SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549









FORM
10-Q




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


ACT
OF 1934





For
the quarterly period ended June 30, 2009





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


ACT
OF 1934





For
the transition period from ______ to ______.




Commission
file number: 001-33456




ORSUS
XELENT TECHNOLOGIES, INC.


(Exact
name of registrant as specified in its charter)




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





29th Floor,
Tower B, Chaowai MEN Office Building


26
Chaowai Street, Chaoyang Disc.


Beijing,
People’s Republic Of China 100020


(Address
of principal executive offices, including zip code)




86-10-85653777


(Registrant’s
telephone number, including area code)




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





Yes  x                      No   ̈





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





Yes   ̈                      No  x





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
accelerated filer  ̈                                                                                          Accelerated
filer  ̈





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





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





Yes   ̈                      No  x





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





Yes   ̈                      No  x





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





Class
            
            Outstanding
      at August 19, 2009Common
      Stock, US$.001 par value per share
            
            29,756,000
      shares








PagePart
      I: Financial Information
                
                
                1Item
      1 -Financial Statements
                
                
                1Consolidated
      Balance Sheets
                
                
                1Consolidated
      Statements of Income and Comprehensive Income
                
                
                2Consolidated
      Statements of Cash Flows
                
                
                3Notes
      to Consolidated Financial Statements
                
                
                4Item
      2 - Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                
                
                14Item
      3 - Quantitative and Qualitative Disclosures about Market
    Risk
                
                
                21Item
      4T - Controls and Procedures
                
                
                22Part
      II. Other Information
                
                
                22Item
      1 - Legal Proceedings
                
                
                22Item
      1A - Risk Factors
                
                
                22Item
      2 - Unregistered Sales of Equity Securities and Use of
      Proceeds
                
                
                22Item
      3 - Defaults Upon Senior Securities
                
                
                23Item
      4 - Submission of Matters to a Vote of Security Holders
                
                
                23Item
      5 - Other Information
                
                
                23Item
      6 - Exhibits
                
                
                23Signatures
                
                
                24












PART
I – FINANCIAL INFORMATION


Item
1.               Financial
Statements




Orsus
Xelent Technologies, Inc. and Subsidiaries


Consolidated Balance
Sheets





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


June
      30, 2009
                                      
                                      
                                      December
      31, 2008(Unaudited)
                                      
                                      
                                      (Audited)ASSETSCurrent
      assetsCash
      and cash equivalents
                                      
                                      
                                      32
                                      
                                      
                                      
                                      102Accounts
      receivable
                                      
                                      
                                      82,317
                                      
                                      
                                      
                                      82,076Advance
      to suppliers
                                      
                                      
                                      20,249
                                      
                                      
                                      
                                      8,441Other
      current assets
                                      
                                      
                                      1,823
                                      
                                      
                                      
                                      1,859Pledged
      deposit
                                      
                                      
                                      1,289
                                      
                                      
                                      
                                      1,287Total
      current assets
                                      
                                      
                                      105,710
                                      
                                      
                                      
                                      93,765Property,
      plant and equipment, net
                                      
                                      
                                      198
                                      
                                      
                                      
                                      241105,908
                                      
                                      
                                      
                                      94,006LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesLoan
      payable-bank
                                      
                                      
                                      9,379
                                      
                                      
                                      
                                      9,484Loan
      payable
                                      
                                      
                                      307
                                      
                                      
                                      
                                      364Current
      portion of mortgage loan
                                      
                                      
                                      -
                                      
                                      
                                      
                                      12Accounts
      payable
                                      
                                      
                                      16,485
                                      
                                      
                                      
                                      16,353Accrued
      expenses and other accrued liabilities
                                      
                                      
                                      18,593
                                      
                                      
                                      
                                      12,012Trade
      deposits received
                                      
                                      
                                      1,935
                                      
                                      
                                      
                                      1,934Due
      to shareholders
                                      
                                      
                                      469
                                      
                                      
                                      
                                      457Income
      tax payable
                                      
                                      
                                      5,654
                                      
                                      
                                      
                                      4,989Total
      current liabilities
                                      
                                      
                                      52,822
                                      
                                      
                                      
                                      45,605Commitments
      and contingencies (Note 11)Stockholders’
      equityPreferred
      stock- US US$0.001 par value, Authorized 100,000,000 shares; non
      issued
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Common
      stock, US$0.001 par value;
                                        Authorized
      100,000,000 shares;
                                        Issued
      and outstanding 29,756,000 shares, both periods
                                      
                                      
                                      30
                                      
                                      
                                      
                                      30Additional
      paid-in capital
                                      
                                      
                                      3,209
                                      
                                      
                                      
                                      3,209Dedicated
      reserves
                                      
                                      
                                      1,115
                                      
                                      
                                      
                                      1,042Accumulated
      other comprehensive income
                                      
                                      
                                      5,632
                                      
                                      
                                      
                                      5,389Retained
      earnings
                                      
                                      
                                      43,100
                                      
                                      
                                      
                                      38,731Total
      stockholders’ equity
                                      
                                      
                                      53,086
                                      
                                      
                                      
                                      48,401105,908
                                      
                                      
                                      
                                      94,006





See notes
to consolidated financial statements.


1





Orsus
Xelent Technologies, Inc. and Subsidiaries


Unaudited Consolidated Statements of
Income and Comprehensive Income
 
 (US Dollars in
thousands except share data and per share amounts)





Three
      months ended
                  June
      30,
              
              
              Six
      months ended
                  June
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Operating
      revenue – Net sales
              
              
              23,332
              
              
              
              28,894
              
              
              
              43,056
              
              
              
              49,613Cost
      of operating revenue
              
              
              20,242
              
              
              
              25,728
              
              
              
              36,874
              
              
              
              43,229Gross
      income
              
              
              3,090
              
              
              
              3,166
              
              
              
              6,182
              
              
              
              6,384Operating
      expenses:Selling
      expenses
              
              
              50
              
              
              
              122
              
              
              
              173
              
              
              
              225General
      and administrative expenses
              
              
              103
              
              
              
              1,135
              
              
              
              369
              
              
              
              1,571Research
      and development expenses
              
              
              11
              
              
              
              26
              
              
              
              28
              
              
              
              141Depreciation
              
              
              19
              
              
              
              24
              
              
              
              42
              
              
              
              49Total
      operating expenses
              
              
              183
              
              
              
              1,307
              
              
              
              612
              
              
              
              1,986Operating
      income
              
              
              2,907
              
              
              
              1,859
              
              
              
              5,570
              
              
              
              4,398Other
      income (expenses)Interest
      expenses
              
              
              (266
              )
              
              
              (240
              )
              
              
              (488
              )
              
              
              (478
              )Other
      income
              
              
              -
              
              
              
              214
              
              
              
              17
              
              
              
              378Income
      before income taxes
              
              
              2,641
              
              
              
              1,833
              
              
              
              5,099
              
              
              
              4,298Provision
      for income taxes
              
              
              334
              
              
              
              327
              
              
              
              657
              
              
              
              875Net
      income
              
              
              2,307
              
              
              
              1,506
              
              
              
              4,442
              
              
              
              3,423Other
      comprehensive incomeForeign
      currency translation adjustment
              
              
              179
              
              
              
              50
              
              
              
              243
              
              
              
              1,516Comprehensive
      income
              
              
              2,486
              
              
              
              1,556
              
              
              
              4,685
              
              
              
              4,939Earnings
      per share:Basic
      and diluted
              
              
              0.08
              
              
              
              0.05
              
              
              
              0.15
              
              
              
              0.12Weighted
      average number of common shares outstanding – basic and
      diluted
              
              
              29,756,000
              
              
              
              29,756,000
              
              
              
              29,756,000
              
              
              
              29,756,000





See notes
to consolidated financial statements.


