Edgar Filing: Orsus Xelent Technologies Inc

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, 2008

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.)

12^th 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 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 August 13, 2008
Common Stock, $.001 par value per share		29,756,000 shares

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Orsus Xelent Technologies, Inc.

Index to Financial Statements

	Page

Condensed Consolidated Statements of Operations (Unaudited)	2

Condensed Consolidated Balance Sheets (Unaudited)	3

Condensed Consolidated Statement of Cash Flows (Unaudited)	4

Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)	5

Notes to Condensed Consolidated Financial Statements	6

Orsus Xelent Technologies, Inc.

Condensed Consolidated Statements of Operations and Other Comprehensive Income

For the 6 months ended June 30, 2008 and 2007

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

			(Unaudited) Three months ended June 30,						(Unaudited) Six months ended June 30,
			2008			2007			2008			2007
	*Note*		*US$’000*			US$’000			*US$’000*			US$’000

Operating revenue - Net sales				28,894			16,356			49,613			36,365

Cost of operating revenue				(25,728	)		(13,181	)		(43,229	)		(29,522	)

Gross income				3,166			3,175			6,384			6,843
Operating expenses:
Sales and marketing				(122	)		(134	)		(225	)		(247	)
General and administrative				(1,135	)		(614	)		(1,571	)		(1,988	)
Research and development				(26	)		(243	)		(141	)		(296	)
Depreciation				(24	)		(35	)		(49	)		(87	)
Allowance for obsolete inventories				-			(272	)		-			(592	)

Total operating expenses				(1,307	)		(1,298	)		(1,986	)		(3,210	)

Operating income				1,859			1,877			4,398			3,633

Other income (expenses) Interest expense				(240	)		(177	)		(478	)		(304	)
Other income, net				214			5			378			7

Income before income taxes				1,833			1,705			4,298			3,336

Income taxes		3		(327	)		(256	)		(875	)		(640	)

Net income				1,506			1,449			3,423			2,696

Other comprehensive income Foreign currency translation adjustment				50			-			1,516			-

Comprehensive income				1,556			1,449			4,939			2,696

Earnings per share:		2

Basic and diluted (US$)				5.06cents			4.87cents			11.50cents			9.06cents

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

The accompanying notes are an integral part of these consolidated financial statements.

Orsus Xelent Technologies, Inc.

Condensed Consolidated Balance Sheets

As of June 30, 2008 and December 31, 2007

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

			As of June 30, 2008		As of December 31, 2007
	*Note*		*US$’000*		US$’000
ASSETS			(Unaudited)
Current assets
Cash and cash equivalents				1,558		2,928
Accounts receivable, net of allowance				72,241		57,743
Inventories, net				-		4
Trade deposit paid, net				9,428		839
Other current assets		4		4,448		4,196
Pledged deposit		6		1,256		1,206

Total current assets				88,931		66,916

Property, plant and equipment, net		5		281		318

Total assets				89,212		67,234

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Short-term bank loans		6		9,541		9,160
Short-term loan from a non-financial institution		7		57		-
Current portion of mortgage loan		8		45		68
Accounts payable - Trade				24,026		10,854
Accrued expenses and other accrued liabilities				9,564		8,048
Trade deposits received				1,907		1,709
Due to directors		9		408		323
Provision for warranty				128		123
Tax payables				3,975		3,047

Total current liabilities				49,651		33,332
Non-current liabilities Mortgage loan		8		-		5

Commitments and contingencies		11		-		-

Stockholders’ equity
Preferred stock, US$0.001 par value: Authorized: 100,000,000 shares, no shares issued				-		-
Common stock and paid-in capital, US$0.001 par value: Authorized: 100,000,000 shares Issued and outstanding: 29,756,000 shares as of June 30, 2008 and as of December 31, 2007		12		30		30
Additional paid-in capital				3,209		2,484
Dedicated reserves				1,042		1,042
Accumulated other comprehensive income				4,422		2,906
Retained earnings				30,858		27,435

Total stockholders’ equity				39,561		33,897

Total liabilities and stockholders’ equity				89,212		67,234

The accompanying notes are an integral part of these consolidated financial statements.

Orsus Xelent Technologies, Inc.

