UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the quarterly period ended September 30, 2006

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

For the transition period from ______ to ______.

                       Commission file number: 000-117718

                         ORSUS XELENT TECHNOLOGIES, INC.
             (Exact name of registrant as specified in its charter)

        Delaware                                          20-11998142
(State of incorporation)                    (I.R.S. Employer Identification No.)

                12th Floor, Tower B, Chaowai MEN Office Building
                        26 Chaowai Street, Chaoyang Disc.
                   Beijing, People's Republic Of China 100020
          (Address of principal executive offices, including zip code)

                                 86-10-85653777
              (Registrant's telephone number, including area code)

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                                Yes [ X ] No [ ]

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act).

                                 Yes [ ]  No [X]

Indicate by check mark whether the registrant is a shell Registrant (as defined
in Rule 12b-2 of the Exchange Act).

                                Yes [ ] No [ X ]

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

                 Class                          Outstanding at November 10, 2006
---------------------------------------         --------------------------------
Common Stock, $.001 par value per share                  29,756,000 shares

<PAGE>
<TABLE>
<CAPTION>

                        PART I --- FINANCIAL INFORMATION

Item 1.       Financial Statements.

Orsus Xelent Technologies, Inc.

Condensed Consolidated Statements of Operations
------------------------------------------------------------------------------------------------------


                                                      (Unaudited)                   (Unaudited)
                                                  Three months ended             Nine months ended
                                                     September 30,                  September 30,
                                              --------------------------    --------------------------
                                                  2006           2005           2006           2005
<S>                                           <C>            <C>            <C>            <C>
                                        Note      US$'000        US$'000        US$'000        US$'000

Operating revenues:                                20,525         13,164         45,901         16,604
                                              -----------    -----------    -----------    -----------

Operating expenses:
    Cost of sales                                  16,716         10,358         37,879         13,257
    Sales and marketing                               140            430            926          1,131
    General and administrative                      1,194            200          1,883            769
    Research and development                           40            195            187            337
    Depreciation                                       24             89            149            164
                                              -----------    -----------    -----------    -----------
    Total operating expenses                       18,114         11,272         41,024         15,658
                                              -----------    -----------    -----------    -----------

Operating profit                                    2,411          1,892          4,877            946

Interest expense                                      (41)          --              (70)           (25)
Other income, net                                      (4)            89              1            541
                                              -----------    -----------    -----------    -----------

Income before income taxes                          2,366          1,981          4,808          1,462

Income taxes                             3           --              (23)          (160)           (23)
                                              -----------    -----------    -----------    -----------

Net income                                          2,366          1,958          4,648          1,439

Other comprehensive income                           --             --             --             --
                                              -----------    -----------    -----------    -----------

                                                    2,366          1,958          4,648          1,439
                                              ===========    ===========    ===========    ===========

Earnings per share:                      2

Basic                                                0.08           0.07           0.16           0.05
                                              ===========    ===========    ===========    ===========

Weighted average number of common stock
    outstanding                                29,756,000     29,756,000     29,756,000     29,756,000
                                              ===========    ===========    ===========    ===========

The  accompanying  notes are an integral  part of these  condensed  consolidated
financial statements.
------------------------------------------------------------------------------------------------------
</TABLE>

                                      -1-
<PAGE>
<TABLE>
<CAPTION>

Orsus Xelent Technologies, Inc.

Condensed Consolidated Balance Sheets
-----------------------------------------------------------------------------------------------------

                                                                            As of           As of
                                                                        September 30,   December 31,
                                                                            2006            2005
                                                                 Note      US$'000         US$'000
                                                                         (Unaudited)
<S>                                                                     <C>             <C>
ASSETS
Current assets
    Cash and cash equivalents                                                      88           2,974
    Accounts receivable, net of allowance for doubtful accounts
        of $555,000 ($149,000 in 2005)                                         31,527          12,034
    Inventories                                                                 2,361           4,460
    Trade deposits paid                                                         3,112          10,580
    Advance to third party                                                        125            --
    Other current assets                                                          125             182
                                                                        -------------   -------------

    Total current assets                                                       37,338          30,230

Property, plant and equipment, net                                4               782             781
                                                                        -------------   -------------

Total assets                                                                   38,120          31,011
                                                                        =============   =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
    Short-term bank loan                                          5             2,477            --
    Accounts payable - Trade                                                   11,764           7,939
    Accrued expenses and other accrued liabilities                              3,474           2,238
    Trade deposits received                                                       260           5,432
    Due to directors                                              6               320             320
    Provision for warranty                                                         57             122
    Taxes payable                                                                 181              21
                                                                        -------------   -------------

    Total current liabilities                                                  18,533          16,072
                                                                        -------------   -------------

Commitments and contingencies

Stockholders' equity Preferred stock, US$0.001 par value:
    Authorized: 100,000,000 shares, no shares issued
Common stock and paid-in capital, US$0.001 par value:
    Authorized: 100,000,000 shares
Issued and outstanding: 29,756,000 shares as of September
    30, 2006 and as of December 31, 2005                                           30              30
Additional paid-in capital                                                      2,484           2,484
Dedicated reserves                                                              1,042           1,042
Other comprehensive income                                                        349             349
Retained earnings                                                              15,682          11,034
                                                                        -------------   -------------

Total stockholders' equity                                                     19,587          14,939
                                                                        -------------   -------------

Total liabilities and stockholders' equity                                     38,120          31,011
                                                                        =============   =============


The  accompanying  notes are an integral  part of these  condensed  consolidated
financial statements.
-----------------------------------------------------------------------------------------------------
</TABLE>

                                      -2-
<PAGE>
<TABLE>
<CAPTION>

Orsus Xelent Technologies, Inc.

Condensed Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------------


                                                                        (Unaudited)
                                                                    Nine months ended
                                                                       September 30,
                                                                    ------------------
                                                                      2006       2005
<S>                                                                 <C>        <C>
                                                                    US$'000    US$'000
Cash flows from operating activities
Net income                                                            4,648      1,462
Adjustments to reconcile net income to net cash used in operating
    activities:
    Depreciation                                                        149        164
Changes in assets and liabilities:
    Accounts receivable -trade                                      (19,493)    (1,895)
    Inventories, net                                                  2,099      1,215
    Trade deposits paid                                               7,468       (207)
    Other current assets                                                 57       (142)
    Trade deposits received                                          (5,172)       419
    Accounts payable - trade                                          3,825     (2,786)
    Provision for warranty                                              (65)       (94)
    Accrued expenses and other accrued liabilities                    1,236        930
    Provision for taxation                                              160       --
                                                                    -------    -------

Net cash used in operating activities                                (5,088)      (934)
                                                                    -------    -------

Cash flows from investing activities
    Purchase of property, plant and equipment                          (150)      (579)
    Repayment from a related company                                   --        3,319
    Advance to a director                                              --           (6)
    Decrease in restricted cash                                        --          710
    Loan to third parties                                              (125)      --
                                                                    -------    -------

Net cash (used in) / generated from investing activities               (275)     3,444
                                                                    -------    -------

Cash flows generated from financing activities
   Borrowing from bank                                                2,477       --
                                                                    -------    -------

Net cash generation from financing activities                         2,477       --
                                                                    -------    -------

Net (decrease) / increase in cash and cash equivalents               (2,886)     2,510

Cash and cash equivalents, beginning of the period                    2,974        224
                                                                    -------    -------

Cash and cash equivalents, end of the period                             88      2,734
                                                                    =======    =======

The  accompanying  notes are an integral  part of these  condensed  consolidated
financial statements.
--------------------------------------------------------------------------------------
</TABLE>

                                      -3-
<PAGE>

Orsus Xelent Technologies, Inc.