2




Orsus
Xelent Technologies, Inc. and Subsidiaries


Unaudited Consolidated Statements of
Cash Flows
 
 
 (US Dollars in
thousands except share data and per share amounts)





Six
      months ended
                              June
      30,2009
                            
                            
                            2008Cash
      flows from operating activitiesNet
      income
                            
                            
                            4,442
                            
                            
                            
                            3,423Adjustments
      to reconcile net income to net cash used in operating
      activities:Depreciation
                            
                            
                            43
                            
                            
                            
                            49Compensation
      costs for stock options granted
                            
                            
                            -
                            
                            
                            
                            725Changes
      in assets and liabilities:Accounts receivable
                            
                            
                            (123
                            )
                            
                            
                            (12,098
                            )Inventories
                            
                            
                            -
                            
                            
                            
                            4Advance to
      suppliers
                            
                            
                            8,116
                            
                            
                            
                            (8,554
                            )Other current
      assets
                            
                            
                            (19,888
                            )
                            
                            
                            (78
                            )Trade deposits
      received
                            
                            
                            -
                            
                            
                            
                            127Accounts
payable
                            
                            
                            117
                            
                            
                            
                            12,721Due to
    shareholders
                            
                            
                            -
                            
                            
                            
                            (17
                            )Accrued expenses and other
      accrued liabilities
                            
                            
                            6,622
                            
                            
                            
                            1,179Income tax
    payables
                            
                            
                            615
                            
                            
                            
                            801Net
      cash used in operating activities
                            
                            
                            (56
                            )
                            
                            
                            (1,718
                            )Cash
      flows from financing activitiesAdvance
      paid by shareholders
                            
                            
                            -
                            
                            
                            
                            89Proceeds
      from short-term bank loan
                            
                            
                            2,512
                            
                            
                            
                            2,563Proceeds
      from short-term loan from a non-financial institution
                            
                            
                            -
                            
                            
                            
                            57Repayment
      of loan payable-bank
                            
                            
                            (2,687
                            )
                            
                            
                            (2,563
                            )Repayment
      of mortgage loan
                            
                            
                            (12
                            )
                            
                            
                            (31
                            )Net
      cash (used in)/provided by financing activities
                            
                            
                            (187
                            )
                            
                            
                            115Effect of foreign currency
      exchange rate fluctuation on cash and cash
      equivalents
                            
                            
                            173
                            
                            
                            
                            233Net
      decrease in cash and cash equivalents
                            
                            
                            (70
                            )
                            
                            
                            (1,370
                            )Cash
      and cash equivalents-beginning of the period
                            
                            
                            102
                            
                            
                            
                            2,928Cash
      and cash equivalents-end of the period
                            
                            
                            32
                            
                            
                            
                            1,558Supplemental
      disclosure of cash flow informationInterest
      Paid
                            
                            
                            43
                            
                            
                            
                            478Income Tax
      Paid
                            
                            
                            41
                            
                            
                            
                            87





See notes
to consolidated financial statements.


3







ORSUS
XELENT TECHNOLOGIES, INC.




NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




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





1.
            ORGANIZATION





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





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





Upon the
completion of the reorganization, ORS assumed the business operations of UFI as
primarily undertaken by its subsidiary, Beijing Orsus Xelent Technologies &
Trading Co., Limited (“BOXT”) (English translation for identification purposes
only), an enterprise incorporated in Beijing, PRC on November 10, 2004 which is
engaged in the business of design, retail and wholesale distribution of cellular
phones.





On July
14, 2005, Orsus Xelent Holdings (BVI) Limited (“OXHBVI”) was incorporated by ORS
in the British Virgin Islands (“BVI”) with issued capital of US$2.00. OXHBVI is
100% owned by ORS; OXHBVI’s principal activity is investment holding. On July
22, 2005, Orsus Xelent Trading (HK) Company Limited (“OXTHK”) was incorporated
by OXHBVI in HK with issued capital of 100.00 Hong Kong dollars (equivalent to
US$13.00); OXTHK is a company engaged in trading cellular phones and
accessories, and is 100% owned by OXHBVI.





2.
            DESCRIPTION
      OF BUSINESS





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





3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





Basis of presentation





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





The
accompanying unaudited condensed consolidated financial statements as of June
30, 2009 and for the three months and six months ended June 30, 2009 and 2008
have been prepared in accordance with GAAP for interim financial information and
with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X applicable to
smaller reporting companies. In the opinion of management, these unaudited
consolidated interim financial statements include all adjustments considered
necessary to ensure the financial statements are not misleading.





The
unaudited consolidated interim financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto for the year ended December 31, 2008.





4


Basis
of consolidation





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





Revenue
recognition





Net sales
represent the invoiced value of goods sold, net of value-added tax (“VAT”) and
returns.  The Company generally recognizes product revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable, and collectability is probable.  The Company
has a policy of including handling costs incurred for finished goods, which are
not significant, in sales and marketing expenses.





Cash
and cash equivalents





Cash and
cash equivalents include all cash, deposits in banks and other highly liquid
investments with initial maturities of three months or less to be cash
equivalents.  As of June 30, 2009 and December 31, 2008, almost all
the cash and cash equivalents were denominated in RMB and were placed with banks
in the PRC.  They are not freely convertible into foreign currencies
and the remittance of these funds out of the PRC is subject to exchange control
restrictions imposed by the PRC government.  The remaining
insignificant balance of cash and cash equivalents were denominated in Hong Kong
dollars and US$.





Use
of Estimates





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




Recently
issued accounting pronouncements





In March
2008, the FASB issued SFAS No. 161, “Disclosure about Derivative Instruments and
Hedging Activities – an amendment to FASB Statement No. 133.” SFAS 161 is
intended to improve financial standards for derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understanding their effects on an entity’s financial position, financial
performance, and cash flows.  Entities are required to provide
enhanced disclosure about: (a) how and why an entity uses derivative
instruments; (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations; and (c) how
derivative instruments and related hedged items affect an entity financial
position, financial performance and cash flows.  It is effective for
financial statements issued for fiscal years beginning after November 15, 2008,
with early adoption encouraged.  The adoption of this statement has no
material effect on the Company’s financial statements.





In April
2009, the FASB issued three FASB Staff Positions (“FSPs”) to provide additional
application guidance and enhance disclosures regarding fair value measurement
and impairment of securities. FSP FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly,” provides
guidelines for making fair value measurements more consistent with the
principles presented in SFAS No.157. FSP FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments,” enhances consistency in
financial reporting by increasing the frequency of fair value disclosures. FSP
FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments,” provides additional guidance designed to create greater clarity
and consistency in accounting for and presenting impairment losses on
securities. These three FSPs are effective for interim and annual periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009.  The adoption of this statement has no material effect
on the Company's financial statements.