Condensed Consolidated Statements of Cash Flows

For the 6 months ended June 30, 2008 and 2007

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

	(Unaudited)
	Six months ended June 30,
	2008			2007
	*US$’000*			US$’000
Cash flows from operating activities
Net income		3,423			2,696
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation		49			87
Allowance for obsolete inventory		-			592
Allowance for doubtful account		-			1,409
Compensation costs for stock options granted		725			-
Changes in assets and liabilities:
Accounts receivable - trade		(12,098	)		(7,083	)
Inventories, net		4			367
Trade deposits paid		(8,554	)		(4,641	)
Other current assets		(78	)		23
Trade deposits received		127			762
Accounts payable - trade		12,721			973
Due to directors		(17	)		(133	)
Due to a stockholder		-			133
Provision for warranty		-			62
Accrued expenses and other accrued liabilities		1,179			1,474
Tax payables		801			640

Net cash used in operating activities		(1,718	)		(2,639	)

Cash flows from investing activities
Purchase of property, plant and equipment		-			(185	)
Advance from directors		-			127
Repayment of loan to third parties		-			288

Net cash from investing activities		-			230

Cash flows from financing activities
Advance from a director		89			-
Proceeds from short-term bank loan		2,563			2,303
Proceeds from short-term loan from a non-financial institution		57			-
Repayment of short-term loans		(2,563	)		-
Repayment of mortgage loan		(31	)		-

Net cash from financing activities		115			2,303

Net decrease in cash and cash equivalents		(1,603	)		(106	)

Cash and cash equivalents, beginning of the period		2,928			2,421

Effect on exchange rate changes		233			-

Cash and cash equivalents, end of the period		1,558			2,315

Supplemental disclosure of cash flow information
Interest paid		478			304
Interest received		39			-
Tax paid		87			-

The accompanying notes are an integral part of these consolidated financial statements.

	Common stock issued
	No. of shares		Amount		Additional paid-in capital		Dedicated reserves		Other compre- hensive income		Retained earnings		Total
			US$’000		US$’000		US$’000		US$’000		US$’000		US$’000

Balance as of January 1, 2007		29,756,000		30		2,484		1,042		975		17,752		22,283

Net income		-		-		-		-		-		9,683		9,683

Foreign currency translation adjustment		-		-		-		-		1,931		-		1,931

Balance as of January 1, 2008		29,756,000		30		2,484		1,042		2,906		27,435		33,897

Net income		-		-		-		-		-		3,423		3,423

Compensation costs for stock options granted		-		-		725		-		-		-		725

Foreign currency translation adjustment		-		-		-		-		1,516		-		1,516

Balance as at June 30, 2008 (Unaudited)		29,756,000		30		3,209		1,042		4,422		30,858		39,561

The accompanying notes are an integral part of these consolidated financial statements.

Orsus Xelent Technologies, Inc.

Notes to Condensed Consolidated Financial Statements

For the 6 months ended June 30, 2008 and 2007

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

1.	BASIS OF PRESENTATION AND CONSOLIDATION

Basis of presentation

The accompanying financial statements, as of June 30, 2008 and for the 6 months ended June 30, 2008 and 2007, have been prepared by the Company without audit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“USGAAP”) have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures herein are adequate to make the information presented not misleading. These financial statements should be read in conjunction with Management’s Discussion and Analysis and the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2007 included in the Company’s 2007 Form 10-K dated March 31, 2008.

The preparation of financial statements in conformity with USGAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. Actual results and outcomes may differ from management’s estimates and assumptions.

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with USGAAP. The results for the 6 months ended June 30, 2008 and 2007 do not necessarily indicate the results that may be expected for the full year.

Basis of consolidation

The financial statements include the accounts of Orsus Xelent Technologies, Inc. (“ORS”) and its subsidiaries. Intercompany transactions and balances have been eliminated.

Stock-based compensation

Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment”, (SFAS 123(R)) requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The Company records the cost as expense over the offering period and vesting term in connection with compensation expense for stock-based employee compensation plans.

During the period, the Company has accounted for compensation expense for stock-based employee compensation plans in accordance with SFAS 123(R) as interpreted by SEC Staff Accounting Bulletin No. 107. The Company adopted the modified prospective transition method provided for under SFAS 123(R), and consequently has not retroactively adjusted results from prior periods. Under the modified prospective transition method, compensation expense is recognized in the financial statements on a prospective basis for share-based payments granted on or subsequent to January 1, 2006, based upon the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The grant-date fair value of awards expected to vest is expensed on a straight-line basis over the vesting period of the related awards.

As of June 30, 2008, the Company has a stock-based employee compensation plan, details of which are set out in note 13.

Orsus Xelent Technologies, Inc.