Notes to Condensed Consolidated Financial Statements
--------------------------------------------------------------------------------


1.   PREPARATION OF INTERIM FINANCIAL STATEMENTS

     The accompanying  unaudited condensed  consolidated financial statements as
     of September 30, 2006 and 2005 have been prepared based upon Securities and
     Exchange  Commission  ("SEC")  rules that  permit  reduced  disclosure  for
     interim periods and include, in the opinion of management,  all adjustments
     (consisting  of  normal   recurring   adjustments  and   reclassifications)
     necessary to present fairly the financial  position,  results of operations
     and cash flows for the periods presented.

     Certain information and footnote disclosures normally included in financial
     statements  prepared in accordance  with  accounting  principles  generally
     accepted in the United  States of America  ("USA")  have been  condensed or
     omitted.  These condensed  consolidated financial statements should be read
     in  conjunction  with the audited  financial  statements  and notes thereto
     incorporated  by reference in the Company's  Form 10-KSB for the year ended
     December 31, 2005 filed on April 3, 2006.  The balance sheet as of December
     31, 2005 and the  related  notes are  derived  from the  audited  financial
     statements of the Company for the year ended December 31, 2005. The results
     of operations for the nine-month  periods ended September 30, 2006 and 2005
     are not necessarily  indicative of the operating results to be expected for
     the full year.

     The condensed  consolidated financial statements and accompanying notes are
     presented  in  United  States  dollars  and  prepared  in  conformity  with
     accounting  principles  generally  accepted  in the  USA  ("USGAAP")  which
     requires  management to make certain  estimates and assumptions that affect
     the reported amounts of assets and liabilities and disclosure of contingent
     assets and liabilities at the date of financial statements and the reported
     amounts of  revenues  and  expenses  during the  reporting  period.  Actual
     results could differ from those estimates.


2.   EARNINGS PER SHARE

     Basic earnings per share is computed based upon the weighted average number
     of shares of common stock  outstanding  during each period as restated as a
     result of the reorganization and recapitalization. The 29,756,000 shares in
     connection  with the  recapitalization  were included in the computation of
     earnings  per  share as if  outstanding  at the  beginning  of each  period
     presented.

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


3.   INCOME TAXES

     The Company is subject to income taxes on an entity basis on income arising
     in or derived from the tax  jurisdictions  in which it operates.  Provision
     for income and other related  taxes have been  provided in accordance  with
     the tax rates and laws in effect in the various countries of operations.


--------------------------------------------------------------------------------
                                      -4-
<PAGE>

Orsus Xelent Technologies, Inc.

Notes to Condensed Consolidated Financial Statements
--------------------------------------------------------------------------------


3.   INCOME TAXES (CONTINUED)

     No provision for withholding or United States federal or state income taxes
     or  tax  benefits  on  the  undistributed  earnings  and/or  losses  of the
     Company's   subsidiaries  has  been  provided  as  the  earnings  of  these
     subsidiaries,  in  the  opinion  of  the  management,  will  be  reinvested
     indefinitely. Determination of the amount of unrecognized deferred taxes on
     these earnings is not practical,  however, unrecognized foreign tax credits
     would be available to reduce a portion of the tax liability.

     United First International Limited was incorporated in Hong Kong and has no
     assessable  profit for the periods  presented.  Orsus Xeleent  Trading (HK)
     Limited  ("OXTHK") was also incorporated in Hong Kong and Hong Kong Profits
     Tax has been provided at the rate of 17.5% on OXTHK's estimated  assessable
     profits for the period.  Since Beijing Orsus Xeleent Technologies & Trading
     Co., Limited has registered as a wholly-owned foreign investment enterprise
     ("WOFIE"),  it is subject to tax laws applicable to WOFIE in the PRC and is
     fully  exempt  from  the PRC  enterprise  income  tax of 24% for two  years
     followed  by a 50%  reduction  for the next three  years,  commencing  with
     fiscal year 2005.

     Reconciliation  from the expected  statutory  tax rate in PRC of 24% (2005:
     24%) is as follows:

                                                                (Unaudited)
                                                            Nine months ended
                                                               September 30,
                                                            ------------------
                                                               2006       2005
                                                                  %          %

     Statutory rate                                            24.0       24.0
     Difference in tax rates in the countries that the
        Company operates                                       (1.0)      (0.6)
     Tax exemption                                            (22.3)     (22.7)
     Others                                                     2.6        0.9
                                                            -------    -------

     Effective tax rate                                         3.3        1.6
                                                            =======    =======




--------------------------------------------------------------------------------
                                      -5-
<PAGE>

Orsus Xelent Technologies, Inc.

Notes to Condensed Consolidated Financial Statements
--------------------------------------------------------------------------------


4.   PROPERTY, PLANT AND EQUIPMENT, NET

     Property, plant and equipment is summarized as follows:

                                         As of             As of
                                     September 30,      December 31,
                                         2006              2005
                                       US$'000           US$'000
                                      (Unandited)

          Moulds                              1,384             1,239
          Leasehold improvement                 112               112
          Plant and machinery                  --                  14
          Office equipment                      275               255
          Motor vehicles                         86                86
                                     --------------    --------------
                                              1,857             1,706

          Accumulated depreciation           (1,075)             (925)
                                     --------------    --------------

                                                782               781
                                     ==============    ==============


5.   SHORT-TERM BANK LOAN

     The bank loan was  guaranteed  by the  director,  Mr. Liu Yu,  repayable on
     January 29, 2007 at interest rate 6.696% - 7.02% per annum.


6.   RELATED PARTY TRANSACTIONS

     a.   Name and relationship of related parties

        Related party     Relationship with the Company as at September 30, 2006
        -------------     ------------------------------------------------------

        Mr. Wang Xin      Director and stockholder of the Company
        Mr. Liu Yu        Director and stockholder of the Company
        Mr. Wang Zhibin   Director and stockholder of the Company




--------------------------------------------------------------------------------
                                      -6-
<PAGE>
<TABLE>
<CAPTION>

Orsus Xelent Technologies, Inc.

