SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

______________

FORM 10-Q

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

For the quarterly period ended September 30, 2009

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

For the transition period from ______ to ______.

Commission file number: 001-33456

ORSUS XELENT TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

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

29th Floor, Tower B, Chaowai MEN Office Building

26 Chaowai Street, Chaoyang Disc.

Beijing, People’s Republic Of China 100020

(Address of principal executive offices, including zip code)

86-10-85653777

(Registrant’s telephone number, including area code)

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

Yes  x                      No  o

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

Yes  o                      No  x

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

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

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

Yes  o                      No  x

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

Yes  o                      No  x

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

Class	Outstanding at November 23, 2009
Common Stock, US$.001 par value per share	29,756,000 shares

	Page
Part I: Financial Information	1
Item 1 -Financial Statements	1
Consolidated Balance Sheets	1
Consolidated Statements of Income and Comprehensive Income	2
Consolidated Statements of Cash Flows	3
Notes to Consolidated Financial Statements	4
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3 - Quantitative and Qualitative Disclosures about Market Risk	22
Item 4T - Controls and Procedures	23
Part II. Other Information	23
Item 1 - Legal Proceedings	23
Item 1A - Risk Factors	23
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3 - Defaults Upon Senior Securities	24
Item 4 - Submission of Matters to a Vote of Security Holders	24
Item 5 - Other Information	24
Item 6 - Exhibits	24
Signatures	25

PART I – FINANCIAL INFORMATION

Item 1.           Financial Statements

Orsus Xelent Technologies, Inc. and Subsidiaries

Consolidated Balance Sheets

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

	September 30, 2009		December 31, 2008
	(Unaudited)		(Audited)
ASSETS
Current assets
Cash and cash equivalents		32		102
Accounts receivable		93,398		82,076
Advances to suppliers		21,834		8,441
Other current assets		1,824		1,859
Pledged deposit		1,290		1,287
Total current assets		118,378		93,765
Property, plant and equipment, net		187		241
		118,565		94,006
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Loan payable-bank		9,389		9,484
Loan payable		307		364
Current portion of mortgage loan		-		12
Accounts payable		24,166		16,353
Accrued expenses and other accrued liabilities		21,813		12,012
Trade deposits received		1,936		1,934
Due to shareholders		568		457
Income taxes payable		5,871		4,989
Total current liabilities		64,050		45,605
Commitments and contingencies (Note 12)
Stockholders’ equity
Preferred stock, par value US$0.001; authorized 100,000,000 shares; none issued				-
Common stock, par value US$0.001; authorized 100,000,000 shares; Issued and outstanding 29,756,000 shares, both periods		30		30
Additional paid-in capital		3,209		3,209
Dedicated reserves		1,115		1,042
Accumulated other comprehensive income		5,691		5,389
Retained earnings		44,470		38,731
Total stockholders’ equity		54,515		48,401
		118,565		94,006

See notes to consolidated financial statements.

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Orsus Xelent Technologies, Inc. and Subsidiaries

Unaudited Consolidated Statements of Income and Comprehensive Income

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

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

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Orsus Xelent Technologies, Inc. and Subsidiaries

Unaudited Consolidated Statements of Cash Flows

(Dollars in thousands except share and per share data)

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

See notes to consolidated financial statements.

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ORSUS XELENT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

1.  ORGANIZATION

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

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

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

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

2.  DESCRIPTION OF BUSINESS

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

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

The Company is discussing with those distributors to try to collect a portion of account receivable in fourth quarter of 2009.

The Company has limited cash and cash equivalents in hand for a long time and may obtain loans from banks to finance business operation from time to time. The Company currently has certain overdue loan from Beijing Rural Commercial Bank at September 30, 2009. The Company is negotiating an extension of the term with the bank.

The Company has not paid salaries and welfare to employees for certain months in 2009 due to difficulty in cash flow.

