            117
            
            
            
            1,370
            
            
            
            (585
            )
            
            
            5,812Other
      comprehensive incomeForeign
      currency translation adjustment
            
            
            726
            
            
            
            59
            
            
            
            917
            
            
            
            302Comprehensive
      (loss)/income
            
            $
            843
            
            
            
            1,429
            
            
            $
            332
            
            
            
            6,114(Loss)/earnings
      per share:Basic
      and diluted
            
            $
            0.03
            
            
            $
            0.05
            
            
            $
            0.01
            
            
            $
            0.2Weighted
      average number of common shares outstanding – basic and
      diluted
            
            
            30,256,000
            
            
            
            29,756,000
            
            
            
            30,256,000
            
            
            
            29,756,000





See notes
to consolidated financial statements.


2


Orsus
Xelent Technologies, Inc. and Subsidiaries


Consolidated
Statements of Cash Flows


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


(Unaudited)





Nine
      months ended September 30,2010
            
            
            2009Cash
      flows from operating activitiesNet
      (loss)/income
            
            $
            (585
            )
            
            $
            5,812Adjustments
      to reconcile net (loss)/income to net cash used by operating
      activities:Deferred
      tax
            
            
            (246
            )
            
            
            -Depreciation
      and amortization
            
            
            21
            
            
            
            54Loss
      due to liability for possible settlement to accounts
    payable
            
            
            1,257
            
            
            
            -Changes
      in assets and liabilities:Accounts
      receivable
            
            
            (15,853
            )
            
            
            (11,114
            )Notes
      receivable
            
            
            2,787
            
            
            
            -Trade
      deposits paid, net
            
            
            (2,377
            )
            
            
            (13,363
            )Other
      current assets, net
            
            
            -
            
            
            
            41Accounts
      payable
            
            
            10,315
            
            
            
            7,769Accrued
      expenses, other accrued liabilities and other tax payable
            
            
            4,312
            
            
            
            9,443Income
      tax payable
            
            -
            
            
            
            832Net
      cash flows used by operating activities
            
            
            (369
            )
            
            
            (526
            )Cash
      flows from financing activitiesProceeds
      from banks and other loans
            
            
            -
            
            
            
            2,821Repayment
      of bank loans
            
            
            -
            
            
            
            (2,689
            )Repayment
      of mortgage loans
            
            -
            
            
            
            (12
            )Net
      cash flows used by financing activities
            
            
            -
            
            
            
            230Net
      change in cash and cash equivalents
            
            
            (369
            )
            
            
            (296
            )Effect
      of foreign exchange rate changes on cash and cash
    equivalent
            
            
            (1
            )
            
            
            226Cash
      and cash equivalents - beginning of period
            
            
            374
            
            
            
            102Cash
      and cash equivalents - end of period
            
            $
            4
            
            
            $
            32Supplemental
      disclosure for cash flow informationInterest
      paid
            
            $
            -
            
            
            $
            43Income
      taxes paid
            
            $
            -
            
            
            $
            41





See notes
to consolidated financial statements.


3


ORSUS
XELENT TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





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





1.           ORGANIZATION





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





Prior to
reorganization with United First International Limited (“UFI”) on March 31,
2005, a company incorporated in the Hong Kong Special Administrative Region
(“HK”) of the People’s Republic of China (the “PRC” or “China”), 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”). OXHBVI is a wholly-owned subsidiary of
ORS; OXHBVI’s principal activity is investment holding. On July 22, 2005, Orsus
Xelent Trading (HK) Company Limited (“OXTHK”) was incorporated by OXHBVI in HK;
OXTHK is a company engaged in trading cellular phones and accessories, and is
wholly-owned by OXHBVI.





2. DESCRIPTION
OF BUSINESS





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





3.           SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





Basis
of presentation





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





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





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





Principle
of consolidation





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




4


Use
of Estimates





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





Accounts
Receivable





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




Recently
issued accounting pronouncements




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




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





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





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





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





4.           RESTRICTED
CASH





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





5




5.           ACCOUNTS
RECEIVABLE





The
Company’s business relies on a few distributors. Accounts receivable as of
September 30, 2010 and December 31, 2009, respectively, mainly consisted of a
balance of US$91,727 and US$75,616 due from Beijing Xingwang Shidai Commerce
Co., Ltd. (“Xingwang”), the major distributor of the Company. The reason for the
large accounts receivable balance as of September 30, 2010 and December 31, 2009
is due to longer turnover days than before.  Longer turnover days
occur due to the following: (i) industry profit has decreased, middle-level
distributors have been removed and the national level distributor, Xingwang, had
to sell the products to direct customers—the retailers—and (ii) the turn-over
rate of the retailers is always slower than middle level
distributors.