Notes to Condensed Consolidated Financial Statements
--------------------------------------------------------------------------------


6.   RELATED PARTY TRANSACTIONS (CONTINUED)

     b.   Summary of related party balances

                                                                  As of            As of
                                                              September 30,    December 31,
                                                                  2006             2005
                                                        Note     US$'000          US$'000
                                                               (Unandited)
<S>                                                           <C>              <C>

          Due to directors
          Mr. Wang Xin, Mr. Liu Yu and Mr. Wang Zhibin   (i)            320              320
                                                              =============    =============

          Bank loan guaranteed by a director
          Mr. Liu Yu                                                    991             --
                                                              =============    =============
</TABLE>

          Note:

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











--------------------------------------------------------------------------------
                                      -7-
<PAGE>

Item 2.   Managements' Discussion and Analysis or Plan 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 State of Delaware in May 2004,
under  the name of  "Universal  Flirts  Corp.".  On June 1,  2004,  the  Company
acquired all the issued and outstanding  shares of Universal  Flirts Inc., a New
York corporation, from Darrel Lerner, the sole shareholder, in consideration for
the issuance of 8,500,000  shares of the  Company's  common stock to Mr.  Lerner
pursuant to a stock exchange  agreement  between  Universal  Flirts Inc. and the
Company.  Pursuant to the purchase  and share  exchange  transaction,  Universal
Flirts Inc. became the wholly-owned subsidiary of the Company.

     Pursuant to Stock  Transfer  Agreement  dated March 29,  2005,  the Company
transferred  all of the common stock of Universal  Flirts,  Inc. to Mr.  Darrell
Lerner in exchange for the  cancellation  of 28,200,000  shares of the Company's
common stock. Immediately, 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,  a
company  incorporated  under the laws of Hong Kong  ("UFIL").  The  exchange was
consummated  under the laws of State of  Delaware  and  pursuant to the terms of
Exchange  Agreement dated effective as of March 31, 2005. In connection with its
acquisition  of UFIL,  the Company also  authorized  a 4-1 forward  split of its
common stock.

     Pursuant  to  the  Exchange   Agreement,   Universal  Flirts  Corp.  issued
15,000,000 shares of its common stock,  $0.001 par value, to the stockholders of
UFIL, representing  approximately 50.41% of the Company's issued and outstanding
common stock,  in exchange for  20,000,000  outstanding  shares of UFIL and cash
payment of $50,000 from UFIL.  Immediately  after giving effect to the exchange,
the Company had 29,756,000 shares of its common stock  outstanding.  Pursuant to
the 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").


                                      -8-
<PAGE>

     On April 19, 2005, the Company,  formerly known as Universal  Flirts Corp.,
changed its list name to Orsus  Xelent  Technologies,  Inc.  The  Company's  OTC
Bulletin Board symbol is ORXT and its CUSIP Number is 68749U106.

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

     The  business  operation  of UFIL are  conducted  through its  wholly-owned
subsidiary,  Xelent,  which is also commonly called "Orsus  Cellular" within the
cellular phone industry . Xelent has been engaged since May 2003 in the business
of designing for retail and wholesale distribution  economically priced cellular
phones.  In  February  2004,  Xelent  registered  "ORSUS"  with  the  PRC  State
Administration for Industry and Commerce as its product trademark.  The cellular
phone products produced by Xelent are customarily equipped with leading features
including  1.8-inch to 2.2-inch CSTN or TFT dual-color  display, 1 to 120-minute
video  recording,  300K to 3 million pixel  photography,  MP3,  MPEG4 and U disk
support, dual stereo speakers, e-mail messaging,  multimedia messaging, 40 to 64
ring tone  storage,  slim  bar-phone  &  flip-phone  technology  and ultra  thin
innovative lightweight design. Xelent sold approximately 240,000 cellular phones
in the PRC in 2005.

     According  to a  research  conducted  by the PRC  Ministry  of  Information
Industry,  new cellular  phone users in the PRC increased by 58 million in 2005,
with total consumers reaching 393 million during that year.  Currently,  the PRC
has the largest  number of cellular  phone users in the world.  The  penetration
rate for cellular phones in the PRC was approximately 30% in 2005. The number of
cellular  phone users is expected to reach 500 million by the year-end 2007. The
cellular  phone  market in the PRC is expected to reach $120 billion by the year
end of 2006 according to the PRC Ministry of Information Industry.

     On February  26,  2006,  the TDS-CDMA  technology  standard was  officially
announced as the 3G (Third Generation)  technology standard in the PRC. However,
sales of products incorporating the 3G has not developed as rapidly as generally
anticipated  (it was that 3G network  construction  and  issuance of 3G licenses
would be approved by the end of 2006).  Although the granting of 3G licenses has
been  delayed  until the  middle of 2007,  once  introduction  to the  market of
products  utilizing the 3G  technology is commenced,  Xelent should be in a good
position to take advantage of this business opportunity..  We have commenced the
development  of our owned 3G  cellular  phone  products,  including  3G PCBA (3G
technologies  platform) and cellular phones with 3G PCBA,  based on our existing
2G and 2.5G cellular technologies and cooperation with our 3G solution and chips
providers.  Additionally,  we are  planning to join into the  TDS-CDMA  Industry
League,   and  we  are  working  toward  the  granting  of  3G  cellular  phones
manufacturing licenses from the PRC government in 2007.

     The respective  market shares of domestic PRC cellular phone  manufacturers
decreased in the first  quarter of 2006.  The primary cause of this decrease was
increased competition among domestic and overseas manufacturers. Advancements in
technology prompted foreign cellular phone manufacturers to speed up the rollout
of new  products.  Also,  foreign  cellular  phone  manufacturers  offered price
reductions  to promote  and clear  their  inventories  of older  products.  This
increase in  competition  was  compounded  by the  continuing  proliferation  of


                                       -9-
<PAGE>

counterfeit  and "black  market" cell phones in the PRC, which impacted sales of
cellular phone products by legitimate manufacturers such as Xelent.

     By the second  quarter of 2006,  most of the domestic  PRC  cellular  phone
manufacturers  had adjusted their strategy to increase the  competition by price
cutting,  improving the quality of the products and accelerating the pace of new
product  rollouts.   These  manufacturers  are  creating  better  efficiency  by
introducing products designed for the local market and better using their supply
chain. As a result,  they have adapted to the rapidly changing market in the PRC
and regained in the second quarter of 2006 some of the market share they lost in
the first quarter. Additionally, they are beginning to make a stronger move into
the overseas market to broaden their sales and increase their revenues.