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

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

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

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

Basis of consolidation

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

Use of Estimates

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

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Accounts Receivable

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

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

Recently issued accounting pronouncements

FASB Establishes Accounting Standards Codification

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

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

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

Fair Value Accounting

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

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

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

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

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

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

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

Business Combinations and Noncontrolling Interests

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

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

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

In June 2009, the FASB issued the following standards:  

• SFAS No. 167, “Amendments to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities” (ASC Topic 810-10). This updated guidance requires an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. It also requires an ongoing reassessment and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. This update is effective for our fiscal year beginning January 1, 2010 and we are currently evaluating the impact of adopting this update on our consolidated financial statements.

• SFAS No. 166, “Accounting for Transfers of Financial Assets”, (ASC Topic 810). This updated guidance removed the concept of a qualifying special-purpose entity and removed the exception from applying consolidation guidance to these entities. This update also clarified the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. ASC Topic 810 is effective for our fiscal year beginning on January 1, 2010. We are currently evaluating the impact of adopting this update on our consolidated financial statements.

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

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

4.  ACCOUNTS RECEIVABLE

The main component of US$93,398 of accounts receivable as of September 30, 2009, was mainly a balance of US$83,556 due from Beijing Xingwang Shidai Commerce Co., Ltd. (“Xingwang”). On December 25, 2008, Xingwang entered into an irrevocable Credit Guarantee Contract (the “Guarantee Contract”) with Zhong Hui Guarantee Corporation, a third-party guarantee company licensed by the PRC government (“Zhonghui”), and BOXT under which Zhonghui agreed to guarantee up to Renminbi (“RMB”) 300 million (equivalent to US$43,829), for the principal debt, fine, damages arising out of breach of contract, and costs incurred for realizing those legal rights including but not limited to legal proceeding fees, attorney fees and travel expenses arising out of the distributor agreement entered into by BOXT and Xingwang. The Guarantee Contract was effective as of December 25, 2008 and provides a guarantee for all of the accounts receivable that are or may become outstanding from Xingwang to BOXT from January 1, 2008 through December 31, 2008. Such accounts receivables are guaranteed for a period of two years from the date they are due.

5.  ADVANCE TO SUPPLIERS

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

6.  OTHER CURRENT ASSETS

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

7.  PLEDGED DEPOSIT

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

8.  PROPERTY, PLANT AND EQUIPMENT

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

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

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

9.  LOAN PAYABLE-BANK

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

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

At December 31, 2008	Amount (RMB’000)	Annual interest rate	Term	Guarantee provided by
Loan 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 RMB8,820K
Loan from Huaxia Bank	18,000 (US$2,627)	8.964%	From February 18, 2008 to February 18, 2009	Director Liu Yu; Two third party companies; Distributor Xingwang.

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

US$6,874 (RMB47 million) of loan from Beijing Rural Commercial Bank was originally due on September 27, 2009. The Company is currently negotiating an extension of the term with the bank. The penalty interest rate on the principal and interest in default is 130% of the contracted interest rate and is chargeable from the due date of the principal. The Company accrued $8 in penalty interest from September 28, 2009 to September 30, 2009.

10.  LOAN PAYABLE

The USD$307 short-term loan outstanding at September 30, 2009 was provided by a third party company Zhonghui. It is unsecured, interest-free and repayable on September 27, 2009. The Company is currently negotiating an extension of the term with Zhonghui. No default penalty interest is chargeable according to the loan agreement.

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11.  AMOUNT DUE TO SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

(a)  Name and relationship of shareholders

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

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

	September 30, 2009		December 31, 2008
	US$’000		US$’000
Due to shareholders
Mr. Liu Yu		318		219
Mr. Wang Xin		250		238
		568		457
Bank loans guaranteed by Mr. Liu Yu		9,379		9,484

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

12.  COMMITMENTS AND CONTINGENCIES

(a)  Operating lease commitments

At September 30, 2009, the Company had a non-cancelable operating lease for the office premises, under which the rental payment due within the next twelve months is US$13. The lease term is from January 1, 2009 to December 31, 2009. Rental expense for the nine months ended September 30, 2009 and 2008 was $39 and $103, respectively.