The long
aged account receivable to Xingwang is guaranteed by a
third-party guarantee company licensed by the PRC government, Zhong Hui
Guarantee Corporation (“Zhonghui”). On December 25, 2008, Xingwang entered into
an irrevocable Credit Guarantee Contract (the “Guarantee Contract”) with
Zhonghui and BOXT under which Zhonghui agreed to guarantee up to Renminbi
(“RMB”) 300 million (equivalent to US$43,885), for the principal debt, fine,
damages arising out of breach of contract, and costs incurred for realizing
those legal rights including but not limited to legal proceeding fees, attorney
fees and travel expenses arising out of the distributor agreement entered into
by BOXT and Xingwang. The Guarantee Contract was effective as of December 25,
2008 and provides a guarantee for all of the accounts receivable that are or may
become outstanding from Xingwang to BOXT from January 1, 2008 through December
31, 2008. On December 31, 2009, the guarantee contract expired. A new guarantee
contract was signed between BOXT, Xingwang and Zhonghui on January 1, 2010 and
provides a guarantee for accounts receivable with a maximum amount of US$43,885
that are or may become outstanding from Xingwang to BOXT from January 1, 2008
through December 31, 2010. Xingwang has issued a payment plan to the Company and
the payment will be acted from the payment date.




6.           TRADE
DEPOSITS PAID, NET




US$8,416 and
US$5,875 of trade deposits paid to suppliers on September 30, 2010 and December
31, 2009, is payment in advance to suppliers, which consisted of the
following:





September 30,
              2010
            
            
            December 31,
              2009(US$’000)
            
            
            (US$’000)(Unaudited)
            
            
            (Audited)Trade
      deposits paid
            
            $
            8,545
            
            
            $
            6,004Less:
      allowance for doubtful accounts
            
            
            (129
            )
            
            
            (129
            )Total
            
            $
            8,416
            
            
            $
            5,875





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




7.           OTHER
CURRENT ASSETS, NET





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





The
allowance for doubtful accounts of US$1,794 and US$1,787 as of September 30,
2010 and December 31, 2009 was due to the provision for receivables from Leimeng
Times and other accounts with aging over three years. The management believes
these accounts are uncollectable, and as such, the allowance for doubtful
account is provided.





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





6




8.           PLEDGED
DEPOSIT





US$1,295
of pledged deposits as of September 30, 2010 and US$1,317 of pledged deposits as
of December 31, 2009 were paid to Zhonghui, a guarantee company, in September
2008 as a pledge for US$6,874 (RMB47,000) of bank loans. Refer to Note 10,
“Short-Term Bank Loans” for more discussion of the bank loans.




9.           PROPERTY,
PLANT AND EQUIPMENT





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





September
      30, 2010
            
            
            December
      31, 2009US$’000
            
            
            US$’000(Unaudited)
            
            
            (Audited)Moulds
            
            
            4
            
            
            
            4Leasehold
      improvements
            
            
            131
            
            
            
            131Office
      equipment
            
            
            323
            
            
            
            323Motor
      vehicles
            
            
            303
            
            
            
            303761
            
            
            
            761Less:
      Accumulated depreciation
            
            
            (601
            )
            
            
            (583
            )160
            
            
            
            178





The
depreciation expenses were US$6 and US$12 for the three months ended September
30, 2010 and 2009, respectively. The depreciation expenses were US$21 and US$54
for the nine months ended September 30, 2010 and 2009,
respectively.




10.         SHORT-TERM
BANK LOANS





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





At
      September 30,
              2010
            
            Amount
              (RMB’000)
            
            Annual
              interest
      rate
            
            Term
            
            Guarantee
      provided by(Unaudited)Loan
      from Beijing Rural Commercial Bank
            
            47,000
              (US$7,017)
            
            10.08%
            
            From
      September 28, 2008 to September 27, 2009
            
            Director
      Liu Yu; A guarantee company; pledged deposit of
US$1,290Loan
      from Huaxia Bank
            
            17,200
              (US$2,568)
            
            6.3720%
            
            From
      February 20,2009 to February 20, 2010
            
            Director
      Liu Yu; Two third party companies; Distributor
Xingwang.Total
            
            64,200
              (US$9,585)





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





Interest
expense incurred for the three months ended September 30, 2010 and 2009 were
US$215 and US$270, respectively. Interest expense incurred for the nine months
ended September 30, 2010 and 2009 were US$790 and US$488,
respectively.




7




US$7,017
of a loan from Beijing Rural Commercial Bank was originally due on September 27,
2009. The Company is currently negotiating an extension of the term with the
bank. The penalty interest rate on the principal and interest in default is 130%
of the contracted interest rate and is chargeable from the due date of the
principal. The Company accrued US$680 in penalty interest for the
nine months ended September 30, 2010, and US$1,441 in penalty interest from
September 28, 2009 to September 30, 2010.





US$2,568
of a loan from Huaxia Bank was due on February 20, 2010.  The Company
is currently negotiating an extension of the term with the bank. The penalty
interest rate on the principal and interest in default is 150% of the contracted
interest rate and is chargeable from the due date of the principal. The Company
accrued US$605 in penalty interest for the nine months ended September 30,
2010.