     According to our market  research,  the market of cellular  phones equipped
with  specialized  applications  for specific  industry users has been developed
rapidly  in the PRC.  These  products  are custom  designed  and  equipped  with
specialized  applications and software to meet the special requirements of users
in various specialized industries. In the third quarter of this year, we entered
into an Intent of Cooperation  Agreement with a software development provider to
assist us in meeting the need for these customized cellular phones. The software
company developed specialized software to support an application platform called
the Industry & Commerce  Law-Enforcement  Platform  ("ICEP").  The ICEP platform
uses the CDMA 1X wireless data networks of the PRC to integrate  commercial  and
government   information   resources.   This   includes  a  customized   digital
administration  system for State Administration for Industry & Commerce ("SAIC")
of the PRC that  provides  easy  access by SAIC's  professional  law-enforcement
teams.  It provides  technical  support  for SAIC  officials  to conduct  mobile
law-enforcement and food-safety monitoring.  The public can also access business
information  through  the ICEP.  We  anticipate  that  business  relating to our
specialized   application   cellular  phone  devices  will  grow  rapidly  as  a
consequence of our cooperation with the software  development  company,  the PRC
and SAIC, and that this could provide us a considerable  advantage as we look to
broaden our presence in the larger commercial markets.

BUSINESS REVIEW

     During the third quarter of 2006, we adopted a strategy of customization to
meet the requirements of our telecommunication  operator customers. Sales of our
CDMA products  contributed  approximately  50% of total revenues in the quarter,
compared to 25.94% of total  revenues  for the six moths  ended June 2006.  This
significant  increase in sales of our CDMA  products was  responsible  for a 20%
growth in revenues in this third quarter as compared to the second quarter.

     Demand for our cellular  phone  products  has  increased as a result of the
correct  positioning  of our  products  to meet the needs of the  mid-level  and
low-end markets in the PRC. Our mid-level and low-end  products are all equipped
with a number of attractive  features,  such as MP3,  MEPG4,  camera and support
outer card storage card.  Also, the overall  reduction in the GSM charges of PRC
telecommunication  providers,  which  caused an  increase  in the  number of new
cellular  phone  subscribers,  also enhanced the demand of new cellular  phones.
After reduction of inventories by price cutting from domestic  manufacturers  in
the second quarter, the profit margin of domestic cellular phones manufacturers,
including  Xelent,  in the third quarter was comparable to profit margins in the
first quarter of 2006.  We expect this trend to continue and we are,  therefore,
optimistic with respect to our profits for the fourth quarter.


                                      -10-
<PAGE>
<TABLE>
<CAPTION>

     The following  table  summarizes  our operating  result for the nine months
ended September 30, 2006 and 2005, respectively:

----------------------------- ------------------------------ ------------------------------ ---------------------------
                                    Nine months  ended             Nine months  ended               Comparison
                                    September 30, 2006             September 30, 2005
----------------------------- ------------------------------ ------------------------------ ---------------------------
                                    $' 000     % of revenue       $' 000      % of revenue        $'000              %
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
<S>                           <C>           <C>              <C>          <C>               <C>          <C>
Revenues                            45,901                        16,604                         29,297        176.45%
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Cost of sales                       37,879           82.52%       13,257            79.84%       24,622        185.73%
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Sales & Marketing expenses
                                       926            2.02%        1,131             6.81%         -205        -18.13%
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
General & Admin expenses
                                     1,883            4.10%          769             4.63%        1,114        144.86%
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
R&D expenses                           187            0.41%          337             2.03%         -150        -44.51%
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Depreciation & Amortization            149            0.32%          164             0.99%          -15         -9.15%
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Interest expenses                       70            0.15%           25             0.15%           45           180%
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Other income, net                        1            0.00%          541             3.26%         -540        -99.82%
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Income before tax                    4,808           10.47%        1,462             8.81%        3,346        228.86%
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Income taxes                           160            0.35%           23             0.14%          137        595.65%
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Net income                           4,648           10.13%        1,439             8.67%        3,209        223.00%
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------

     The following  table  summarizes our operating  result for the three months
ended September 30, 2006 and 2005, respectively:

----------------------------- ------------------------------ ------------------------------ ---------------------------
                                    Three months ended             Three months ended               Comparison
                                    September 30, 2006             September 30, 2005
----------------------------- ------------------------------ ------------------------------ ---------------------------
                                    $' 000     % of revenue       $' 000      % of revenue        $'000              %
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Revenues                            20,525          100.00%       13,164           100.00%        7,361         55.92%
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Cost of sales                       16,716           81.44%       10,358            78.68%        6,358         61.38%
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Sales & Marketing expenses
                                        40            0.68%          430             3.27%         -290        -67.44%
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
General & Admin expenses
                                     1,194            5.82%          200             1.52%          994        497.00%
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
R&D expenses                            40            0.19%          195             1.48%         -155        -79.49%
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Depreciation & Amortization             24            0.12%           89             0.68%          -65        -73.03%
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Interest expenses                       41           -0.20%            -             0.00%           41          0.00%
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Other income, net                        4           -0.02%           89             0.68%          -93       -104.49%
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Income before tax                    2,366           11.53%        1,981            15.05%          385         19.43%
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Income taxes                             -            0.00%           23            -0.17%           23       -100.00%
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Net income                           2,366           11.53%        1,958            14.87%          408         20.84%
----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
</TABLE>


                                      -11-
<PAGE>

CRITICAL ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES

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

RESULTS OF OPERATION

Revenues

     Our revenues were $45,901,000 for the nine months ended September 30, 2006,
representing  an  increase  of 176.45% as  compared  to the same period in 2005.
After going through an  environment  of reformation in the cellular phone market
in the first half year of 2005,  we  adjusted  our  business  model,  our market
position and our strategy  and  improved our  technology  and the quality of our
products,  in terms of both function and appearance.  We believe that we are now
in a much  better  position to deal with the rapidly  changing  and  competitive
market for cellular phone products in the PRC and that we are better prepared to
take advantage of the  rejuvenated  cellular phone market that has resulted from
the  reduction  in the  monthly fee charged by  telecommunication  providers  in
second quarter of 2006.

     We expanded the sales of our CDMA products,  which  accounted for 38.73% of
our  total  revenues  for the nine  months  period  ended  September  30,  2006,
representing  an  increase  of  435%,  compared  to the  same  period  in  2005.
Meanwhile,  the sales of  traditional  GSM  products  have  remained  relatively
stable.

     Our mid-level and low-end products contain a number of attractive features,
such as MP3,  MPEG4,  video  recording  and outer  card  storage.  Our  high-end
products  contain those same  features as well as PDA, GPRS and office  software
function,  special  industry  applications  and other  attractive  features  and
functions.  The  appearance  of all our  products  are in line  with the  latest
trends, including being ultra slim and containing a wide use of metals, and they
have been well received by our customers. We introduced a middle-grade dual mode
cellular  phone with both GSM & CDMA  applications  in the third quarter to meet
the demand in the market for this type of product.