Notes to Condensed Consolidated Financial Statements

For the 6 months ended June 30, 2008 and 2007

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

2.	EARNINGS PER SHARE

Basic earnings per share is computed based upon the net income attributable to stockholders for the periods presented on the weighted average number of shares of common stock outstanding during each period.

The calculation of diluted earnings per share is based on net income attributable to stockholders for the periods presented and on the weighted average number of shares of common stock outstanding during each period and adjusted for the effects of all dilutive potential shares of common stock outstanding during the periods.

614,000 shares of stock options, which have been granted by ORS during the period ended June 30, 2008, have not been included in the computation of diluted earnings per share for the period ended June 30, 2008 because to do so would have been anti-dilutive for the period. Accordingly, the basic and diluted earnings per share are the same.

3.	INCOME TAXES

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

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

United First International Limited (“UFI”) was incorporated in Hong Kong and has no assessable income for the periods presented. Orsus Xelent Trading (HK) Limited (“OXTHK”) was incorporated in Hong Kong and Hong Kong Profits Tax has been provided at the rate of 17.5% in respect of its under-provision for prior years’ estimated assessable income; but no Hong Kong Profits Tax has been provided for the current 6-month period as OXTHK has no assessable income for the period presented.

The Company’s income is principally generated in the PRC by Beijing Orsus Xelent Technologies & Trading Co., Limited (“BOXT”). Since BOXT is registered as a wholly-owned foreign investment enterprise (“WOFIE”), it is subject to tax laws applicable to WOFIE in the PRC and is fully exempt from the PRC enterprise income tax of 24% for two years commencing in fiscal year 2005, followed by a 50% reduction for the next three years.

Orsus Xelent Technologies, Inc.

Notes to Condensed Consolidated Financial Statements

For the 6 months ended June 30, 2008 and 2007

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

3.	INCOME TAXES (CONTINUED)

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 enterprise income tax laws. The NEITL unifies the enterprise tax law applicable to both DE and FIE commencing in fiscal year beginning from January 1, 2008. The different enterprise income tax (“EIT”) rates with effective from January 1, 2008 are as follows:

Unified EIT rate effective January 1, 2008	25%
Small scale / low profit enterprises	20%
New / hi-tech enterprises	15%

By virtue of the NEITL, it is expected that BOXT will be subject to the unified EIT rate of 25% under the NEITL. 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 the year to expiry at 2009.

Under FIN 48, the Company must recognize the tax benefit from an uncertain position only if it is more-likely-than-not the tax position will be sustained on examination by the taxing authority, based on the technical merits of the position. The tax benefits recognized in the financial statements attributable to such position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon the ultimate resolution of the position.

Since January 1, 2007, the Company is subject to the provisions of FIN 48, and has analyzed its filing positions in all of the federal, state and foreign jurisdictions where it is required to file income tax returns, as well as for all open years for those jurisdictions. As of December 31, 2007 and June 30, 2008, the Company has identified the following jurisdictions as “major” tax jurisdictions, as defined, in which it is required to file income tax returns: United States, Hong Kong and 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, 2008 and during the year ended December 31, 2007, 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 twelve months.

As of December 31, 2007 and June 30, 2008, the Company had no unrecognized tax benefits or accruals for the potential payment or interest and penalties. The Company’s policy is to record interest and penalties in this connection as a component of the provision for income tax expense. For the six months ended June 30, 2008, no interest or penalties were recorded.

Orsus Xelent Technologies, Inc.

Notes to Condensed Consolidated Financial Statements

For the 6 months ended June 30, 2008 and 2007

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

3.	INCOME TAXES (CONTINUED)

(a)

Income tax expenses comprised the following:

	(Unaudited) Six months ended June 30,
	2008		2007
	*US$’000*		US$’000
Current tax
United States		-		-
Hong Kong		228		-
PRC		647		640
		875		640

(b)

Reconciliation from the expected statutory tax rate in the PRC of 25% (2007: 24%) is as follows:

	(Unaudited) Six months ended June 30,
	2008			2007
	%			%

Statutory rate - PRC		25.0			24.0
Differences in tax rates of subsidiaries of the Company		(2.9	)		-
Underprovision for in prior period		7.6			-
Tax exemption		(17.1	)		(19.8	)
Non-deductible items		7.8			15.0

Effective tax rate		20.4			19.2

4.	OTHER CURRENT ASSETS

Included in other current assets was a deposit of US$4,272 as of June 30, 2008 and US$4,102 as of December 31, 2007, the movement of which represents the effect on exchange rate changes, in relation to a proposed acquisition paid pursuant to a letter of intent entered into in 2007.