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




The
US$314 and US$307 short-term loan from a non-financial institution as of
September 30, 2010 and December 31, 2009, respectively, was provided by a third
party company, Zhonghui. It was unsecured, interest-free and repayable on
September 27, 2009. The Company is currently negotiating an extension of the
term with Zhonghui. No default penalty interest is chargeable according to the
loan agreement.




12.         AMOUNT
DUE TO SHAREHOLDERS AND RELATED PARTY TRANSACTIONS





(a)
            Name
      and relationship of shareholders





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





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




September
      30, 2010
            
            
            December
      31, 2009US$’000
            
            
            US$’000(Unaudited)
            
            
            (Audited)Due
      to shareholdersMr.
      Liu Yu
            
            
            487
            
            
            
            402Mr.
      Wang Xin
            
            
            210
            
            
            
            209697
            
            
            
            611Bank
      loans guaranteed by Mr. Liu Yu
            
            
            9,585
            
            
            
            9,390





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




13.         COMMITMENTS
AND CONTINGENCIES





(a)
              Operating
      lease commitments





As of
September 30, 2010 and December 31, 2009, the Company had non-cancelable
operating leases for its office premises, under which the expected rental
payment due within the next year was US$13 and US$53, respectively.





(b)
              Contingencies





Tax
penalty





In
accordance with the PRC’s tax regulations, BOXT’s sales are subject to a 17%
value added tax (“VAT”) upon the sales made to customers. BOXT follows the
practice of reporting its revenue with VAT invoices issued to PRC tax
authorities for VAT purposes.  For the nine months ended September 30,
2010 and 2009, there were sales amounting to US$18,039 and US$56,800,
respectively, for which VAT invoices have not yet been issued.




8


The sales
revenue of the nine months ended September 30, 2010 and 2009 was US$19,971 and
US$62,181, respectively, representing US$3,395 and US$10,571 output VAT,
respectively. Meanwhile, the input VAT for which the invoice had been received
was US$13,168 and US$11,321for the nine months ended September 30, 2010 and
2009, respectively. Therefore, the net VAT payable is US$8,650 and US$50,860 for
the nine months ended September 30, 2010 and 2009 respectively.





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





As there
is little tax payment made during the years, the accumulated VAT payable is
US$25,018 and US$21,423 as of September 30, 2010 and December 31, 2009,
respectively.





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





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





Litigation




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




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




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





Warranty





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





Overdue Bank
Loan





The
Company currently has an overdue bank loan of US$7,017 from Beijing Rural
Commercial Bank and US$2,568 from Huaxia Bank that were loaned on September 30,
2010. The Company is negotiating an extension of the terms of the
loans with the banks.




14.        UNAPPROPRIATED
RETAINED EARNINGS





The
Company’s subsidiary, BOXT, is 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, 2010, BOXT made
appropriations to this statutory reserve of US$0 due to little net income
incurred for the period. The accumulated balance of the dedicated reserve at
BOXT as of September 30, 2010 and December 31, 2009 were US$1,042 and US$1,042,
respectively.





9




15.         STOCK
OPTIONS





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





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





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





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





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





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





16.        LIABILITIES
FOR POSSIBLE SETTLEMENT OF ACCOUNTS PAYABLE





Liabilities
for possible settlement of accounts payable of US$4,182 arose from the provision
of a penalty for unpaid accounts payable to suppliers on September 30,
2010. In the purchase contracts signed between suppliers and the Company
since 2006, an agreed term between BOXT and the suppliers acknowledges that any
outstanding payment which exceeds the agreed payment schedule will be imposed an
additional 0.3% per day delayed payment penalty based on the principle amount of
contract liability. However, some of such purchase contracts were signed before
2006, and according to relevant PRC civil laws and regulations, if the
creditors did not claim for the right in writing to the Company within two years
since the date on which the liability was due, the periods of prescription will
expire after two years from the date on which the liability was due. We note
that in the meantime, no legal letters related to this liability (0.3% penalty
arising from the outstanding payment) were issued from our suppliers in the past
4 years. However, from the point of prudence principle, we accrued this
liability based on the terms of the contract. As of September 30, 2010, the
Company has accrued a possible penalty for the purchase contracts signed
after September, 2008 based on such penalty term in the amount of US$4,268,000.
Such possible liability was accrued during the nine months ended September 30,
2010.




17.        PENSION
COSTS




As
stipulated by the PRC regulations, the Company maintains a defined contribution
retirement plan for all of its employees who are residents of the
PRC.  All retired PRC employees of the Company are entitled to an
annual pension equivalent to their basic annual salary upon
retirement.  The Company contributed to a state sponsored retirement
plan approximately 20% of the base 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$1 and US$0 for the three months ended September 30,
2010 and 2009 respectively. The pension expenses were US$14 and US$3 for the
nine months ended September 30, 2010 and 2009 respectively.





10




18.         INCOME
TAXES




The
Company and its subsidiaries file separate income tax returns.





The
United States of America





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





British
Virgin Islands





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





Hong
Kong





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





PRC





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





The
Company’s effective income tax rate was 25%% and 13.14% for the nine-month
periods ended September 30, 2010 and 2009, respectively. The difference between
effective tax rate and statutory tax rate primarily represented the tax effects
on the non-taxable income and non-deductible expenses.