(b)  Contingencies

Tax penalty

In accordance with the PRC’s tax regulations, BOXT’s sales are subject to a 17% of value added tax (“VAT”) upon the sales made to customers. BOXT follows the practice of reporting its revenue to PRC tax authorities for VAT purposes when invoices are issued, but accruing the VAT liability when sales are made prior to invoices being issued. As of September 30, 2009 and December 31, 2008, sales accumulatively amounted to approximately US$236,748 and US$175,834, respectively, for which VAT invoices have not yet been issued. The associated output VAT amounts with the above unbilled revenue were US$40,247 and US$29,892 as of September 30, 2009 and December 31, 2008. Meanwhile, as of September 30, 2009 and December 31, 2008, purchases amounted to US$144,232 and US$137,119 respectively for which VAT invoices have not been received from suppliers. The input VAT amounts associated with the above purchase were US$24,519 and US$23,310 as of September 30, 2009 and December 31, 2008, respectively. The net VAT payables resulting from the above non-issued and non-received invoices were US$15,728 and US$6,582 as of September 30, 2009 and December 31, 2008, respectively. The net VAT payable resulting from the issued and received invoices netting paid amount was US$3,323 and US$3,590 as of September 30, 2009 and December 31, 2008, respectively. The total net VAT payables were US$19,051 and US$10,172 as of September 30, 2009 and December 31, 2008, respectively. These balance amounts were included in “Accrued expenses and other accrued liabilities.”

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

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

9

Financial guarantee contract

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

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

13.  DEDICATED RESERVES

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

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

14.  STOCK OPTIONS

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

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

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

10

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

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

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

15.  PENSION COSTS

As stipulated by the PRC regulations, the Company maintains a defined contribution retirement plan for all of its employees who are residents of the PRC.  All retired PRC employees of the Company are entitled to an annual pension equivalent to their basic annual salary upon retirement.  The Company contributed to a state sponsored retirement plan approximately 20% of the basic salary of its PRC employees and has no further obligations for the actual pension payments or post-retirement benefits beyond the annual contributions.  The state sponsored retirement plan is responsible for the entire pension obligation payable to all employees. The pension expenses were US$6 and US$8 for the three months ended September 30, 2009 and 2008 respectively. The pension expenses were US$34 and US$24 for the nine months ended September 30, 2009 and 2008 respectively.

16.  INCOME TAXES

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

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

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

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

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

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

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(a)  Income tax expense comprised the following:

	Nine months ended September 30,
	2009		2008
	US$’000		US$’000
Current tax
United States		-		-
Hong Kong		-		238
PRC		868		1,082
		868		1,320

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

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

17.  EARNINGS PER SHARE

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

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

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

18.  CONCENTRATIONS AND CREDIT RISKS

At September 30, 2009 the Company had a credit risk exposure of uninsured cash in banks of approximately US $32, US $93,398 accounts receivable and US $21,834 advances to suppliers.To limit exposure to credit risk relating to deposits, the Company primarily places cash deposits only with large financial institutions in the PRC with acceptable credit ratings.

During three and nine months ended September 30, 2009, the Company is engaged principally in the design and trading of cellular phones to two primary distributors in the PRC.  The Company’s policy is that the sole agent arrangement gives the dealers more incentive to promote the Company’s products and reduce the Company’s exposure to the distribution market.

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

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

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

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

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

13

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

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

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

19.  RECLASSIFICATION

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

20.  SUBSEQUENT EVENT

Management has considered all events occurring through November 23, 2009, the date the financial statements have been issued, and has determined that there are no such events that are material to the financial statements, or all such material events have been fully disclosed.