Orsus Xelent Technologies, Inc.

Notes to Condensed Consolidated Financial Statements

For the 6 months ended June 30, 2008 and 2007

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

5.	PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment are summarized as follows:

	(Unaudited)
	As of June 30, 2008			As of December 31, 2007
	*US$’000*			US$’000

Moulds		4			4
Leasehold improvements		128			128
Plant and machinery		19			19
Office equipment		296			296
Motor vehicles		296			296

		743			743
Accumulated depreciation		(462	)		(425	)

		281			318

Property, plant and equipment with an aggregate net book value as of June 30, 2008 of US$175 and as of December 31, 2007 of US$177 were collateralized for the mortgage loan granted to a subsidiary of the Company as set out in note 8 to the financial statements.

6.	SHORT-TERM BANK LOANS

All bank loans are secured by personal guarantee provided by the director, Mr. Liu Yu. In addition, bank loans of US$6,978 as of June 30, 2008 and US$6,699 as of December 31, 2007 are further secured by a pledged deposit of US$1,256 as of June 30, 2008 and US$1,206 as of December 31, 2007 and guarantee provided by a guaranty company. Remaining bank loan of US$2,563, obtained during the period, as of June 30, 2008 and US$2,461 as of December 31, 2007 is further secured by co-guarantees provided by two third party companies and a major customer of the Company. All bank loans are repayable within one year at interest rates ranging from 8.964% to 10.343% per annum.

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

The short-term loan is provided by a third party. It is unsecured, interest-free and is repayable on September 19, 2008. The directors consider that the carrying amount of the interest-free loan in the financial statements approximate its fair value.

Orsus Xelent Technologies, Inc.

Notes to Condensed Consolidated Financial Statements

For the 6 months ended June 30, 2008 and 2007

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

8.	MORTGAGE LOAN

The mortgage loan is collateralized by a motor vehicle of a subsidiary of the Company as set out in note 5 to the financial statements and a personal guarantee provided by the director, Mr. Wang Xin. It was charged at a fixed interest rate of 7.56% per annum and repayable on February 9, 2009.

	As of June 30, 2008		As of December 31, 2007
	*US$’000*		US$’000
	(Unaudited)
Current portion		45		68
Non-current portion		-		5

		45		73

9.	RELATED PARTY TRANSACTIONS

Name and relationship of related parties


Related party	Relationship with the Company during the period ended June 30, 2008

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

Summary of related party balances

			As of June 30, 2008		As of December 31, 2007
	*Note*		*US$’000*		US$’000
			(Unaudited)
Due to directors
Mr. Wang Xin and Mr. Liu Yu		(i)		408		323

Bank loans guaranteed by a director
Mr. Liu Yu		6		9,541		9,160

Mortgage loan guaranteed by a director
Mr. Wang Xin		8		45		73

Note:

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

Orsus Xelent Technologies, Inc.

Notes to Condensed Consolidated Financial Statements

For the 6 months ended June 30, 2008 and 2007

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

10.

SEGMENT INFORMATION

During the period ended June 30, 2008 and year ended December 31, 2007, all revenue of the Company are from its business of designing for retail and wholesale distribution cellular phones. Accordingly no financial information by business segment is presented.

The Company operates in the PRC and all its revenue and operating profit are from the PRC. Accordingly no geographical analysis is presented.

11.

CONTINGENCIES

Tax penalty

In accordance with 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 for VAT purposes when invoices are issued. As of June 30, 2008 and December 31, 2007, there were sales amounted to approximately US$146,941 and US$117,824 respectively for which VAT invoices have not yet been issued.

Furthermore, BOXT reports its revenue for PRC enterprise income tax (“EIT”) purposes when VAT invoices are issued instead of when goods are delivered. All unbilled revenue will become taxable when invoice are issued.

The above practice is not in strict compliance with the relevant 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 financial statements, BOXT may be subject to a penalty for the deferred reporting of above tax obligations. The exact amount of penalty cannot be estimated with any reasonable degree of certainty. The board of directors considers it is more likely than not that the penalty will not be imposed.

Financial guarantee contract

On June 20, 2007, BOXT entered into a guarantee contract for three years to June 16, 2010 to serve as guarantor of a bank loan amounting to approximately US$17,089 (equivalent to RMB120,000) to an independent third-party, CECT-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 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 27, 2008 issued by an independent professional valuer, the fair value of the undiscounted maximum potential amount of future payments, which was estimated by the independent professional valuer, that BOXT could be required to make under the guarantee contract was amounted to approximately US$106 (equivalent to RMB745) as of the date of inception. At the balance sheet date, there is no change in the estimated fair value of the financial guarantee since the date of inception in accordance with the estimation made by the directors of the Company.