The
Company had deferred tax assets of approximately $4,431 and $4,095 as of
September 30, 2010 and December 31, 2009, respectively, which arose from the
allowance for doubtful accounts and the provision for liability for possible
settlement to accounts payable. The Company had no other temporary differences
as of September 30, 2010 and December 31, 2009.





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





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




11




19.         EARNINGS
PER SHARE





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




Nine
      months ended September 30,2010
            
            
            2009(Unaudited)
            
            
            (Unaudited)Numerator
      used in basic net income per share:Net
      (loss)/income
            
            
            (332
            )
            
            
            6,114Shares
      (denominator):Weighted
      average common shares outstanding
            
            
            29,756,000
            
            
            
            29,756,000Plus:
      weighted average incremental shares from assumed exercise of
      warrants
            
            
            -
            
            
            
            -Weighted
      average common shares outstanding used in computing diluted net
      income per common share
            
            
            30,256,000
            
            
            
            29,756,000Earnings
      per ordinary share-basic and diluted
            
            $
            0.01
            
            
            $
            0.2




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




20.           CONCENTRATIONS
AND CREDIT RISKS





As of
September 30, 2010, the Company had a credit risk exposure of uninsured cash in
banks of approximately US $4.  To limit exposure to credit risk relating to
deposits, the Company primarily places cash deposits only with large financial
institutions in the PRC with acceptable credit ratings.





During
the nine months ended September 30, 2010, the Company was engaged principally in
the design and trading of cellular phones to two primary distributors in the
PRC.  The Company’s policy is that the sole agent arrangement gives
the dealers more incentive to promote the Company’s products and reduce the
Company’s exposure to the distribution market.





The
Company buys certain major materials from one major supplier (over 67% of
materials purchased). In addition, the Company subcontracts material purchasing
and assembly works of cellular phones primarily to two subcontracting factories.
The diversification of suppliers will reduce the risk of increasing production
cost.




(a)
            During
      the nine months ended September 30, 2010 and 2009, the Company’s operating
      revenue was mainly derived from two distributors. For nine months ended
      September 30, 2010 and 2009, 93.31% and 90.44%, respectively, of total
      revenue was derived from our largest distributor Xingwang. There were no
      trade deposits received from Xingwang as of September 30, 2010 and 2009.
      Accounts receivable from Xingwang were US$91,927 and US$75,616 as of
      September 30, 2010 and December 31, 2009, respectively. As mentioned in
      Note 5, “Accounts Receivable”, in the year 2008, a guarantee company
      provided a guarantee of up to US$43,829 (RMB300 million) for the accounts
      receivable from Xingwang for two years from the date they are due.
       The agreement has been renewed and re-signed as of January 20,
      2010, and the guaranteed period was extended to the year ended December
      31, 2010.




12





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





Three
      months ended September 30
            
            
            Nine months
      ended September 302010
            
            
            2009
            
            
            2010
            
            
            2009%
            
            
            %
            
            
            %
            
            
            %(Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)Supplier
      A
            
            
            80
            %
            
            
            47
            %
            
            
            67
            %
            
            
            50
            %Supplier
      B
            
            
            20
            %
            
            
            44
            %
            
            
            26
            %
            
            
            40
            %Total
            
            
            100
            
            
            
            91
            
            
            
            93
            
            
            
            90





Advances
to the above suppliers were US$8,416 and US$3,815 as of September 30, 2010 and
December 31, 2009, respectively. Accounts payable owed to the above suppliers
were US$2,210 and US$0 as of September 30, 2010 and December 31, 2009,
respectively.




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





30-Sept-10
            
            
            31-Dec-09US$’000
            
            
            US$’000(unaudited)
            
            
            (audited)PRC
            
            
            159
            
            
            
            176Hong
      Kong
            
            
            1
            
            
            
            2Total
      long-lived assets
            
            
            160
            
            
            
            178




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




21.        SUBSEQUENT
EVENTS




Management
has considered all events occurring through November 12, 2010, the date the
financial statements have been issued, and has determined that there are no such
events that are material to the financial statements, or all such material
events have been fully disclosed.




13


Item
      2.
            Management
      Discussion and Analysis of Financial Conditions and Results of
      Operations





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





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





OVERVIEW





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





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





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





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





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





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





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





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.




14




Xelent has provided its handsets to
many different types of consumers in the market for GSM mobile devices. At
present, the GSM mobile devices constitute a significant percentage of the sales
and profit of the Company. In addition, Xelent has emphasized the development of
specialized application mobile terminals in accordance with market changes and
popular features. The Company has established itself in the specialized
application field and made significant marketing efforts since entering the
field in September 2006. Based on its evaluation of the market and the
engagement proposals received from its major customers, the Company began to
produce GSM model X180 in large volumes starting in April 2007, thereby taking
advantage of the opportunity to establish a presence in the specialized
application mobile terminal market.