                                      -12-
<PAGE>

Products Segment

     -------------------------- ------------------------------------------------
                                      Nine months ended September 30, 2006
                                ------------------------------------------------
                                         $'000                  % of revenue
     -------------------------- -------------------------- ---------------------
     X5                                  8,337                     18.16%
     -------------------------- -------------------------- ---------------------
     D8120                               4,912                     10.70%
     -------------------------- -------------------------- ---------------------
     C300                                4,155                     9.05%
     -------------------------- -------------------------- ---------------------
     C8000                               3,705                     8.07%
     -------------------------- -------------------------- ---------------------
     C200                                3,335                     7.27%
     -------------------------- -------------------------- ---------------------
     C109                                2,446                     5.33%
     -------------------------- -------------------------- ---------------------
     TDA6028                             2,250                     4.90%
     -------------------------- -------------------------- ---------------------
     X5+                                 2,011                     4.38%
     -------------------------- -------------------------- ---------------------
     Others                             14,750                    32.14%
     -------------------------- -------------------------- ---------------------

     The  total  revenues  for  the  first  nine  months  of  2006  amounted  to
$45,901,000,  of which the sale of GSM  products  in this period  accounted  for
$28,123,000,  or 61.27%, of our total revenues. The GSM products mainly included
X5 ($8,337,000),  D8120 ($4,912,000), X5+ (2,011,000), and others ($12,863,000).
The sales of CDMA was  $17,778,000,  representing  38.73% of our total revenues,
which included C300 ($4,155,000),  C8000 ($3,705,000),  C200 ($3,335,000),  C109
($2,446,000), TDA6028 ($2,250,000) and others ($1,887,000).

     Our GSM products are purchased from China Electronic  Apparatus Company and
Beijing  Dong Fang Long Yu Trading  Company,  which  include  D8120 (ultra thin,
slide PDA with MP3, MP4, Camera,  T-Flash Card,  handwriting  touch screen),  X5
(ultra thin with MP3, MP4, Camera,  T-Flash Card),  D8110 (ultra thin, slide PDA
with MP3,  MEPG4,  Camera,  T-Flash Card).  Our CDMA products are purchased from
Tian  Feng  Ju  Yuan  Technology  Company  Limited  and  Beijing  Tian  Hong  Bo
Communication Apparatus Company Limited, and include C200 (a low-end shell phone
with colorful screen,  MP3,  Camera),  C300 (a high-end cell phone with colorful
screen,  MP3,  Camera and IM  System),  C8000 (a high-end  PDA with MP3,  MEPG4,
Camera, T-Flash Card, GSM & CDMA Simultaneous Standby Dual Mode handset).

     X188 (Low-end  product with MP3,  MEPG4,  MINI SD support  functions),  X5+
(ultra thin, MP3, MEPG4,  Camera,  T-Flash Card),  TDA6028 (a high-end  cellular
phone with PDA, GPRS,  2.8-inch TFT LCD handwriting  touch screen,  finger print
identification,  MPEG4,  extended  scanner,  RFID and WIFI  functions),  X718 (a
cellular phone with MPEG4, external memory card support function in a super-slim
case) and D9000 (a low-end  product with PDA  function).  Our CDMA products C100
and C109 were developed in cooperation with Dalian Daxian Communication  Company
Limited.





                                      -13-
<PAGE>

----------------------------- --------------------------------------------------
                                  Three months ended September 30, 2006
                              --------------------------------------------------
                                      $'000                     % of revenue
----------------------------- ----------------------- --------------------------
D8120                                 4,912                        23.93%
----------------------------- ----------------------- --------------------------
C300                                  4,155                        20.24%
----------------------------- ----------------------- --------------------------
C8000                                 3,705                        18.05%
----------------------------- ----------------------- --------------------------
C200                                  3,335                        16.25%
----------------------------- ----------------------- --------------------------
X5                                    2,181                        10.63%
----------------------------- ----------------------- --------------------------
D8110                                 1,426                         6.95%
----------------------------- ----------------------- --------------------------
Others                                  811                         3.95%
----------------------------- ----------------------- --------------------------

     In the third quarter of 2006, sales reached  $20,525,000,  as compared with
$13,164,000  in the same period in 2005,  which  represents a growth in sales of
55.92%.Sales  of our  CDMA  products  in the  third  quarter  of 2006  generated
revenues of  $11,195,000  and  accounted  for 55% of sales in this  quarter,  as
compared to 18% in the same period of 2005.  The growth in the sales of our CDMA
products  also lead to 20.67%  increase in our revenues in the third  quarter as
compared to the second quarter of 2006.

     The  increase of the revenue is  primarily  attributable  the launch of our
ultra-thin,  slim bar modes which are currently in demand by the market; and our
cooperation with  telecommunication  operators with respect to our CDMA products
in various grades.

Customers Segment
-----------------

------------------------------------- ------------------------------------------
                                         Nine months ended September 30, 2006
                                      ------------------------------------------
                                            $'000                % of revenue
------------------------------------- --------------------- --------------------
Beijing Xingwang Shidai Tech &
Trading Co., Ltd.                           24,816                  54.06%
------------------------------------- --------------------- --------------------
CEC Cellular Limited                        12,756                  27.79%
------------------------------------- --------------------- --------------------
Singapore ST                                 6,124                  13.34%
------------------------------------- --------------------- --------------------
Singapore CEO                                2,000                   4.36%
------------------------------------- --------------------- --------------------
Others                                         205                   0.45%
------------------------------------- --------------------- --------------------

     Our revenues were primarily derived from two major domestic customers.  For
the nine months ended  September 30, 2006,  our revenues  generated from Beijing
Xingwang  Shidai Tech & Trading Co.,  Ltd.  ("XWSD")  and CEC  Cellular  Limited
("CECM")  were  $24,816,000  and  $12,756,000,  respectively.  These  two  major
domestic  customers  aggregated to account for $37,572,000,  or 81.85%, of total
revenue.  Both XWSD and CECM are distributors and dealers in Mainland China, and
their  sales  networks  cover most of the major  cities in the PRC.  XWSD is the
major  customer of our company,  and account for 54.06% of total  sales.  In the
overseas  market,  we have  secured two new  Singapore  customers,  which are ST
Electronics  (Info-Software  Systems) Pte Ltd. and Chartered  Electro-Optics Pte
Ltd. The revenues generated from these two companies were $8,124,000, or 17.70%,
of the total revenue.





                                      -14-
<PAGE>
<TABLE>
<CAPTION>

------------------------------------ -------------------------------------------
                                        Three months ended September 30, 2006
                                     -------------------------------------------
                                             $'000           % of revenue
------------------------------------ -------------------- ----------------------
Beijing Xingwang Shidai Tech &
Trading Co., Ltd.                           16,021               78.06%
------------------------------------ -------------------- ----------------------
CEC Cellular Limited                         4,491               21.88%
------------------------------------ -------------------- ----------------------
Others                                          13                0.06%
------------------------------------ -------------------- ----------------------

     In the third quarter, XWSD and CECM were also our major domestic customers.
Our  deliveries to CECM were  terminated  in the second  quarter due to the fact
that CECM had an outstanding receivable over our credit limit. The supply of our
products was re-commenced  after we received a substantial  payment from CECM in
the third quarter of 2006.