Orsus Xelent Technologies, Inc.

Notes to Condensed Consolidated Financial Statements

For the 6 months ended June 30, 2008 and 2007

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

12.

COMMON STOCK

As of June 30, 2008 and December 31, 2007, the authorized capital of ORS is 200,000,000 shares within which 100,000,000 being shares of common stock with a par value of US$0.001, and 100,000,000 being shares of preferred stock with a par value of HK$0.001.

On April 3, 2008, ORS granted 614,000 shares of stock options to certain directors, senior officers and other key employees of the Company for promoting the long-term performance goals and general prosperity. The stock options are exercisable on July 2, 2008 for a 10-year period at an exercise price of US$2.26 per share.

ORS had 29,756,000 shares of outstanding common stock as of June 30, 2008 and December 31, 2007 and 614,000 shares of outstanding stock options as of June 30, 2008.

13.

STOCK OPTIONS

On March 27, 2008, a stock option plan of “2007 Omnibus Long-Term Incentive Plan” (“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 for non-employee directors and key employees with an additional motivation and incentive to improve the business results and contribute to the success of the Company.

On April 2, 2008, stock options to subscribe 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.

In accordance with the terms of the share-based payment arrangement, options granted during the period vest at the date of grant.

	No. of share options

As of January 1, 2008	-
Granted		614,000
Exercised		-
Cancelled/lapsed		-

As of June 30, 2008		614,000

Orsus Xelent Technologies, Inc.

Notes to Condensed Consolidated Financial Statements

For the 6 months ended June 30, 2008 and 2007

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

13.

STOCK OPTIONS (CONTINUED)

According to a valuation report dated August 1, 2008 issued by an independent professional valuer, the fair value of these options was US$725, which was estimated on the date of granted using 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 is charged to income as the benefit was fully vested at the date of grant. Key assumptions included in the estimation are as follows:

	As of June 30, 2008
	(Unaudited)
Expected dividend yield	-
Expected stock price volatility		85.07	%
Rise free interest risk		3.61	%
Expected life of share options		10 years

14.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued SFAS No. 141 (Revised), Business Combinations. SFAS No. 141(R) improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this Statement is not expected to have a material impact on the Company’s financial position or results of operations.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary and clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This Statement is effective for fiscal years beginning on or after December 15, 2008. The adoption of this Statement is not expected to have a material impact on the Company’s financial position or results of operations.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133. SFAS No. 161 amends SFAS No. 133 and requires entities to enhance their disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years beginning on or after November 15, 2008. The adoption of SFAS No. 161 is not expected to have a material impact on the Company’s financial position or results of operations.

Orsus Xelent Technologies, Inc.

Notes to Condensed Consolidated Financial Statements

For the 6 months ended June 30, 2008 and 2007

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

14.

RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162 (SFAS No. 162), The Hierarchy of Generally Accepted Accounting Principles. The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for non-governmental entities. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company is currently evaluating the impact of the adoption of SFAS No. 162 on its consolidated financial statements.

In May 2008, the FASB issued SFAS 163, Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60 to requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation and clarifies how Statement 60 applies to financial guarantee insurance contracts. The adoption of this Statement is not expected to have a material impact on the Company’s financial position or results of operations.

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

Pursuant to Stock Transfer Agreement dated March 29, 2005, the Company transferred all of the common stock of Universal Flirts, Inc. to Mr. Darrell Lerner in exchange for the cancellation of 28,200,000 shares of the Company’s common stock. Immediately following such 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 (the “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, $0.001 par value, to the stockholders of UFIL, representing approximately 50.41% of the Company’s issued and outstanding common stock, in exchange for the 20,000,000 outstanding shares of UFIL and a cash payment of $50,000 from UFIL. Immediately after giving effect to the exchange, the Company had 29,756,000 shares of its common stock outstanding. Pursuant to 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 May 9, 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, Orsus Xelent Trading (HK) Company Limited (“OXHK”), was incorporated under the laws of Hong Kong. This subsidiary is engaged in the business of selling cellular phones and accessories to overseas customers. In September 2005, OXHK commenced its Hong Kong operations to sell and distribute the Company’s cellular phone products and technical support services to customers outside the People’s Republic of China (the “PRC”).