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





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





Business
Review





The
Company sold 67,500 cell phone units during the third quarter of 2010. For
the three months ended September 30, 2010, the Company generated revenue of
US$5,907,000, representing a decrease of 69.11% as compared to US$19,125,000 for
the same period in 2009.  During August 2010, total handset sales were
17.4 million units sold in China mainland market, an month-over-month increase
of 4.7% and a year-over-year increase of 15.6%.  Sales of 3G units
rose to 4 million units, an increase 17.8% compared to the previous
month.  Moreover, sales of (CDMA) EVDO models increased by 21.6%
and grew to 900,000 units.  Due to seasonal variations, the 2G market
had slower growth compared to the previous month.  The sales in the
GSM market grew to 10.9 million, a month-over-month increase of 3.7%, while the
CDMA1X market sales declined by 2.5 million, a 8.1% month-over-month
decrease.





The
Company believes the decrease in sales for the third quarter was due to the fact
that our major customers didn’t get several large orders from their customers.
The Company continued to supply feature-rich, economically-priced, mid-level and
low-end products—a different strategy from that of foreign brands, which tend to
have higher costs and higher output prices.





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





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





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





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





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.




15




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





CRITICAL
ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES





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





RESULTS
OF OPERATIONS





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





Nine
      months ended
            
            
            Nine
      months ended30-Sep-10
            
            
            30-Sep-09
            
            
            ComparisonUS$’000
            
            
            %
      of Revenue
            
            
            US$’000
            
            
            %
      of Revenue
            
            
            US$’000
            
            
            %Net
      sales
            
            
            19,971
            
            
            
            100.00
            %
            
            
            62,181
            
            
            
            100.00
            %
            
            
            (42,210
            )
            
            
            (67.88
            )%Cost
      of sales
            
            
            18,466
            
            
            
            92.46
            %
            
            
            53,928
            
            
            
            86.73
            %
            
            
            (35,462
            )
            
            
            (65.76
            )%Sales
      expenses
            
            
            83
            
            
            
            0.42
            %
            
            
            213
            
            
            
            0.34
            %
            
            
            (130
            )
            
            
            (61.03
            )%General
      & administrative expenses
            
            
            212
            
            
            
            1.06
            %
            
            
            533
            
            
            
            0.86
            %
            
            
            (321
            )
            
            
            (60.23
            )%Research
      and development expenses
            
            
            13
            
            
            
            0.07
            %
            
            
            32
            
            
            
            0.05
            %
            
            
            (19
            )
            
            
            (59.38
            )%Depreciation
      and amortization
            
            
            21
            
            
            
            0.11
            %
            
            
            54
            
            
            
            0.09
            %
            
            
            (33
            )
            
            
            (61.11
            )%Allowance
      for doubtful accounts
            
            
            251
            
            
            
            1.26
            %
            
            
            0
            
            
            
            0.00
            %
            
            
            251
            
            
            
            N/AInterest
      expenses
            
            
            1,005
            
            
            
            5.03
            %
            
            
            758
            
            
            
            1.22
            %
            
            
            247
            
            
            
            32.59
            %Other
      (expenses)/income, net
            
            
            1,252
            
            
            
            6.27
            %
            
            
            (17
            )
            
            
            (0.03
            )%
            
            
            1,269
            
            
            
            7464.71
            %Income
      before income tax expense
            
            
            (830
            )
            
            
            (4.16
            )%
            
            
            6680
            
            
            
            10.74
            %
            
            
            (7,510
            )
            
            
            112.43
            %Current
      tax expense
            
            
            
            
            
            
            0.00
            %
            
            
            868
            
            
            
            1.40
            %
            
            
            (868
            )
            
            
            (100.00
            )%Deferred
      taxes benefit
            
            
            245
            
            
            
            1.23
            %
            
            
            0
            
            
            
            0.00
            %
            
            
            245
            
            
            
            N/AForeign
      currency translation adjustment
            
            
            917
            
            
            
            4.59
            %
            
            
            302
            
            
            
            0.49
            %
            
            
            615
            
            
            
            203.64
            %Net
      (loss)/income
            
            
            332
            
            
            
            1.66
            %
            
            
            6,114
            
            
            
            9.83
            %
            
            
            (5,782
            )
            
            
            94.57
            %




16




Three
      months ended
            
            
            Three
      months ended30-Sep-10
            
            
            30-Sep-09
            
            
            ComparisonUS$’000
            
            
            %
      of Revenue
            
            
            US$’000
            
            
            %
      of Revenue
            
            
            US$’000
            
            
            %Net
      sales
            
            
            5,907
            
            
            
            100.00
            %
            
            
            19,125
            
            
            
            100.00
            %
            
            
            (13,218
            )
            
            
            (69.11
            )%Cost
      of sales
            
            
            5,474
            
            
            
            92.67
            %
            
            
            17,053
            
            
            
            89.17
            %
            
            
            (11,579
            )
            
            
            (67.90
            )%Sales
      expenses
            
            
            21
            
            
            
            0.36
            %
            
            
            40
            
            
            