Other net income

     For the nine months ended September 30, 2006,  other net income was $1,000,
or 0.002%,  of the total revenue.  There was a significant  decrease as compared
with  $541,000 of other net income in the same period of 2005.  The  decrease in
other income for the nine months ended September 2006 was attributable primarily
to the fact that no toll free  income was earned  from  cooperative  partners in
2006 because our cooperative partners changed their toll fee policy.

Operating expenses

     For the nine months  ended  September  30,  2006,  our  operating  expenses
amounted to  $41,024,000.  The  operating  expenses  mainly  includes  sales and
marketing expenses,  general and administrative  expenses and R & D expenses and
depreciation were shown and compared with the same period in 2005 as follows:

------------------------- ---------------------------- --------------------------- ------------------------
                               Nine months  ended           Nine months  ended            Comparison
                               September 30, 2006           September 30, 2005
                          ---------------------------- --------------------------- ------------------------
                              $'000      % of revenue      $'000     % of revenue      $'000             %
------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
<S>                       <C>        <C>               <C>        <C>              <C>        <C>
Cost of sales                37,879            82.52%     13,257           79.84%     24,622       185.73%
------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
Sales & marketing exp.          926             2.02%      1,131            6.81%       -205       -18.13%
------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
General & admin. exp.         1,883             4.10%        769            4.63%      1,114       144.86%
------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
R&D                             187             0.41%        337            2.03%       -150       -44.51%
------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
Depreciation                    149             0.32%        164            0.99%        -15        -9.15%
------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
Total                        41,024            89.37%     15,658           94.30%     25,366       162.00%
------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------





                                      -15-
<PAGE>

     For the three  months ended  September  30, 2006,  our  operating  expenses
increased by 51.36%, as compared to the third quarter of 2005.

------------------------- ---------------------------- --------------------------- ------------------------
                               Three months ended           Three months ended            Comparison
                               September 30, 2006           September 30, 2005
------------------------- ---------------------------- --------------------------- ------------------------
                              $'000      % of revenue      $'000     % of revenue      $'000             %
------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
Cost of sales                16,716            81.44%     10,358           78.68%      6,358        61.38%
------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
Sales & marketing. exp.         140             0.68%        430            3.27%       -290       -67.44%
------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
General & admin. exp.         1,194             5.82%        200            1.52%        994       497.00%
------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
R&D                              40             0.19%        195            1.48%       -155       -79.49%
------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
Depreciation                     24             0.12%         89            0.68%        -65       -73.03%
------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
Total                        18,114                       11,272           85.63%      6,842        60.70%
------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
</TABLE>

Cost of sales
-------------

     For the nine  months  ended  September  30,  2006,  our  cost of sales  was
$37,879,000,  or 82.52%, of revenue. Other than the factor of provision for slow
moving  stock of $626,000,  the  percentage  of cost of sales to total  revenues
dropped  to  81.16%.   The  cost  of  sales  to  revenues  was  79.11%  for  the
corresponding  period in 2005,  resulting in an increase of 2.05%. The principal
reasons  for  this  increase  was the keen  competition  in the  cellular  phone
industry as exemplified by the price cutting  pressure in our selling price that
was greater  than the  reduction in our  purchase  cost,  and nearly half of the
sales in the  second  quarter  of 2006 were from  overseas  trade,  which  carry
smaller margins as compared to our domestic sales.

     For the  three  months  ended  September  30,  2006,  our cost of sales was
81.44%. Other than the factor of provision for slow moving stock, the percentage
of cost of  sales  to total  revenues  was  79.08%,  which  amounted  to a 1.32%
increase  when  comparing  to 77.76% over the same period in 2005.  This however
resulted in a decrease  when  compared to 85.41% in the second  quarter of 2006,
and was the result of a higher percentage of overseas trade in second quarter of
2006.


Sales and marketing expenses
----------------------------

     Sales  and  marketing  expenses  mainly  represent  payments  made to sales
personnel,  cost of  provision  for  after-sales  services,  and  marketing  and
transportation costs.

     For the nine months ended September 30, 2006, sales and marketing  expenses
were $926,000,  or 2.02%, of the total revenues,  as compared to $1,131,000,  or
6.81%, of total revenues for the corresponding  period in 2005. This constituted
a decrease  of 18.13% as  compared  to the  corresponding  period in 2005.  This
decrease was due to the reduction in the number of personnel.

     For the three months ended September 30, 2006, sales and marketing expenses
were reduced to $140,000 from $342,000,  representing a 57.49%  decrease that is
attributable to the fact that we laid off some redundant staff and  restructured
our marketing  department.  It represents a decrease of 67.44%, as compared with
$430,000 in the third quarter of 2005.


                                      -16-
<PAGE>

R&D expenses
------------

     Our R&D expenses  were  $187,000 for the nine months  ended  September  30,
2006,  which  represents  0.41% of total  revenue as compared  with $337,000 and
2.03%  respectively  in the same period of 2005.  This decrease of 44.51% in R&D
expenses  was  attributed  to  the   adjustment  of  strategy,   which  involves
forecasting  market demand and choosing the most popular  products in the market
for salesso that internal investment is reduced.

General and administrative expenses
-----------------------------------

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

     For the nine months ended  September 30, 2006,  general and  administrative
expenses was $1,883,000,  which represents  4.10% of total revenue.  Included in
general and  administrative  expenses  was a  provision  for  doubtful  accounts
amounting to $1,364,000,  due primarily to the  uncertainty of long  outstanding
account  receivables and trade  deposits.  Except for the provision for doubtful
accounts, the general and administrative expenses were $519,000, or 1.13% of the
total revenues, which represented a $250,000, or 32.51%, decrease as compared to
the second  quarter of 2005.  The decrease in the expenses was mainly due to the
fact that we laid off redundant  personnel.  Since the second half year of 2005,
we have  adjusted  our business  strategy,  and this  resulted in the  redundant
personnel.  We incurred some one-time  compensation  expenses as a result, while
the ordinary  staff costs,  including  the wages and  insurance  for  personnel,
decreased in relation to the decrease in the numbers of staff.

     For the three months ended September 30, 2006,  general and  administrative
expenses  were  $1,194,000.  Except for the  provision  of doubtful  debts,  the
expenses were only $141,000,  which decreased  $59,000,or  29.5%, as compared to
$200,000,  for the  corresponding  period in 2005.  General  and  administrative
expenses  decreased 25.4% in the third quarter of2006, as compared to the second
quarter, which was mainly due to personnel layoff.