5





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 157, “Fair Value Measurement” (FAS 157). While this statement does
not require new fair value measurements, it provides guidance on applying fair
value and expands required disclosures. FAS157 is effective for the Company
beginning in fiscal 2008 as it applies to fair value measurements of financial
assets and financial liabilities and to fair value measurements of non-financial
items that are recognized or disclosed at fair value in the financial statements
on a recurring basis, and beginning in fiscal 2009 it applies to fair value
measurements of non-financial assets and non-financial liabilities that are
recognized or disclosed at fair value in the financial statements on a
nonrecurring basis. The adoption of FAS 157 has no material impact on the
Company’s financial statements.





In May
2009, the FASB issued Statement No. 165, “Subsequent Events” (FAS 165). The
statement established general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. This Statement requires the disclosure
of the date through which an entity has evaluated subsequent events and the
basis for that date, i.e., whether that date represents the date the financial
statements were issued or were available to be issued.




FAS
165 is effective for the Company beginning in this second quarter of fiscal
2009. We evaluated subsequent events through August 19, 2009, the date of filing
of this Quarterly Report on Form 10-Q with the Securities and Exchange
Commission (“SEC”).




In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R)(SFAS 167),which changes the
consolidation rules as they relate to variable interest entities. Specifically,
SFAS 167 makes significant changes to the model for determining who should
consolidate a variable interest entity, and also addresses how often this
assessment should be performed. SFAS 167 will be effective for us beginning in
the first quarter of 2010. We do not expect the adoption will have any impact on
our consolidated financial statements.




4.
            ACCOUNTS
      RECEIVABLE





The main
component of US$82,317 of accounts receivable as of June 30, 2009, was mainly a
balance of US$74,072 due from Beijing Xingwang Shidai Commerce Co., Ltd.
(“Xingwang”). On December 25, 2008, Xingwang entered into an irrevocable Credit
Guarantee Contract (the “Guarantee Contract”) with Zhong Hui Guarantee
Corporation, a third-party guarantee company licensed by the PRC government
(“Zhonghui”), and BOXT under which Zhonghui agreed to guarantee up to Renminbi
(“RMB”) 300 million (equivalent to US$43,829), for the principal debt, fine,
damages arising out of breach of contract, and costs incurred for realizing
those legal rights including but not limited to legal proceeding fees, attorney
fees and travel expenses arising out of the distributor agreement entered into
by BOXT and Xingwang. The Guarantee Contract was effective as of December 25,
2008 and provides a guarantee for all of the accounts receivable that are or may
become outstanding from Xingwang to BOXT from January 1, 2009 through December
31, 2009. Such accounts receivables are guaranteed for a period of two years
from the date they are due.




5.
            OTHER
      CURRENT ASSETS





US$1,823
of the Company’s other current assets at June 30, 2009 included other
receivables with a balance of US$1,731 which relates to the refundable deposit
paid for the potential acquisition of Hebei Leimeng Times Telecommunication
Equipment Co. Ltd.  The potential acquisition was terminated during
the year ended December 31, 2008.




6.
            PLEDGED
      DEPOSIT





RMB8,820
(US$1,289) of deposit at June 30, 2009 and RMB8,820 (US$1,287) of deposit at
December 31, 2008 was paid to a guarantee company in September 2008 as a pledge
for RMB47,000 of bank loans. Refer to Note 8, “Loan Payable-bank” for more
discussion of the bank loans.


6







7.
            PROPERTY,
      PLANT AND EQUIPMENT





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


June 30, 2009
                                                  
                                                  December 31, 2008US$’000
                                                  
                                                  US$’000Moulds
                                                  
                                                  4
                                                  
                                                  4Leasehold
      improvements
                                                  
                                                  131
                                                  
                                                  131Plant
      and machinery
                                                  
                                                  -
                                                  
                                                  20Office
      equipment
                                                  
                                                  323
                                                  
                                                  303Motor
      vehicles
                                                  
                                                  303
                                                  
                                                  303761
                                                  
                                                  761Less:
      Accumulated depreciation
                                                  
                                                  (563
                                                  )
                                                  (520
                                                  )Net
                                                  
                                                  198
                                                  
                                                  241





The
depreciation expenses were US$19 and US$24 for the three months ended June 30,
2009 and 2008 respectively. The depreciation expenses were US$43 and US$49 for
the six months ended June 30, 2009 and 2008 respectively.




8.
            LOAN
      PAYABLE-BANK





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





At
      June 30, 2009
                
                Amount
      (RMB’000)
                
                Annual
      interest rate
                
                Term
                
                Guarantee
      provided byLoan
      from Beijing Rural Commercial Bank
                
                47,000
      (US$6,866)
                
                10.08%
                
                September
      28, 2008 to September 27, 2009
                
                Director
      Liu Yu; A guarantee company; pledged deposit of
  RMB8,820KLoan
      from Huaxia Bank
                
                17,200
      (US$2,513)
                
                6.372%
                
                February
      20, 2009 to February 20, 2010
                
                Director
      Liu Yu; Two third party companies; Distributor
  Xingwang.





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





Interest
expenses incurred for the three months ended June 30, 2009 and 2008 were US$266
and US$240, respectively. Interest expenses incurred for the six months ended
June 30, 2009 and 2008 were US$488 and US$478, respectively.




9.
            LOAN
      PAYABLE





The
short-term loan outstanding at June 30, 2009 was provided by a third party
company. It is unsecured, interest-free and repayable on September 27,
2009.





10.
            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)




7







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




June 30, 2009
                    
                    
                    December 31, 2008US$’000
                    
                    
                    US$’000Due
      to shareholdersMr.
      Liu Yu
                    
                    
                    219
                    
                    
                    
                    219Mr.
      Wang Xin
                    
                    
                    250
                    
                    
                    
                    238469
                    
                    
                    
                    457Bank
      loans guaranteed by Mr. Liu Yu
                    
                    
                    9,379
                    
                    
                    
                    9,484





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




11.
            COMMITMENTS
      AND CONTINGENCIES





(a)           Operating
lease commitments





At June
30, 2009, the Company had non-cancelable operating leases for the office
premises, under which the expected rental payment due within the twelve months
was US$26. The lease term is from January 1, 2009 to December 31,
2009.