            0.21
            %
            
            
            (19
            )
            
            
            (47.50
            )%General
      & administrative expenses
            
            
            70
            
            
            
            1.19
            %
            
            
            164
            
            
            
            0.86
            %
            
            
            (94
            )
            
            
            (57.32
            )%Research
      and development expenses
            
            
            4
            
            
            
            0.07
            %
            
            
            4
            
            
            
            0.02
            %
            
            
            0
            
            
            
            0.00
            %Depreciation
      and amortization
            
            
            6
            
            
            
            0.10
            %
            
            
            12
            
            
            
            0.06
            %
            
            
            (6
            )
            
            
            (50.00
            )%Allowance
      for doubtful accounts
            
            
            0
            
            
            
            0.00
            %
            
            
            0
            
            
            
            0.00
            %
            
            
            0
            
            
            
            N/AInterest
      expenses
            
            
            215
            
            
            
            3.64
            %
            
            
            270
            
            
            
            1.41
            %
            
            
            (55
            )
            
            
            (20.37
            )%Other
      (expenses)/income, net
            
            
            0
            
            
            
            0.00
            %
            
            
            0
            
            
            
            0.00
            %
            
            
            0
            
            
            
            0.00
            %Income
      before income tax expense
            
            
            117
            
            
            
            1.98
            %
            
            
            1582
            
            
            
            8.27
            %
            
            
            (1,465
            )
            
            
            92.60
            %Current
      tax expense
            
            
            0
            
            
            
            0.00
            %
            
            
            212
            
            
            
            1.11
            %
            
            
            (212
            )
            
            
            (100.00
            )%Deferred
      taxes benefit
            
            
            0
            
            
            
            0.00
            %
            
            
            0
            
            
            
            0.00
            %
            
            
            0
            
            
            
            0Foreign
      currency translation adjustment
            
            
            726
            
            
            
            12.29
            %
            
            
            59
            
            
            
            0.31
            %
            
            
            667
            
            
            
            1130.51
            %Net
      (loss)/income
            
            
            843
            
            
            
            14.27
            %
            
            
            1,429
            
            
            
            7.47
            %
            
            
            (586
            )
            
            
            41.01
            %





Nine
Months Ended September 30, 2010 Compared to Nine Months Ended September 30,
2009





Net
sales





Our
revenue was US$19,971,000 for the nine months ended September 30, 2010,
representing a decrease of 67.88% compared to US$62,181,000 for the same period
in 2009.





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


17


Products
Segment





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




Nine
      months ended
              September
      30, 2010Cellular
      phones
      model
            
            
            Amount
              (US$’000)
            
            
            %
      of total
              revenueDX796
            
            
            
            5,392
            
            
            
            26.99
            %DX9188
            
            
            
            4,038
            
            
            
            20.21
            %6228
            
            
            
            2,703
            
            
            
            13.53
            %Total
            
            
            
            12,133
            
            
            
            60.73




Customer Segments





For the
nine months ended September 30, 2010, our sales in the aggregate amount of
US$91,727,000 were derived mainly from Xingwang.  Xingwang has been
our most important distributor for a long period of time. It is one of the
largest distributors in mainland China and has sales networks in major cities
across the PRC.





Nine
      months ended
              September
      30, 2010Amount
              (US$’000)
            
            
            %
      of total
              salesBeijing
      Xingwang Shidai Tech & Trading Co., Ltd.
            
            
            91,727
            
            
            
            92.70
            %Tianjin
      Tongguang
            
            
            7,220
            
            
            
            7.30
            %Total
            
            
            98,947
            
            
            
            100
            %




Gross
Margin





For the
nine months ended September 30, 2010, gross profit rate was 1.66%, representing
a decrease of 8.17% in gross profit when compared to the same period of 2009
which was 9.83%.  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.





For the
nine months ended September 30, 2010, DX796 products have contributed
approximately 27% of our revenue in the quarterly financial results. Marketed at
a very reasonable price, these DX796 products were sold in such a large quantity
that they boosted the Company’s overall gross margin for this
quarter.





Under the
guidance of its previously planned products strategy, the Company will focus 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
nine months ended September 30, 2010, selling expenses were US$83,000, or 0.42%
of revenues, representing a US$130,000 decrease compared with US$213,000 for the
corresponding period in 2009.





The
decrease in selling expenses was due to sales performance for the three quarters
of 2010 which did not meet the management’s expectations.




18




Research
and Development (R&D) expenses





For the
nine months ended September 30, 2010, R&D expenses were US$13,000, or 0.07%
of revenue, representing a decrease compared with US$32,000 for the
corresponding period in 2009. The decrease is due-to less R&D activities
conducted in the three quarters of 2010 compared with the same period of
2009.





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
nine months ended September 30, 2010, total general and administrative expenses
were US$212,000, or 1.06% of total revenues, representing a decrease of
US$321,000, or 60.23% as compared to US$533,000, or 0.86%, of the total revenues
for the corresponding period in 2009.