The business operations of the Company are conducted through Xelent, which is also commonly called “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, custom operators, and specialized users from all fields of business and government. Most of our mobile phone models are either designed by us for our exclusive distribution and joint sales under established co-brands, or developed in conjunction with outside design firms. In February 2004, Xelent registered “ORSUS” as its product trademark with the PRC State Administration for Industry and Commerce.

In the GSM mobile phone market, Xelent provides its handsets to various types of customers and dealers. At present, the GSM mobile devices constitute a significant percentage of the Company’s sales and profit. In addition, Xelent has focused on the development of specialized application mobile terminals in accordance with market changes and the popularity of certain features. The Company has established itself in the specialized application field and made significant efforts in its marketing since entering the field in September 2006.

The cellular phone products produced by Xelent are customarily equipped with industry leading features, including 1.8-inch to 2.8-inch CSTN, TFT or QVGA dual-color display, 1 minute to 4 hours video recording, 300K to 3 million pixel photography, MP3, MPEG4 and U-disk support, dual stereo speakers, e-mail messaging, multimedia messaging, 40 to 64 ring tone storage, slim bar-phone & flip-phone technology and ultra thin innovative lightweight design. Xelent has sold approximately 2,360,800 cellular phones since its first product launched in 2004.

In April 2007, the Company’s common stock was approved for listing on the American Stock Exchange (“AMEX”), and began trading on AMEX on May 10, 2007 under the ticker symbol “ORS.” The Company's CUSIP Number is 68749U106.

Business Review

With the objectives we set at the beginning of the year 2008, the Company made no major structural adjustments to operational strategies in the second quarter while assessing the impact of the ongoing telecommunications operators’ reorganization. Instead, the Company continued to enhance the foundations built in the first quarter of the year and optimize its traditional distribution channels to sell more handsets popular among typical customers in the market. With the help of marketing and effective administration, sales volume reached a record of 321,000 cellphone units and revenues reached $28,894,000 in the second quarter of 2008, the second highest per quarter revenues in the Company’s history.

In the second quarter of 2008, most domestic cellphone makers were focused on existing mid-level and low-end products instead of launching new products into the market. In particular, low-end handsets sold well with their cost-effective features appealing to the mass domestic market. Our products at prices less than RMB1,000 accounted for 70% of our total sales in the second quarter of the year. This was the major reason why our quarterly gross margin declined. Although low-end products led the mainstream in the domestic market, we have been trying to equip our products with features that correspond with market trends. In general, a majority of our products featured popular colors, demonstrating a transition away from monochrome that corresponded with market trends. In addition, we ensured our cellphones included functional features such as multimedia, multi-mega pixel and dual simcards.

Currently, we have various annual operational agendas in process. We have followed up on potential custom orders with operators. Although the split and reorganization among domestic telecommunication carriers is progressing in the PRC, we have decided to closely track the changing situation and to launch our custom distribution under appropriate conditions. We have had a customized cellphone model for sale in the market since the second quarter of 2008.

With respect to the pending acquisition of a manufacturing facility, the Company withdrew the letter of intent with its originally targeted company and executed a new letter of intent with Dalian Daxian Investment Development Co. Ltd. (“DDID”) as well as DDID’s holding and subsidiary companies (collectively “Dalian Daxian”). As scheduled in the agreement, Dalian Daxian has commenced their internal restructuring. When all preparatory work is done, the Company will sign a formal agreement to complete its acquisition of the manufacturing entity.

For the six months ended June 30, 2008, the Company’s sales grew substantially and its revenues increased by 36% over the same period during the previous year. This defies the convention that the second quarter is usually an inactive season for sales. The Company attained a 77% increase in revenues for the three months ended June 30, 2008 as compared to the corresponding period during the previous year.

For the six months ended June 30, 2008, the Company’s net profit amounted to $3,423,000, representing an increase of 27% as compared to the same period during the previous year. Among non-operational factors, the Company granted incentive stock options during this quarter which resulted in non-cash expenses of $725,000, which represented the cost of all for the options granted. At the time the stock options are granted, the compensation costs must be calculated based on 1) the Binomial Lattice option pricing model for calculating the value and 2) the vesting period. As the options of the Company vested immediately, the non-cash expenses were shown as large portion of General and Administrative expenses. Excluding the impact of this factor, the Company’s operational earnings were targeted to reach $4,148,000, more than a 54% increase over the same period in the previous year.