(b)          Contingencies





Tax
penalty





In
accordance with the PRC’s tax regulations, BOXT’s sales are subject to a 17% of
value added tax (“VAT”) upon the issuance of VAT invoices to customers. BOXT
follows the practice of reporting its revenue to PRC tax authorities for VAT
purposes when invoices are issued. As of June 30, 2009 and December 31, 2008,
sales amounted to approximately US$217,623 and US$175,834, respectively, for
which VAT invoices have not yet been issued. The associated output VAT amounts
with the above unbilled revenue were US$36,996 and US$29,892 as of June 30, 2009
and December 31, 2008. Meanwhile, as of June 30, 2009 and December 31, 2008,
purchases amounted to US$137,308 and US$137,119 respectively for which VAT
invoices have not been received from suppliers. The input VAT amounts associated
with the above purchase were US$23,342 and US$23,310 as of June 30, 2009 and
December 31, 2008. The net VAT payables resulting from the above non-issued and
non-received invoices were US$13,686 and US$6,582 as of June 30, 2009 and
December 31, 2008. The net VAT payables resulting from the issued and received
invoices were US$2,510 and US$3,590 as of June 30, 2009 and December 31, 2008.
The total net VAT payables were US$16,196 and US$10,172 as of June 30, 2009
and December 31, 2008 respectively. These balance amounts were included in
“Accrued expenses and other accrued liabilities.”





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





The above
practice is not in strict compliance with the relevant PRC laws and regulations
in respect of VAT and EIT.  Despite the fact that BOXT has made full
provision on VAT and EIT including any estimated surcharge in the condensed
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.


8







Financial guarantee
contract





On June
20, 2007, BOXT entered into a guarantee contract for three years from June 20,
2007 to June 16, 2010 to serve as guarantor of a bank loan amounting to
approximately US$17,530 (equivalent to RMB120,000) to an independent
third-party, Chinacom Communications Co., Ltd. (“CECT”), from Beijing Rural Bank
to provide CECT with capital for equipment purchases. Under the guarantee
contract, BOXT shall perform all obligations of CECT under the loan contract
including principal and interest, late interest payments, fines and other
expenses incurred in the claiming process, if CECT fails to perform its
obligations as set forth in the loan contract, including, but not limited to,
ceasing production, going out of business, dissolving the business, having its
business license withdrawn and filing for bankruptcy.





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




12.
            DEDICATED
      RESERVES





The
Company’s subsidiary, BOXT, was required to allocate at least 10% of its after
tax profits as determined under generally accepted accounting principal in the
PRC to a statutory dedicated reserve until the reserve balance reaches 50% of
its registered capital. For the six months ended June 30, 2009, BOXT made
appropriations to this statutory reserve of US$73. The accumulated balance of
the dedicated reserve at BOXT as of June 30, 2009 and December 31, 2008 were
US$1,115 and US$1,042, respectively.





In
accordance with the PRC laws and regulations, BOXT is restricted in its ability
to transfer a portion of its net assets to UFI in the form of dividends, which
amounted to US$2,795 as of June 30, 2009.




13.
            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


9







A summary
of the share option plan activity during the six month period ended June 30,
2009 is presented below:





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




14.
            PENSION
      COSTS





As
stipulated by the PRC regulations, the Company maintains a defined contribution
retirement plan for all of its employees who are residents of the
PRC.  All retired PRC employees of the Company are entitled to an
annual pension equivalent to their basic annual salary upon
retirement.  The Company contributed to a state sponsored retirement
plan approximately 20% of the basic salary of its PRC employees and has no
further obligations for the actual pension payments or post-retirement benefits
beyond the annual contributions.  The state sponsored retirement plan
is responsible for the entire pension obligation payable to all employees. The
pension expenses were US$6 and US$8 for the three months ended June 30, 2009 and
2008 respectively. The pension expenses were US$28 and US$16 for the six months
ended June 30, 2009 and 2008 respectively.




15.
            INCOME
      TAXES





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





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





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





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





The
Company’s income is principally generated in the PRC by BOXT. Since BOXT is
registered as a wholly-owned foreign investment enterprise (“WOFE”), it is
subject to tax laws applicable to WOFEs in the PRC and is fully exempt from the
PRC enterprise income tax (“EIT”) of 24% for two years commencing from fiscal
year 2005, and then is subject to a 50% reduction for the following three
years.





On March
16, 2007, a New Enterprise Income Tax Law (“NEITL”) was issued in the PRC. Prior
to the issuance of the NEITL, domestic enterprises (“DE”) and foreign invested
enterprises (“FIE”) in the PRC were taxed under different EIT laws. The NEITL
unifies the enterprise tax laws applicable to both DE and FIE for fiscal years
commencing on or after January 1, 2008.





By virtue
of the NEITL, BOXT was subject to the unified EIT rate of 25% in effect from
January 1, 2008. However, the 50% tax reduction, which has already been obtained
by BOXT under the old tax laws, can still be maintained and the remaining tax
holiday, which was commenced before 2008, can still be enjoyed by BOXT, until
expiration in 2009.


10







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





(a)           Income
tax expenses comprised the following:


Six
      months ended June 30,2009
                        
                        
                        2008US$’000
                        
                        
                        US$’000Current
      taxUnited
      States
                        
                        
                        -
                        
                        
                        
                        -Hong
      Kong
                        
                        
                        -
                        
                        
                        
                        228PRC
                        
                        
                        657
                        
                        
                        
                        647657
                        
                        
                        
                        875





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




Six months ended June
    30,2009
                        
                        
                        2008PRC
      statutory income tax
                        
                        
                        25
                        %
                        
                        
                        25
                        %Tax
      exemption and tax relief granted to PRC subsidiary
                        
                        
                        (12.5
                        )%
                        
                        
                        (12.5
                        )%12.5
                        %
                        
                        
                        12.5
                        %




16.
            EARNINGS
      PER SHARE





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




Three months ended
                    
                    
                    Six months endedJune
      30, 2009
                    
                    
                    June
      30, 2008
                    
                    
                    
                    June
      30, 2009
                    
                    
                    June
      30, 2008Numerator
      used in basic net income per share:Net
      income
                    
                    
                    2,307
                    
                    
                    
                    1,506
                    
                    
                    
                    4,442
                    
                    
                    
                    3,423Shares
      (denominator):Weighted
      average ordinary shares outstanding
                    
                    
                    29,756,000
                    
                    
                    
                    29,756,000
                    
                    
                    
                    29,756,000
                    
                    
                    
                    29,756,000Plus:
      weighted average incremental shares from assumed exercise of
      warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Weighted
      average ordinary shares outstanding used in computing diluted net
      income per ordinary share
                    
                    
                    29,756,000
                    
                    
                    
                    29,756,000
                    
                    
                    
                    29,756,000
                    
                    
                    
                    29,756,000Earnings
      per ordinary share-basic
                    
                    $
                    0.08
                    
                    
                    $
                    0.05
                    
                    
                    $
                    0.15
                    
                    
                    $
                    0.12Earnings
      per ordinary share-diluted
                    
                    $
                    0.08
                    
                    
                    $
                    0.05
                    
                    
                    $
                    0.15
                    
                    
                    $
                    0.12




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


11







17.
            CONCENTRATIONS
      AND CREDIT RISKS





At June
30, 2009 and December 31, 2008, the Company had a credit risk exposure of
uninsured cash in banks of approximately US$32 and US$102, respectively. 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.





The
Company is engaged principally in the design and trading of cellular phones to
three primary distributors in the PRC.  The Company buys certain major
materials from six major suppliers. In addition, the Company subcontracts
material purchasing and assembly works of cellular phones primarily to five
subcontracting factories.  The Company’s policy is that the sole agent
arrangement gives the dealers more incentive to promote the Company’s products
and reduce the Company’s exposure to the distribution market. On the other hand,
the diversification of suppliers will reduce the risk of increasing production
cost.