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





Interest
expenses





For the
nine months ended September 30, 2010, interest expenses increased by US$247,000
compared with same period in 2009. The increase is mainly due to the Company not
paying the outstanding interest expenses in a timely manner.





Other
(expenses) income, net





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





Provision
for income taxes





For the
nine months ended September 30, 2010, provision for income taxes decreased by
US$868,000 compared with same period in 2009. The decrease is mainly
attributable to a decline in taxable income.





Net
income





For the
nine months ended September 30, 2010, our net income was US$332,000 or a net
profit margin of 1.66%, representing a decrease of US$5,782,000, or 1,741.57%,
as compared to US$6,114,000, or a net profit margin of 9.83% in the same period
of 2009. The significant decrease was mainly due to our business shrinking in
the current economic downturn.





Three
Months Ended September 30, 2010 Compared to Three Months Ended September 30,
2009





Net
sales





For the
three months ended September 30, 2010, the total revenues of the Company were
US$5,907,000, representing a decrease of 69.11% as compared to US$19,125,000 in
the same period of 2009.





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




19


Products
Segment





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




Three
      months ended
              September
      30, 2010Cellularphones
      model
            
            Amount
              (US$’000)
            
            
            %
      of total
              revenueHC9999
            
            
            1,246
            
            
            
            21.1
            %DM2068
            
            
            1,943
            
            
            
            32.9
            %6228
            
            
            2,718
            
            
            
            46.0
            %Total
            
            
            5,907
            
            
            
            100
            %




Customer Segments





For the
three months ended September 30, 2010, our sales in the aggregate amount of
US$5,876,000 were derived mainly from Xingwang.  Xingwang has been our
most important distributor for a long period of time. It is one of the largest
distributors in mainland China and has sales networks in major cities across the
PRC.





Three
      months ended
              September
      30, 2010Amount
              (US$’000)
            
            
            %
      of total
              salesBeijing
      Xingwang Shidai Tech & Trading Co., Ltd.
            
            
            5,876
            
            
            
            100
            %Total
            
            
            5,876
            
            
            
            100
            %





Gross
Margin





For the
three months ended September 30, 2010, gross profit rate was 7.33%, representing
a decrease of 3.5% in gross profit when compared to the same period of 2009
which was 10.83%.  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.





For the
three months ended September 30, 2010, DX796 products have contributed
approximately 46% of our revenue in the quarterly financial results. Marketed at
a very reasonable price, these DX796 products were sold in such a large quantity
that they boosted the Company’s overall gross margin for this
quarter.





Under the
guidance of its previously planned products strategy, the Company will focus 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, 2010, selling expenses were US$21,000, or 0.36%
of revenues, representing a US$19,000 decrease compared with US$40,000 for the
corresponding period in 2009.





The
decrease in selling expenses was due to sales performance in the third quarter
of 2010 which did not meet the management’s expectations.


20


Research
and Development (R&D) expenses





For the
three months ended September 30, 2010, R&D expenses were US$4,000, or 0.07%
of revenue, representing an equal level for the corresponding period in 2009.
There were no new R&D activities during the past three months.





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, 2010, total general and administrative expenses
were US$70,000, or 1.19% of total revenues, representing a decrease of
US$94,000, or 57.32% as compared to US$164,000, or 0.44%, of the total revenues
for the corresponding period in 2009.





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





Interest
expenses





For the
three months ended September 30, 2010, interest expenses decreased by US$55,000
compared with same period in 2009. The decrease is mainly due to the Company not
Company not paying the outstanding interest expenses in a timely
manner.





Other
(expenses) income, net





For the
three months ended September 30, 2010, other expenses accounted for
US$0.





Provision
for income taxes





For the
three months ended September 30, 2010, provision for income taxes decreased by
US$212,000 compared with same period in 2009. The decrease is mainly
attributable to a decline in taxable income.





Net
income





For the
three months ended September 30, 2010, our net income was US$332,000 or a net
profit margin of 1.66%, representing a decrease of US$5,782,000, or 1,741.57%,
as compared to US$6,114,000, or a net profit margin of 9.83% in the same period
of 2009. The significant decrease was mainly due to our business shrinking in
the current economic downturn.





LIQUIDITY
AND SOURCES OF CAPITAL





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





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





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





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




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


21




As of
September 30, 2010, we had current assets of US$108,716,000. Current assets are
mainly comprised of accounts receivable of US$98,947,000, advances to suppliers
of US$8,416,000, cash and cash equivalents of US$4,000, pledged deposits of
US$1,317,000, restricted cash of US$4,000 and other current assets of
US$28,000.





As of
September 30, 2010, our current liabilities were US$70,699,000 and included
short-term bank loans of US$9,585,000, short-term loan payable of US$314,000,
accounts payable of US$18,294,000, accrued expenses and other accrued
liabilities of US$4,630,000, trade deposits received of US$1,902,000, amounts
due to shareholders of US$697,000, income taxes payable of US$5,991,000, other
taxes payable of US$25,018,000 and liabilities for possible settlement to
accounts payable of US$4,268,000.