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

During the second quarter of 2008, the Company emphasized distribution of traditional handsets, which resulted in a 76.66% growth in revenues as compared to the same period during the previous year. However, due to the recognition of share option expenses on their grant date in the second quarter of 2008, the Company only achieved an increase of 3.93% in net profit for the three months ended June 30, 2008. This share options have fully vested and their expense was fully accounted for in this quarter. The following table summarizes our operating results for the six months ended June 30, 2008 and June 30, 2007, respectively:

	Six months ended June 30, 2008			Six months ended June 30, 2007			Comparison
	$000	% of Revenue		$000	% of Revenue		$000		%
Revenue	49,613	-		36,365	-		13,248		36.43	%
Cost of sales	43,229	87.13	%	29,522	81.18	%	13,707		46.43	%
Sales & marketing expenses	225	0.45	%	247	0.68	%	(22	)	(8.91	%)
General & admin. expenses	1,571	3.17	%	579	1.59	%	992		171.33	%
R&D expenses	141	0.28	%	296	0.81	%	(155	)	(52.36	%)
Depreciation	49	0.10	%	87	0.24	%	(38	)	(43.68	%)
Allowance for obsolete inventories	-	-		592	1.63	%	(592	)	(100.00	%)
Allowance for trading deposit receivables	-	-		1,409	3.87	%	(1,409	)	(100.00	%)
Finance cost	478	0.96	%	304	0.84	%	174		57.24	%
Other net income	378	0.76	%	7	0.02	%	371		5,300.00	%
Pre-tax profit	4,298	8.66	%	3,336	9.17	%	962		28.84	%
Income tax	875	1.76	%	640	1.76	%	235		36.72	%
Profit	3,423	6.90	%	2,696	7.41	%	727		26.97	%

This table below illustrates our operating results for the three months ended June 30, 2008 and June 30, 2007, respectively:

	Three months ended June 30, 2008			Three months ended June 30, 2007			Comparison
	$000	% of Revenue		$000	% of Revenue		$000		%
Revenue	28,894	-		16,356	-		12,538		76.66	%
Cost of sales	25,728	89.04	%	13,181	80.59	%	12,547		95.19	%
Sales & marketing expenses	122	0.42	%	134	0.82	%	(12	)	(8.96	%)
General & admin. expenses	1,135	3.93	%	420	2.57	%	715		170.24	%
R&D expenses	26	0.09	%	243	1.49	%	(217	)	(89.30	%)
Depreciation	24	0.08	%	35	0.21	%	(11	)	(31.43	%)
Allowance for obsolete inventories	-	-		272	1.66	%	(272	)	(100.00	%)
Allowance for trading deposit receivables	-	-		194	1.19	%	(194	)	(100.00	%)
Finance cost	240	0.83	%	177	1.08	%	63		35.59	%
Other net income	214	0.74	%	5	0.03	%	209		4,180.00	%
Pre-tax profit	1,833	6.34	%	1,705	10.42	%	128		7.51	%
Income tax	327	1.13	%	256	1.57	%	71		27.73	%
Profit	1,506	5.21	%	1,449	8.85	%	57		3.93	%

Revenues

Our Revenues were $49,613,000 for the six months ended June 30, 2008, representing an increase of 36.43% as compared to $36,365,000 in the corresponding period in 2007.

At present, we divide our products into three categories according to distribution channels: (1) specialized application mobile terminals; (2) custom-made products for operators; and (3) traditional products for typical customers in market. In addition, we created three series of product lines based on product features, such as functions, appearance, price and target market. Our mid-level and low-end products contain a number of attractive features, such as MP3, MPEG4, video recording and outer card storage, while our high-end products contain the above-mentioned features as well as PDA, GPS and office software functions, Mobile TV, special industry applications and other attractive features and functions.

Our revenues were $28,894,000 for the three months ended June 30, 2008, representing an increase of 76.66% as compared to $16,356,000 for the same period in 2007.