(a)
            During
      the six months ended June 30, 2009 and 2008, the Company’s operating
      revenue was mainly derived from three distributors. For the six months
      ended June 30, 2009 and 2008, 92% and 100%, respectively, of total revenue
      was derived from our largest distributor Xingwang. For the three months
      ended June 30, 2009 and 2008, 86% and 100% of total revenue was derived
      from our largest distributor Xingwang. There was no trade deposit received
      from Xingwang as of June 30, 2009 and December 31, 2008 respectively.
      Accounts receivables from Xingwang were US$74,072 and US$77,740 as of June
      30, 2009, and December 31, 2008 respectively. As mentioned in note 4,
      “accounts receivable”, in year 2009, a guarantee company provided a
      guarantee up to RMB300 million for the accounts receivable from Xingwang
      for two years from the date they are
due.





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





Three
      months ended June 30,
                  
                  
                  Six
      months ended June 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008%
                  
                  
                  %
                  
                  
                  %
                  
                  
                  %(Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)Supplier
      A
                  
                  
                  53
                  
                  
                  
                  -
                  
                  
                  
                  49
                  
                  
                  
                  -Supplier
      B
                  
                  
                  31
                  
                  
                  
                  -
                  
                  
                  
                  42
                  
                  
                  
                  -Supplier
      C
                  
                  
                  16
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Supplier
      D
                  
                  
                  -
                  
                  
                  
                  46
                  
                  
                  
                  -
                  
                  
                  
                  36Supplier
      E
                  
                  
                  -
                  
                  
                  
                  35
                  
                  
                  
                  -
                  
                  
                  
                  28Supplier
      F
                  
                  
                  -
                  
                  
                  
                  10
                  
                  
                  
                  -
                  
                  
                  
                  20Supplier
      G
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  11Total
                  
                  
                  100
                  
                  
                  
                  91
                  
                  
                  
                  91
                  
                  
                  
                  95





Advance
to the above suppliers were US$13,323 and US$8,114 as of June 30, 2009 and
December 31, 2008 respectively. Account payables owed to the above suppliers
were US$1,552 and US$6,961 as of June 30, 2009 and December 31, 2008,
respectively.





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





June 30, 2009
                    
                    
                    December 31,2008US$’000
                    
                    
                    US$’000PRC
                    
                    
                    195
                    
                    
                    
                    237Hong
      Kong
                    
                    
                    3
                    
                    
                    
                    4Total
      long-lived assets
                    
                    
                    198
                    
                    
                    
                    241




12







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.




18.
            RECLASSIFICATION





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




19.
            SUBSEQUENT
      EVENT





There are
no significant subsequent events that may require disclosure.  A
subsequent event review has been made up to August 19, 2009.


13





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





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





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





OVERVIEW





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





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





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





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





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





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





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


14





Many of Xelent’s cellular phone
products are equipped with industry cutting-edge features such as 1.8 to
2.8-inch CSTN, TFT or QVGA dual-color display; capacity to record videos lasting
one minute up to four hours; 300K to 3 million pixel photography; MP3, MPEG4 and
U disk support; dual stereo speakers; e-mail messaging; multimedia messaging; 40
to 64 ring tone storage; slim bar-phone and flip-phone technology; and
innovative ultra-thin lightweight design.





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





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





The Company’s cell phone products are
mainly produced through Original Equipment Manufacturers (OEMs) and the products
were delivered from OEMs to distributors directly. The Company keeps no or very
limited level of inventory.





Business
Review





The Company sold 256,700 cell
phone units during the second quarter of 2009. For the three months ended
June 30, 2009, the Company generated revenue of US$23,332,000, representing
a decrease of 19.25% as compared to US$28,894,000 for the same period in 2008,
in contrast with the entire cell phone market, in which sales declined by
9.8% compared to the same period in 2008, as recently reported by Sino
Market Research Limited. Meanwhile, the Company achieved a gross profit margin
of 13.24%, an increase of 2.28% as compared to 10.96% earned for the same period
in 2008. The Company believes this increase is mainly attributable to
its appropriate products strategy and its successful handling of the
telecom carriers market. 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.  90% of the products the Company sold in this quarter
were priced below RMB1,000 (approximately US$146). This has led to a decrease of
US$76,000 or 2.40% in the Company’s gross income, from US$3,166,000 earned
in the three months ended June 30, 2008, to US$3,090,000 for the three months
ended June 30, 2009.





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





The Company is aware that the cell
phone market in the PRC may continue to experience some difficulty in the early
2009, but it still projects that the industry will be in a better position in
2009 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:


15


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.





In
summary, the Company predicts at least moderate growth in both sales revenues
and net income during the fiscal year ending December 31, 2009.





CRITICAL
ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES





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





RESULTS
OF OPERATIONS





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





Six
      months ended
                  
                  
                  Six
      months endedJune
      30, 2009
                  
                  
                  June
      30, 2008
                  
                  
                  ComparisonUS$000
                  
                  
                  %
      of Revenue
                  
                  
                  US$000
                  
                  
                  %
      of Revenue
                  
                  
                  US$000
                  
                  
                  %Net
      sales
                  
                  
                  43,056
                  
                  
                  
                  100.00
                  %
                  
                  
                  49,613
                  
                  
                  
                  100.00
                  %
                  
                  
                  (6,557
                  )
                  
                  
                  (13.22
                  )%Cost
      of sales
                  
                  
                  36,874
                  
                  
                  
                  85.64
                  %
                  
                  
                  43,229
                  
                  
                  
                  87.13
                  %
                  
                  
                  (6,355
                  )
                  
                  
                  (14.70
                  )%Sales
      & marketing expenses
                  
                  
                  173
                  
                  
                  
                  0.40
                  %
                  
                  
                  225
                  
                  
                  
                  0.45
                  %
                  
                  
                  (52
                  )
                  
                  
                  (23.11
                  )%General
      & admin. expenses
                  
                  
                  369
                  
                  
                  
                  0.86
                  %
                  
                  
                  1,571
                  
                  
                  
                  3.17
                  %
                  
                  
                  (1,202
                  )
                  
                  
                  (76.51
                  )%R&D
      expenses
                  
                  
                  28
                  
                  
                  
                  0.07
                  %
                  
                  
                  141
                  
                  
                  
                  0.28
                  %
                  
                  
                  (113
                  )
                  
                  
                  (80.14
                  )%Depreciation
                  
                  
                  42
                  
                  
                  
                  0.10
                  %
                  
                  
                  49
                  
                  
                  
                  0.10
                  %
                  
                  
                  (7
                  )
                  
                  
                  (14.29
                  )%Interest
      expenses
                  
                  
                  488
                  
                  
                  
                  1.13
                  %
                  
                  
                  478
                  
                  
                  
                  0.96
                  %
                  
                  
                  10
                  
                  
                  
                  2.09
                  %Other
      income
                  
                  
                  17
                  
                  
                  
                  0.04
                  %
                  
                  
                  378
                  
                  
                  