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

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

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

OVERVIEW

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

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

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

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

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

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

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

15

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

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

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

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

Business Review

The Company sold 186,950 cell phone units during the third quarter of 2009. For the three months ended September 30, 2009, the Company generated revenue of US$19,125,000, representing a decrease of 34.59% as compared to US$29,240,000 for the same period in 2008, in contrast with the entire cell phone market, in which sales increased by 10.08% compared to the same period in 2008, as recently reported by Sino Market Research Limited. Meanwhile, the Company achieved a gross profit margin of 10.83%, a decrease of 3.42% as compared to 14.25% earned for the same period in 2008. The Company believes this decrease is due to the fact that our major customers didn’t get several large orders from their customers. The Company continued to supply feature-rich, economically-priced, mid-level and low-end products – a different strategy from that of foreign brands, which tend to have higher costs and higher output prices.  92% of the products the Company sold in this quarter were priced below RMB1,000 (approximately US$146). This has led to a decrease of US$2,095,000 or 50.28% in the Company’s gross income, from US$4,167,000 earned in the three months ended September 30, 2008, to US$2,072,000 for the three months ended September 30, 2009.

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

The Company is aware that the cell phone market in the PRC may continue to experience some difficulty in the 2009, but it still projects that the industry will be in a better position in upcoming quarters because (a) the reorganization of PRC telecom carriers is projected to lead to market development, and (b) new 3G technology is likely to encourage market demand.  With these projections in mind, the Company will continue to employ the following three operating strategies going forward:

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

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

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

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

CRITICAL ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES

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

RESULTS OF OPERATIONS

The following table summarizes our operating results for the nine months ended September 30, 2009 and 2008, respectively (in thousand USD):

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

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

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

Net sales

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

As stated in Business Review above, despite the global economic turmoil, we believe China's economy has begun to improve gradually. However, it seems that the economy has mainly focused on large-scale projects instead of the consumer goods markets, as the sector has experienced a much slower recovery. In the Chinese cell phone market, sales volume has fallen by 30% as compared to the same period last year. During this quarter, the Company has continued to undertake its sales strategy of supplying feature-rich, low-priced, mid-level and low-end products. It has also put great efforts into developing new products tailored for telecom operators and expanding its sales channels beyond the enhanced traditional market in which products were traded at prices less than RMB1,000, or approximately US$146.

Products Segment

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

Cellular	Nine months ended September 30, 2009
phones model	Amount (US$’000)		% of total revenue
X600		5,430		8.73	%
X610		5,559		8.94	%
X555		1,949		3.13	%
T303		6,795		10.93	%
DX880		3,685		5.93	%
X650		3,710		5.97	%
X780		12,554		20.19	%
LM2800		1,187		1.91	%
LM2850		1,312		2.11	%
LM2820		877		1.41	%
CN747		2,571		4.13	%
X98		2,748		4.42	%
X666		8,542		13.74	%
X8828		2,598		4.18	%
X6102		2,666		4.28	%
Total		62,183		100.00	%

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

Cellular	Three months ended September 30, 2009
phones model	Amount (US$’000)		% of total revenue
CN747		2,571		13.44	%
X98		2,748		14.37	%
X666		8,542		44.66	%
X8828		2,598		13.58	%
X6102		2,666		13.95	%
Total		19,125		100.00	%

Customer Segments

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

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

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

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

Gross Margin

For the three months ended September 30, 2009, gross margin was US$2,072,000, representing a decrease of US$2,095,000 in gross profit when compared to the same period of 2008.  During this period, to cope with the global financial crisis and the increasing competition in the Chinese cell phone market, many manufacturers were involved in price wars, clearance sales and capital recalls, regardless of the losses they might suffer from in the short term. As a result, normal selling prices of products were unstable and products’ gross profits dropped severely. The Company’s gross margin for the period decreased to 10.83% as compared to 14.25% for the same period of 2008.

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

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

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

Selling expenses

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

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

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

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

R&D expenses

For the three months ended September 30, 2009, R&D expenses were US$4,000, or 0.02% of revenue, representing a decrease of US$246,000 or 98.40%, compared with the numbers for the corresponding period in 2008. For the nine months ended September 30, 2009, R&D expenses were US$32,000, or 0.05% of revenue, representing a decrease of US$359,000 or 91.82%, compared with the numbers for the corresponding period in 2008. The significant decrease in R&D expenses was a result of the Company’s focus on more regular R&D initiatives and the fact that it did not launch full R&D projects for development of new products during the current year. This decision was considered prudent in light of the potential impact from the pending telecom industrial reorganization in the PRC.