Gross profit and gross profit margin

     For the nine  months  ended  September  30,  2006,  our  gross  profit  was
$8,022,000,  which represented an increase of $5,301,000 or 158.39%, as compared
to the gross profit of $3,347,000  in the same period in 2005.  Our gross profit
margin for the reporting period decreased from 20.16% in 2005 to 17.48% in 2006.
Included  in the  cost of  sales  in 2006 was a  provision  for  slowing  moving
inventory amounting to $626,000. Except for the effect of the provision for slow
moving inventory, the gross profit margin would have been 18.84%.

     The gross profit in the third quarter of 2006 is $3,809,000. Except for the
effect of the provision for slow moving inventory, the gross profit margin would
have been 20.92%,  and compared with the second quarter of 2006,  representing a
6.33% growth. However, it represents a slight decline of 0.40%, as compared with
21.32% in the third  quarter of 2005.  The decline in our gross profit margin is
attributable to:

1.   The gross profit of overseas trade being  relatively low. We have continued
     to develop our overseas customers since the second quarter of 2006, and the


                                      -17-
<PAGE>

     overseas  sales  accounted  for 18% of the total  sales in the  first  nine
     months of 2006.  At the  beginning  stage of the  development  of  overseas
     customers,  the price of our products was designed to be very favorable and
     attractive  to  our  customers,   and  the  gross  profit  of  overseas  is
     approximately  14%. As a result, the gross profit for the first nine months
     was lower in 2006 when comparing with the same period in 2005.
2.   The gross profit margin of trade sales is relatively low,  ranging from 12%
     to 16%, and is continuing to decline as a result of competitive factors.
3.   Due to seasonal factors and price cutting by domestic  manufacturers in the
     second quarter, our gross margin dropped to 14.59% in the second quarter of
     2006.  Along with the  recovery of the  cellular  phone market in the third
     quarter, the profit margin increased in the third quarter..


Net income

     For  the  nine  months  ended  September  30,  2006,  our  net  income  was
$4,647,000,  or 10.12%, of revenue.  Except for the provisions  described above,
our ordinary net income was $6,637,000,  or 14.46%, of the total revenues, which
presents an increase of $5,077,000, as compared with the corresponding period in
2005.  The  improvement  in our net profit is due  primarily to the fact that we
have been  successful in  overcoming a difficult  operating  environment  in the
first half year of 2005, and the growth of sales and the  development in oversea
customers  played  an  important  part  in  the  increase  in  our  net  income.
Furthermore, the sharp decline in the operating expenses resulting from our cost
control efforts is another reason for the improvement in net income.

     For  the  three  months  ended  September  30,  2006,  our net  income  was
$2,366,000, which represents 51% of total net profit in the first nine months of
2006. It increased by 20.84%,  as compared to the same period of in 2005. Except
for the provisions  described above, net imcome increased 99.28%, as compared to
the same period in 2005. The substantial increase in net profit is due primarily
to adjustment in our marketing  strategy and  improvements in the cellular phone
market in the third quarter.

     We expect that the  competition in the cellular phone market will be remain
intense in the PRC for the foreseeable future.  Fortunately,  as a result in the
change of our business strategy, we anticipate that the market will move towards
healthier  development and a more favorable  environment for domestic legitimate
manufacturers  such as Xelent.  In the future,  we will  continue to develop our
overseas  operations  with the  objective  of  establishing  a more  diversified
revenue base, fostering closer cooperation with telecommunication  providers and
making an determined  effort top collect our long outstanding  trade receivables
and trade deposits and reduce our inventory level.

LIQUIDITY AND SOURCE OF CAPITAL

     We generally finance our operations from cash flow generated internally.

     As of September 30, 2006,  we had current  assets of  $37,338,000.  Current
assets are mainly comprised of inventory of $2,361,000,  accounts  receivable of
$31,527,000,  trade  deposits and other  receivables  aggregated of  $3,112,000,
other current assets of $250,000, and restricted cash, cash and cash equivalents
of $88,000. Current liabilities included accounts payable of $11,764,000,  trade
deposit received of $260,000,  other accrued expenses and accrued liabilities of


                                      -18-
<PAGE>

$3,474,000,  short-term  bank loan of  $2,477,000,  amounts due to  directors of
$320,000, provision for warranty of $57,000 and tax payable of $181,000.

     We   offer   two   different   trading   terms  to  our   customers,   i.e.
cash-on-delivery and on credit term within 45-90 days. As of September 30, 2006,
our accounts receivable were $31,527,000,  which was an increase  $19,493,000 as
compared  to  $12,034,000  on December  31,  2005.  The  increase in our account
receivables was due primarily to trading with our two major customers,  XWSD and
CECM. As of September 30, 2006, these receivables all remain within our approved
credit  terms.  We have taken  steps to  control  credit  extended  to our major
customers and we review their outstanding balances regularly.  To reduce further
risk  exposure,  we may in the future  terminate our supply of products to those
customers if the credit limit is reached.

     As  of  September  30,  2006,  our  inventories  were   $2,361,000,   which
represented  a decrease of  $2,099,000  or 47.06%,  as compared to $4,460,000 on
December  30,  2005.  This  decrease  was  due in  large  part to our use of old
materials  during the  production  of our older models.  In addition,  our newly
developed products do not require us to carry large level of inventories because
the component  parts are readily  available.  We have  critically  and regularly
evaluated our inventory and a provision for  slow-moving  inventory was made. An
aggregate of $1,001,000 was taken as a provision for slow moving inventory as of
September 30, 2006.

     As of  September  30,  2006,  our trade  deposits  were  $3,112,000,  which
represented a decrease of $7,468,000 or 70.59%,  as compared to  $10,580,000  on
December 31, 2005.  This decrease was due primarily to delivery of our purchased
goods from our vendors,  which are Tian Feng Ju Yuan Technology  Company Limited
and China Electronic Apparatus Company, in the third quarter.

     As of September  30, 2006,  our accounts  payable were  $11,764,000,  which
represented  an increase of $3,825,000  or 48.18%,  as compared to $7,939,000 on
December 31, 2005. The increase in accounts payable was  attributable  mainly to
unpaid products from our vendor China Electronic Apparatus Company.

     As  of  September  30,  2006,  our  cash  and  bank  balances  were  mainly
denominated in Renminbi ("RMB") and Hong Kong Dollar.  Our revenue and expenses,
assets and liabilities are mainly denominated in RMB. Our activities, assets and
liabilities are mainly denominated in RMB, any further possible inflation of RMB
would  be   beneficial  to  us.  We  consider  that  the  exposure  to  exchange
fluctuations  is relatively low and therefore we have not engaged in any hedging
activity.