We offer
two different trading terms to our customers: cash-on-delivery or credit terms
of 45-120 days.  As of September 30, 2010, our accounts receivable had
increased by US$17,817,000 to US$98,947,000, as compared to US$81,130,000 on
December 31, 2009. The increase in accounts receivables was mainly due to a
longer turn over period in the current economic recession environment. We will
pay close attention to the liquidity progress of our distributors. As previously
disclosed, in order to reduce the risks of default, we have limited terms of
credit to our major distributor in the Master Distributor Agreement and have a
third-party guarantee company to guarantee the accounts receivable due from this
major distributor.





As of
September 30, 2010, our advances to suppliers were US$8,416,000, which
represented an increase of US$2,541,000 as compared with US$5,875,000 as of
December 31, 2009. The increase was primarily because purchases in the current
quarter increased from the same period last year.





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





As of
September 30, 2010, our accounts payable were US$18,294,000, which represents an
increase of US$10,642,000, or 139.07%, as compared to US$7,652,000 as of
December 31, 2009. This significant increase was mainly because we delayed
payment to certain suppliers to meet our working capital demand.





As of
September 30, 2010, accrued expenses and liabilities were US$4,630,000,
representing an increase of US$1,217,000 or 35.66%, compared to US$3,413,000 as
of December 31, 2009. The increase was mainly due to accrued salary and accrued
VAT during the past period.





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





As of
September 30, 2010, income tax payable was US$5,991,000, representing an
increase of US$121,000 or 2.06%, compared to US$5,870,000 as of December 31,
2009.  The increase was mainly due to the foreign exchange rate
change.





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





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


22


CASH
FLOWS




Nine
      Months Ended September, 302010
            
            
            2009Amount
      in thousand US dollarsNet
      cash used in operating activities
            
            $
            ’000
            
            
            
            -369
            
            
            $
            ’000
            
            
            
            -526Net
      cash used in investing activities
            
            
            
            
            
            0
            
            
            
            
            
            
            0Net
      cash provided by financing actives
            
            
            
            
            
            0
            
            
            
            
            
            
            230Effect
      of foreign currency exchange rate changes on cash and cash
      equivalents
            
            
            
            
            
            -1
            
            
            
            
            
            
            226Net
      (decrease) / increase in cash and cash equivalents
            
            $
            ’000
            
            
            
            -369
            
            
            $
            ’000
            
            
            
            -296





Net
cash used in operating activates:





The cash
used in operating activities decreased from US$526,000 to US$369,000, which was
due-to a loss in the amount of US$585,000 which occurred in the nine months
ended September 30,2010 and a decrease of accrued expenses in the form of
interest on outstanding bank loans.





Net
cash used in financing activates:





The cash
provided from the financing activities in the nine months ended September 30,
2010 is $0 compared with US$230,000 in the corresponding period in
2009.




OFF
BALANCE SHEET ARRANGEMENTS





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





Item
      3.
            Quantitative
      and Qualitative Disclosures About Market
Risk.





Market
risk is the sensitivity of income to changes in interest rates, foreign
exchanges, commodity prices, equity prices and other market-driven rates or
prices. The Company, in the normal course of doing business, is exposed to
market risk through changes in interest rates with respect to bank loans.
Aggregate bank loans as of September 30, 2010, were US$9,585,000. The interest
rate for the three months ended September 30, 2010 was charged at 6.372% to
10.080% per annum.





Item
      4.
            Controls
      and Procedures.




Evaluation
of 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.


23


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.


24


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.





Item
      3.
            Defaults
      Upon Senior Securities.





None.





Item
      4.
            Removed
      and Reserved.





Item
      5.
            Other
      Information.





(a)           None.





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





Item
      6.
            Exhibits.





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





Exhibit
                Number
            
            Exhibit
      Description3.1
            
            Certificate
      of Incorporation of Orsus Xelent Technologies, Inc. (incorporated by
      reference from Exhibit 3.1 to the Registration Statement on Form SB-2
      filed with the Securities and Exchange Commission on July 28, 2004 as
      amended by that Plan of Merger and Agreement of Merger attached as Exhibit
      2.1 to the Current Report on Form 8-K filed with the SEC on April 20,
      2005)3.2
            
            Amended
      and Restated Bylaws of the Registrant (incorporated by reference from
      Exhibit 3.2 to the Current Report on Form 8-K filed with the Securities
      and Exchange Commission on February 7, 2007, as amended by the Current
      Report on Form 8-K filed with the SEC on March 5, 2007)4.1
            
            Specimen
      Certificate of Common Stock (incorporated by reference to Exhibit 4.1 to
      Amendment 2 to the Registration Statement on Form SB-2/A filed with the
      Securities and Exchange Commission on October 19,
  2004)




25




Exhibit
              Number
            
            Exhibit
      Description10.1
            
            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


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.DATED:  November
      15, 2010
              By:
              /s/
      Guoji LiuGuoji
      LiuChief
      Executive Officer/s/ Hua
      ChenHua
      ChenChief
      Financial Officer




27


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


28