General and administrative expenses

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

For the three months ended September 30, 2009, total general and administrative expenses were US$164,000, or 0.86% of total revenues, representing a decrease of US$63,000, or 27.63% as compared to US$228,000, or 0.78%, of the total revenues for the corresponding period in 2008.

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

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

Interest expenses

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

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

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Other income

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

Provision for income taxes

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

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

Net income

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

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

The decrease was mainly due to our business shrinking in the current economic downturn.

LIQUIDITY AND SOURCES OF CAPITAL

The Company’s business relies on few distributors. In current economic environment, turnover days of accounts receivable due from these distributors are longer.  The Company has not provided any bad debt provision to the significant accounts receivable balance considering historical good cooperation relationship with these distributors and believes no provision is needed as of September 30, 2009.

The Company is discussing with those distributors to try to collect a portion of account receivable in fourth quarter of 2009.

The Company has limited cash and cash equivalents in hand for a long time and may obtain loans from banks to finance business operation from time to time. The Company currently has certain overdue loan from Beijing Rural Commercial Bank at September 30, 2009.  The Company is negotiating an extension of the term with the bank.

The Company has not paid salaries and welfare to employees for certain months in 2009 due to difficulty in cash flow.

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

As of September 30, 2009, we had current assets of US$118,378,000. Current assets are mainly comprised of accounts receivable of US$93,398,000, advance to suppliers of US$21,834,000, cash and cash equivalents of US$32,000, pledged deposit of US$1,290,000 and other current assets of US$1,824,000.

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

We offer two different trading terms to our customers: cash-on-delivery or credit terms of 45-120 days.  As of September 30, 2009, our accounts receivable had increased by US$11,322,000 to US$93,398,000, as compared to US$82,076,000 on December 31, 2008. The increase in accounts receivables was mainly due to a longer turn over period in the current economic recession environment. We will pay close attention to the liquidity progress of our distributors. As previously disclosed, in order to reduce the risks of default, we have limited terms of credit to our major distributor in the Master Distributor Agreement and have the third-party guarantee company to guarantee the accounts receivable due from this major distributor.

As of September 30, 2009, our advance to suppliers was US$21,834,000, which represented an increase of US$13,393,000 as compared with US$8,441,000 as of December 31, 2008. The increase was primarily because the Company made some prepayments to suppliers in past quarters of year 2009.

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

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

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

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

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

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

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

CASH FLOWS

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

As of September 30, 2009, our aggregate short term loans were US$9,696,000, which were comprised of US$2,515,000 from Huaxia Bank, US$6,874,000 from Beijing Rural and Commercial Bank and US$307,000 from a third party company.

CONTINGENT LIABILITIES

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

OFF BALANCE SHEET ARRANGEMENTS

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

Item 3.        Quantitative and Qualitative Disclosures About Market Risk.

Market risk is the sensitivity of income to changes in interest rates, foreign exchanges, commodity prices, equity prices and other market-driven rates or prices. The Company, in the normal course of doing business, is exposed to market risk through changes in interest rates with respect to bank loans. Aggregate bank loans as of September 30, 2009, were US$9,389,000. The interest rate for the three months ended September 30, 2009 was charged at 6.372% to 10.080% per annum.

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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.

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Item 3.        Defaults Upon Senior Securities.

None.

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

None.

Item 5.        Other Information.

(a)           None.

(b)           There were no material changes to the procedures by which security holders may recommend nominees to the registrant's board of directors during the fiscal quarter ended September 30, 2009.

Item 6.        Exhibits.

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

Exhibit Number	Exhibit Description
3.1	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

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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 Liu
	Guoji Liu
	Chief Executive Officer

By:	/s/ Hua Chen
	Hua Chen
	Chief Financial Officer

DATED:  November 23, 2009

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INDEX TO EXHIBITS

Exhibit Number	Exhibit Description
3.1	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

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