                                      -19-
<PAGE>
<TABLE>
<CAPTION>

CASH FLOWS

     As of September 30, 2006, we have the cash and cash equivalents of $88,000,
as compared to $2,974,000 on December 31, 2005.  This  represented a decrease of
$2,886,000,  or 97.04%.  This  decrease  was mainly due to the  increase  in the
account  receivables  resulting  from the  growth in the  revenues  in the third
quarter of 2006 and long  collection  period.  As of September  30, 2006, we had
account  receivables of  $31,527,000,  as compared to $12,034,000 as of December
31, 2005.  This  represented  an increase of  $19,493,000,  which was due to the
trade  with  XWSD and CECM in the  third  quarter  that  increased  the  account
receivables. As a result, the cash coming to us was slower.

     Our gearing ratio,  calculated as total debts over total assets, was 48.62%
as of September 30, 2006, as compared to 51.83% as of December 31, 2005.

CONTINGENT LIABILITIES

     As of September 30, 2006,  we had not entered into any guarantee  contracts
nor  non-disclosed  contracts  which will affect  stockholders'  equity or share
structure.

OFF BALANCE SHEET ARRANGEMENTS

     As of September 30, 2006, we had no off balance sheet arrangements.

CONTRACTUAL COMMITMENTS

     We are obligated to make future payments under various contracts, including
purchase and operating  leases.  The Company does not have any long-term debt or
capital  lease  obligations.   The  following  table  summarized  the  Company's
contractual   obligations  at  September  30,  2006,  reported  by  maturity  of
obligation.

                                                                  Payments due by period
                                               ------------------------------------------------------
Contractual Obligations                        Total      Less than  1-3 years  3-5 years  More than
                                                            1 year                          5 years
----------------------------                   ---------- ---------- ---------- ---------- ----------
<S>                                            <C>        <C>        <C>        <C>        <C>
                                                   $'000      $'000      $'000      $'000      $'000

Long-term Debt Obligations
                                                   2,477      2,477       --         --         --
Capital Lease Obligations
                                                    --         --         --         --         --
Operating Lease Obligations
                                                      31         11         20       --         --
Purchase Obligations
                                                      82         82                  --         --
Other long-term liabilities reflected on the
   registrant's balance sheet under GAAP            --         --         --         --         --
                                               ---------- ---------- ---------- ---------- ----------

Total
                                                   2,590      2,570         20       --         --
                                               ========== ========== ========== ========== ==========
</TABLE>





                                      -20-
<PAGE>

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. We are not presently engaged in and, if a suitable business target is
not identified by us prior to the prescribed liquidation date of the trust fund,
we may not engage in, any substantive commercial business.  Accordingly,  we are
not and,  until such time as we consummate a business  combination,  we will not
be, exposed to risks associated with foreign exchange rates,  commodity  prices,
equity prices or other  market-driven  rates or prices.  The net proceeds of our
initial public  offering held in the trust fund have been invested only in money
market funds meeting certain  conditions under Rule 2a-7  promulgated  under the
Investment  Company Act of 1940. Given our limited risk in our exposure to money
market funds, we do not view the interest rate risk to be significant.

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

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

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

     Translation  adjustments,  when  material  resulting  from this process are
recorded in accumulated other comprehensive  income (loss) within  stockholders'
equity.

Item 4.   Controls and Procedures.

     The Company maintains  disclosure controls and procedures that are designed
to ensure  that  information  required  to be  disclosed  in our  reports  filed
pursuant  to the  Securities  Exchange  Act of 1934,  as amended,  is  recorded,
processed,  summarized  and reported  within the time  periods  specified in the
SEC's  rules,  regulations  and  related  forms,  and that such  information  is
accumulated and  communicated to our principal  executive  officer and principal
financial officer, as appropriate,  to allow timely decisions regarding required
disclosure.

     The Company, under the supervision of our chief executive officer and chief
financial officer,  carried out an evaluation of the effectiveness of the design
and operation of its disclosure  controls and procedures as of the balance sheet
date.  Based upon that  evaluation,  management,  including our chief  executive
officer and chief  financial  officer,  concluded that the Company's  disclosure
controls and  procedures  were  effective  in alerting it in a timely  manner to
information relating to the Company required to be disclosed in this report.

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


                                      -21-
<PAGE>

                          PART II --- OTHER INFORMATION

Item 1.   Legal Proceedings.

     There is no litigation pending or threatened against the Registrant,  other
than certain legal proceedings arising in the ordinary course of business,  none
of which are expected to have a material  impact on the  Registrant's  financial
condition, operating results or liquidity.

Item 1A.  Risk Factors.

     None

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

     (a) None.

     (b) None.

     (c) None.

Item 3.   Defaults Upon Senior Securities.

     (a) None.

     (b) None.

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

     None

Item 5.   Other Information.

     None

Exhibits.

     Exhibits:
     ---------

     31.1           Certification pursuant to 18 U.S.C. Section 1350, as adopted
                    pursuant  to Section 302 of the  Sarbanes-Oxley  Act of 2002
                    (Chief Executive Officer).

     31.2           Certification pursuant to 18 U.S.C. Section 1350, as adopted
                    pursuant  to Section 302 of the  Sarbanes-Oxley  Act of 2002
                    (Chief Accounting Officer).

     32.1           Certification pursuant to 18 U.S.C. Section 1350, as adopted
                    pursuant  to Section 906 of the  Sarbanes-Oxley  Act of 2002
                    (Chief Executive Officer).

     32.2           Certification pursuant to 18 U.S.C. Section 1350, as adopted
                    pursuant  to Section 906 of the  Sarbanes-Oxley  Act of 2002
                    (Chief Accounting Officer).


                                      -22-
<PAGE>

                                   SIGNATURES

     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                                 ORSUS XELENT TECHNOLOGIES, INC.


                                                 By: /s/ Wang Xin
                                                    ----------------------------
                                                    Wang Xin
                                                    Chief Executive Officer

DATED:  November 14, 2006




















                                      -23-
<PAGE>

Exhibit Number                         Description of Document
--------------      ------------------------------------------------------------

     31.1           Certification pursuant to 18 U.S.C. Section 1350, as adopted
                    pursuant  to Section 302 of the  Sarbanes-Oxley  Act of 2002
                    (Chief Executive Officer).

     31.2           Certification pursuant to 18 U.S.C. Section 1350, as adopted
                    pursuant  to Section 302 of the  Sarbanes-Oxley  Act of 2002
                    (Chief Accounting Officer).

     32.1           Certification pursuant to 18 U.S.C. Section 1350, as adopted
                    pursuant  to Section 906 of the  Sarbanes-Oxley  Act of 2002
                    (Chief Executive Officer).

     32.2           Certification pursuant to 18 U.S.C. Section 1350, as adopted
                    pursuant  to Section 906 of the  Sarbanes-Oxley  Act of 2002
                    (Chief Accounting Officer).

---------------------
* filed herewith