                  0.76
                  %
                  
                  
                  (361
                  )
                  
                  
                  (95.50
                  )%Income
      before income taxes
                  
                  
                  5,099
                  
                  
                  
                  11.84
                  %
                  
                  
                  4,298
                  
                  
                  
                  8.66
                  %
                  
                  
                  801
                  
                  
                  
                  18.64
                  %Income
      tax
                  
                  
                  657
                  
                  
                  
                  1.53
                  %
                  
                  
                  875
                  
                  
                  
                  1.76
                  %
                  
                  
                  (218
                  )
                  
                  
                  (24.91
                  )%Net
      income
                  
                  
                  4,442
                  
                  
                  
                  10.32
                  %
                  
                  
                  3,423
                  
                  
                  
                  6.90
                  %
                  
                  
                  1,019
                  
                  
                  
                  29.77
                  %




16


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





Three
      months ended
                  
                  
                  Three
      months endedJune
      30, 2009
                  
                  
                  June
      30, 2008
                  
                  
                  ComparisonUS$000
                  
                  
                  %
      of Revenue
                  
                  
                  US$000
                  
                  
                  %
      of Revenue
                  
                  
                  US$000
                  
                  
                  %Net
      sales
                  
                  
                  23,332
                  
                  
                  
                  100.00
                  %
                  
                  
                  28,894
                  
                  
                  
                  100
                  %
                  
                  
                  (5,562
                  )
                  
                  
                  (19.25
                  )%Cost
      of sales
                  
                  
                  20,242
                  
                  
                  
                  86.76
                  %
                  
                  
                  25,728
                  
                  
                  
                  89.04
                  %
                  
                  
                  (5,486
                  )
                  
                  
                  (21.32
                  )%Sales
      & marketing expenses
                  
                  
                  50
                  
                  
                  
                  0.21
                  %
                  
                  
                  122
                  
                  
                  
                  0.42
                  %
                  
                  
                  (72
                  )
                  
                  
                  (59.02
                  )%General
      & admin. expenses
                  
                  
                  103
                  
                  
                  
                  0.44
                  %
                  
                  
                  1,135
                  
                  
                  
                  3.93
                  %
                  
                  
                  (1,032
                  )
                  
                  
                  (90.93
                  )%R&D
      expenses
                  
                  
                  11
                  
                  
                  
                  0.05
                  %
                  
                  
                  26
                  
                  
                  
                  0.09
                  %
                  
                  
                  (15
                  )
                  
                  
                  (57.69
                  )%Depreciation
                  
                  
                  19
                  
                  
                  
                  0.08
                  %
                  
                  
                  24
                  
                  
                  
                  0.08
                  %
                  
                  
                  (5
                  )
                  
                  
                  (20.83
                  )%Interest
      expenses
                  
                  
                  266
                  
                  
                  
                  1.14
                  %
                  
                  
                  240
                  
                  
                  
                  0.83
                  %
                  
                  
                  26
                  
                  
                  
                  10.83
                  %Other
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  214
                  
                  
                  
                  0.74
                  %
                  
                  
                  (214
                  )
                  
                  
                  (100.00
                  )%Income
      before income taxes
                  
                  
                  2,641
                  
                  
                  
                  11.32
                  %
                  
                  
                  1,833
                  
                  
                  
                  6.34
                  %
                  
                  
                  808
                  
                  
                  
                  44.08
                  %Income
      tax
                  
                  
                  334
                  
                  
                  
                  1.43
                  %
                  
                  
                  327
                  
                  
                  
                  1.13
                  %
                  
                  
                  7
                  
                  
                  
                  2.14
                  %Net
      income
                  
                  
                  2,307
                  
                  
                  
                  9.89
                  %
                  
                  
                  1,506
                  
                  
                  
                  5.21
                  %
                  
                  
                  801
                  
                  
                  
                  53.19
                  %





Net
sales





Our
revenue was US$43,056,000 for the six months ended June 30, 2009, representing a
decrease of 13.22% compared to US$49,613,000 for the same period in 2008. For
the three months ended June 30, 2009, the total revenues of the Company were
US$23,332,000, representing a decrease of 19.25% as compared to US$28,894,000 in
the same period of 2008.





As stated
in Business Review above, despite the global economic turmoil, we believe
China's economy has begun to improve gradually. However, it seems that the
economy has mainly focused on large-scale projects instead of the consumer goods
markets, as the sector has experienced a much slower recovery. In the Chinese
cell phone market, sales volume has fallen by 9.8% as compared to the same
period last year. During this quarter, the Company has continued to undertake
its sales strategy of supplying feature-rich, low-priced, mid-level and low-end
products. It has also put great efforts into developing new products tailored
for telecom operators and expanding its sales channels beyond the enhanced
traditional market in which products were traded at prices less than RMB1,000,
or approximately US$146.





Products
Segment





For the
six months ended June 30, 2009, the Company’s revenues were primarily
attributable to the following products:


Six months ended June 30,
    2009Amount
                        
                        
                        %
      of total revenue(US$’000)X600
                        
                        
                        5,430
                        
                        
                        
                        12.61
                        %X610
                        
                        
                        5,555
                        
                        
                        
                        12.90
                        %X555
                        
                        
                        1,947
                        
                        
                        
                        4.52
                        %T303
                        
                        
                        6,791
                        
                        
                        
                        15.77
                        %DX880
                        
                        
                        3,686
                        
                        
                        
                        8.56
                        %X650
                        
                        
                        3,711
                        
                        
                        
                        8.62
                        %X780
                        
                        
                        12,558
                        
                        
                        
                        29.17
                        %LM2800
                        
                        
                        1,187
                        
                        
                        
                        2.76
                        %LM2850
                        
                        
                        1,312
                        
                        
                        
                        3.05
                        %LM2820
                        
                        
                        877
                        
                        
                        
                        2.04
                        %Total
                        
                        
                        43,056
                        
                        
                        
                        100.00
                        %




17





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


Three months ended June 30,
      2009Amount
                      
                      
                      %
      of total revenue(US$’000)DX880
                      
                      
                      3,686
                      
                      
                      
                      15.80
                      %X650
                      
                      
                      3,711
                      
                      
                      
                      15.91
                      %X780
                      
                      
                      12,558
                      
                      
                      
                      53.82
                      %LM2800
                      
                      
                      1,187
                      
                      
                      
                      5.09
                      %LM2850
                      
                      
                      1,312
                      
                      
                      
                      5.62
                      %LM2820
                      
                      
                      877
                      
                      
                      
                      3.76
                      %Total
                      
                      
                      23,332
                      
                      
                      
                      100.00
                      %





Customer
Segments





For the
six months ended June 30, 2009, our revenues in the aggregate amount of
US$43,056,000 were derived mainly from sales to Beijing Xingwang Shidai Tech
& Trading Co., Ltd. (“Xingwang”).  Xingwang has been our most
important distributor for a long period of time and provided revenues of
US$39,670,000. It is one of the largest distributors in mainland China and has
sales networks in major cities across the PRC.





Six months ended June 30,
    2009Amount
                        
                        
                        %
      of total revenue(US$’000)Beijing
      Xingwang Shidai Tech & Trading Co., Ltd.
                        
                        
                        39,670
                        
                        
                        
                        92.14
                        %Tianjin
      Tongguang
                        
                        
                        3,386
                        
                        
                        
                        7.86
                        %Total
                        
                        
                        43,056
                        
                        
                        
                        100.00
                        %





For the
three months ended June 30, 2009, our revenues were derived also mainly from
sales to Xingwang, in the aggregate amount of US$19,956,000.





Three months ended June 30,
      2009Amount
                      
                      
                      %
      of total revenue(US$’000)Beijing
      Xingwang Shidai Tech & Trading Co., Ltd.
                      
                      
                      19,956
                      
                      
                      
                      85.53
                      %Tianjin
      Tongguang
                      
                      
                      3,376
                      
                      
                      
                      14.47
                      %Total
                      
                      
                      23,332
                      
                      
                      
                      100.00
                      %





Gross
Profit and Gross Profit Margin





For the
three months ended June 30, 2009, gross profit was US$3,090,000, representing a
decrease of US$76,000 in gross profit earned a year earlier.  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. However,
the Company’s gross profit margin for the period increased to 13.24% as compared
to 10.96% for the same period of 2008, which was a result of the promotion of
several high gross margin phone models such as T303, X780, X650 and DX880 to the
market in the current year.





For the
three months ended June 30, 2009, although we received few bulk orders on
high-margin customized products from the telecom operators sector, we did
develop and supply our customized 3G phone model T303 to meet their needs. X780
products have contributed approximately 58.43% of our sales volume and 53.82% of
our revenue in the quarterly financial results. Marketed at a very reasonable
price, X780 products were sold in such a large quantity that they indeed boosted
the Company’s overall gross margin for this quarter.


18


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





Selling
expenses





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





For the
three months ended June 30, 2009, selling expenses were US$50,000, or 0.21% of
revenues, representing a US$72,000 decrease compared with US$122,000 for the
corresponding period in 2008.





For the
six months ended June 30, 2009, selling expenses were US$173,000, or 0.40% of
revenues, representing a US$52,000 decrease compared with US$225,000 for the
corresponding period in 2008.





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





R&D
expenses





For the
three months ended June 30, 2009, R&D expenses were US$11,000, or 0.05% of
revenue, representing a decrease of US$15,000 or 57.69%, compared with the
numbers for the corresponding period in 2008. For the six months ended June 30,
2009, R&D expenses were US$28,000, or 0.07% of revenue, representing a
decrease of US$113,000 or 80.14%, compared with the numbers for the
corresponding period in 2008.The significant decrease in R&D expenses was a
result of the Company’s focus on more regular R&D initiatives
and  the fact that it did not launch full R&D projects for
development of new products during the current year. This decision was
considered prudent in light of the potential impact from the pending telecom
industrial reorganization in the PRC.





General
and administrative expenses





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





For the
three months ended June 30, 2009, total general and administrative expenses were
US$103,000, or 0.44% of total revenues, representing a decrease of US$1,032,000,
or 90.93% as compared to US$1,135,000, or 3.93%, of the total revenues for the
corresponding period in 2008.





For the
six months ended June 30, 2009, total general and administrative expenses were
US$369,000, or 0.86% of total revenues, representing decreases of US$1,202,000,
or 76.51% as compared to US$1,571,000, or 3.17%, of the total revenues for the
corresponding period of 2008.





The sharp
decrease in general and administrative expenses was primarily attributable to
structural adjustment, internal management control and costs reduction. There
was US$724,520 stock based compensation cost and US$268,000 associated
professional fees recognized during the three months ended June 30, 2008. There
was no such type of expense during the three months ended June 30, 2009 since no
stock option granted or significant professional fees incurred.





Interest
expenses





For the
three months ended June 30, 2009, interest expenses increased by US$26,000
compared with same period in 2008. The increase is mainly due to an additional
of US$218,000 short-term loan is outstanding in the second quarter of 2009
compared with same period in 2008.





For the
six months ended June 30, 2009, interest expenses increased by US$10,000
compared with same period in 2008. The increase is mainly a result of exchange
rate fluctuation, as the short-term loans are denominated in RMB.





Other
income





For the
six months ended June 30, 2009, other income accounted for US$17,000, or 0.04%
of total revenues. It was mainly comprised of reversals of doubtful accounts
allowance.


19





Provision
for income taxes





For the
three months ended June 30, 2009, provision for income taxes increased by
US$7,000 compared with same period in 2008. The increase is mainly attributable
to a rise in taxable income.





For the
six months ended June 30, 2009, provision for income taxes decreased by
US$218,000 compared with same period in 2008. The decrease is mainly
attributable to the effective tax rate for the three months ended March 31,
2008, which at 22% was higher than the 13% effective tax rate for the three
months ended March 31, 2009.





Net
income





For the
six months ended June 30, 2009, our net income was US$4,442,000 or a net profit
margin of 10.32%, representing an increase of US$1,019,000, or 29.77%, as
compared to US$3,423,000, or a net profit margin of 6.90% in the same period of
2008, primarily due to reduced general and administrative expenses described
above.





For the
three months ended June 30, 2009, our net income was US$2,307,000 or a net
profit margin of 9.89%, representing an increase of US$801,000, or 53.19%, as
compared to US$1,506,000, or a net profit margin of 5.21% in the same period of
2008.





The
increase was mainly due to the cost-saving process we conducted in the current
year and the lower effective tax. We also incurred US$724,520 compensation cost
for stock options issued to employees during the six months ended June 30,
2008.





LIQUIDITY
AND SOURCES OF CAPITAL





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





As of
June 30, 2009, we had current assets of US$105,710,000. Current assets are
mainly comprised of accounts receivables of US$82,317,000, advance to suppliers
of US$20,249,000, cash and cash equivalents of US$32,000, pledged deposit of
US$1,289,000 and other current assets of US$1,823,000.





As of
June 30, 2009, our current liabilities were US$52,822,000 and included accounts
payable of US$16,485,000, trade deposits received of US$1,935,000, short-term
loans of US$9,379,000, accrued expenses and other accrued liabilities of
US$18,593,000, income tax payables of US$5,654,000 and amounts due to directors
of US$469,000.





We offer
two different trading terms to our customers: cash-on-delivery or credit terms
of 45-120 days.  As of June 30, 2009, our accounts receivable had
increased by US$241,000 to US$82,317,000, as compared to US$82,076,000 on
December 31, 2008. The increase in accounts receivables was mainly due to a
longer turn over period in the current economic recession environment. We will
pay close attention to the liquidity progress of our distributors. As previously
disclosed, in order to reduce the risks of default, we have limited terms of
credit to our major distributor in the Master Distributor Agreement and have the
third-party guarantee company to guarantee the accounts receivable due from this
major distributor.





As of
June 30, 2009, our advance to suppliers was US$20,249,000, which represented an
increase of US$11,808,000 as compared with US$8,441,000 as of December 31, 2008.
The increase was primarily because the Company made some prepayments to
suppliers in current quarter.





As of
June 30, 2009, our other current assets were US$1,823,000, which represented a
decrease of US$36,000, as compared to US$1,859,000 as of December 31, 2008. The
“other current assets” are mainly composed of prepaid deposits to acquire a
manufacturing facility in the amount of US$1,731,000. The acquisition was
terminated in 2008. The decrease in other current assets was mainly attributable
to the recovery of partial prepaid deposits after we withdrew from a previous
Letter of Intent to acquire the manufacturing facility.





As of
June 30, 2009, our accounts payable were US$16,485,000, which represents a
slight increase of US$132,000, or 0.81%, as compared to US$16,353,000 as of
December 31, 2008.


20





As of
June 30, 2009, accrued expenses and liabilities were US$18,593,000, representing
an increase of US$6,581,000 or 54.79%, compared to US$12,012,000 as of December
31, 2008. The increase was mainly due to an additional VAT payable of
US$6,060,000 mainly caused by outstanding input VAT invoices.





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





As of
June 30, 2009, income tax payable was US$5,654,000, representing an increase of
US$665,000 or 13.33%, compared to US$4,989,000 as of December 31,
2008.  The increase was mainly due to provision of PRC income tax at
the rate of 12.5%.





As of
June 30, 2009, cash and bank balances were mainly denominated in Renminbi
(“RMB”). Our revenue and expenses, assets and liabilities are mainly denominated
in RMB and U.S. Dollars (“USD”). The Company operations are mainly denominated
in RMB.





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





CASH
FLOWS





As of
June 30, 2009, we had cash and cash equivalents of US$32,000. This represented a
decrease of US$70,000 when compared with US$102,000 as of December 31, 2008.
During six months ended June 30, 2009, we had a fast moving cash flow to ensure
desirable goods supplies. We made timely payments to our suppliers so that we
had shortened goods supply terms to deal with the fierce competition in the cell
phone market.





As of
June 30, 2009, our aggregate short term loans were US$9,686,000, which were
comprised of US$2,513,000 from Huaxia Bank, US$6,866,000 from Beijing Rural and
Commercial Bank and US$307,000 from a third party company.





CONTINGENT
LIABILITIES





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





OFF
BALANCE SHEET ARRANGEMENTS





As of June 30, 2009, we had no
off-balance sheet arrangements.





Item 3.
            Quantitative
      and Qualitative Disclosures About Market
Risk.





Market
risk is the sensitivity of income to changes in interest rates, foreign
exchanges, commodity prices, equity prices and other market-driven rates or
prices. The Company, in the normal course of doing business, is exposed to
market risk through changes in interest rates with respect to bank loans.
Aggregate bank loans as of June 30, 2009, were US$9,379,000. The interest rate
for the three months ended June 30, 2009 was charged at 6.372% to 10.080% per
annum.


21


Item
      4T.
              Controls
      and Procedures.
  Evaluation
of Disclosure Controls and Procedures
  Disclosure
Controls and Procedures
  The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in reports filed by the Company under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and regulations and that such information is
accumulated and communicated to our management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. Our Chief Executive Officer and Chief
Financial Officer evaluated, with the participation of other members of
management, the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rule 15d-15(e)), as of the end of the period covered by
this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective.
  Although
the management of our Company, including the Chief Executive Officer and the
Chief Financial Officer, believes that our disclosure controls and internal
controls currently provide reasonable assurance that our desired control
objectives have been met, management does not expect that our disclosure
controls or internal controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within our Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
controls. The design of any system of controls is also based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions.
  Changes
in Internal Controls over Financial Reporting
  There
were no significant changes in our internal controls over financial reporting
identified in connection with this evaluation that occurred during our last
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company’s internal controls over financial
reporting.
 
 PART
II – OTHER INFORMATION
 
 Item
      1.
              Legal
      Proceedings.
 
 We are
party to certain litigation/arbitration with regards to amounts payable to
suppliers for which the Company was not satisfied with the quality and timing of
the goods supplied. However, the amount in question is not material to the
Company and we believe that such litigation/arbitration will not have a material
adverse effect on us or our business and that we will be able to resolve these
issues through further business negotiations.
 
 Item
      1A.
              Risk
      Factors.
 
 Not
required.
 
 Item
      2.
              Unregistered
      Sales of Equity Securities and Use of
Proceeds.
 
 (a)           None.
 
 (b)           Not
applicable.
 
 (c)           None.
  22
 
 Item
      3.
              Defaults
      Upon Senior Securities.
 
 None.
 
 Item
      4.
              Submission
      of Matters to a Vote of Security
Holders.
 
 None.
 
 Item
      5.
              Other
      Information.
 
 (a)           None.
 
 (b)           There
were no material changes to the procedures by which security holders may
recommend nominees to the registrant's board of directors during the fiscal
quarter ended June 30, 2009.
 
 Item
      6.
              Exhibits.
 
 The
following exhibits, which are numbered in accordance with Item 601 of
Regulation S-K, are filed herewith or, as noted, incorporated by reference
herein:


Exhibit Number
                    
                    Exhibit Description3.1
                    
                    Certificate
      of Incorporation of Orsus Xelent Technologies, Inc. (incorporated by
      reference from Exhibit 3.1 to the Registration Statement on Form SB-2
      filed with the Securities and Exchange Commission on July 28, 2004 as
      amended by that Plan of Merger and Agreement of Merger attached as Exhibit
      2.1 to the Current Report on Form 8-K filed with the SEC on April 20,
      2005)3.2
                    
                    Amended
      and Restated Bylaws of the Registrant (incorporated by reference from
      Exhibit 3.2 to the Current Report on Form 8-K filed with the Securities
      and Exchange Commission on February 7, 2007, as amended by the Current
      Report on Form 8-K filed with the SEC on March 5, 2007)4.1
                    
                    Specimen
      Certificate of Common Stock (incorporated by reference to Exhibit 4.1 to
      Amendment 2 to the Registration Statement on Form SB-2/A filed with the
      Securities and Exchange Commission on October 19, 2004)10.1
                    
                    2007
      Omnibus Long-Term Incentive Plan (incorporated by reference from Exhibit
      10.1 to the Current Report on Form 8-K filed with the Securities and
      Exchange Commission on January 11, 2008)10.2
                    
                    Master
      Distributor Agreement, dated as of August 7, 2008, by and between Beijing
      Orsus Xelent Technology & Trading Company Limited and Beijing Xingwang
      Shidai Commerce Co., Ltd. (incorporated by reference from Exhibit 10.1 to
      the Current Report on Form 8-K filed with the Securities and Exchange
      Commission on August 20, 2008)31.1
                    
                    Certification
      of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act
      of 2002 *31.2
                    
                    Certification
      of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act
      of 2002 *32.1
                    
                    Certification
      of Principal Executive Officer under Section 906 of the Sarbanes-Oxley Act
      of 2002 *32.2
                    
                    Certification
      of Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act
      of 2002 *





*       Filed
herewith




23




SIGNATURES





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





ORSUS
      XELENT TECHNOLOGIES, INC.By:
                          /s/ Guoji LiuGuoji
      LiuChief
      Executive OfficerBy:
                          /s/ Hua ChenHua
      ChenChief
      Financial Officer





DATED:  August
19, 2009




24




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




25