Products Segment

For the six months ended June 30, 2008, the Company’s revenues were primarily generated from the following products:

	Six months ended June 30, 2008
	$’000		% of revenue
DX5020	6,045		12.18	%
DX6018	10,077		20.31	%
DX7020	5,327		10.74	%
DX8028	5,050		10.18	%
DX8020	4,621		9.31	%
DX5010	3,287		6.63	%
DX7028	2,740		5.52	%
LM6688	2,710		5.46	%
DX7026	2,680		5.40	%
DX6028	2,001		4.03	%
DX3020	1,679		3.38	%
DX6030	1,382		2.79	%
DX6038	1,310		2.64	%
DX6010	1,263		2.55	%
LG2018	310		0.63	%
Discount allowed	(869	)	(1.75	%)
Total	49,613		100.00	%

For the six months ended June 30, 2008, the total revenues of the Company were $49,613,000. This amount included sales of CDMA products, i.e. DX5020, totaling $6,045,000. Sales of GSM products accounted for 87.82% of total revenue, which was primarily from the sales of DX6018, DX7020, DX8020, DX8028, DX5010, DX7028, LM6688, DX7026, some other models and discount allowed, with revenues of $10,077,000, $5,327,000, $4,621,000, $5,050,000, $3,287,000, $2,740,000, $2,710,000, $2,680,000, $7,945,000 and ($869,000), respectively.

We had only one CDMA product in the second quarter of 2008, which was DX5020 (CDMA, GPS, Touch Pad, Web Browsing), provided by Hongyuan Kangda Trading Co., Ltd. (HKT). Our GSM products are purchased from Tianjin Communication Broadcast Group (TCB) which supplies LM6688 (Dual Simcards Simul-Standby, Dual Cameras, Extended Standby, High-quality Music Player), from Holley Communications Co., Ltd, which supplies DX6018 (Dual Simcards Mono-Standby, 300K Pixel Camera, Bluetooth, Dual Speakers, MP3. MP4) and DX7020 (Dual Simcards Simul-Standby, 2.8+TP, 300K Pixel Camera, Dual Speakers), and from Hongyuan Kangda Trading Co., Ltd. (HKT), which supplies DX8028 (Mono-Chip, Dual Simcards Simul-Standby, 1.8+TP, 300K Pixel Camera, MP3, MP4, Colorful Pad Lamp, Dual Speakers) and DX5010 (EDGE, GPS, Touch Pad, Web Browsing, IPTV).

For the three months ended June 30, 2008, the Company’s revenues were primarily attributable to the following products:

	Three months ended June 30, 2008
		$’000		% of revenue
DX5020		6,045		20.92	%
DX6018		6,087		21.07	%
DX7020		3,868		13.39	%
DX5010		3,287		11.38	%
DX8028		2,716		9.40	%
LM6688		2,710		9.38	%
DX8020		2,358		8.16	%
DX6030		1,382		4.78	%
DX6038		1,310		4.53	%
Discount allowed		(869	)	(3.01	%)
Total		28,894		100.00	%

For the three months ended June 30, 2008, the total revenues of the Company were $28,894,000, representing an increase of 76.66% as compared to $16,356,000 for the same period in 2007. This increase was a result of the Company promoting the sale of cost-effective traditional products prior to the telecommunications operators completing their reorganization.

Customer Segments

For the six months ended June 30, 2008, all of our revenues were derived from Beijing Xingwang Shidai Tech & Trading Co., Ltd. (XWSD), in the amount of $49,613,000. XWSD has been our most important customer for a long period of time. It is one of the largest distributors and dealers in Mainland China and has sales networks in major cities in the PRC.

	Six months ended June 30, 2008
		$’000	% of revenue
Beijing Xingwang Shidai Tech & Trading Co., Ltd.		49,613	100	%

Other net income

For the six months ended June 30, 2008, other net income accounted for $378,000, or 0.76% of total revenues. This was mainly comprised of reversals of allowance for doubtful debts and exchange gains due to RMB appreciation.

For the three months ended June 30, 2008, other net income accounted for $214,000, or 0.74% of total revenues. This was mainly comprised of reversals of allowance for doubtful debts and exchange gains due to RMB appreciation.

Operating expenses

For the six months ended June 30, 2008, our operating expenses were $1,986,000. The operating expenses included sales and marketing, general and administrative, R & D expenses, depreciation, and allowance for obsolete inventories and allowance for doubtful debts which are set forth in the following table, together with a comparison against the corresponding amounts from the same period in 2007:

	Six months ended June 30, 2008			Six months ended June 30, 2007			Comparison
	$’000	% of revenue		$’000	% of revenue		$’000		%
Sales & marketing	225	0.45	%	247	0.68	%	(22	)	(8.91	%)
General & admin	1,571	3.17	%	579	1.59	%	992		171.33	%
R&D	141	0.28	%	296	0.81	%	(155	)	(52.36	%)
Depreciation	49	0.10	%	87	0.24	%	(38	)	(43.68	%)
Allowance for obsolete inventories	-	-		592	1.63	%	(592	)	(100.00	%)
Allowance for trading deposit receivables	-	-		1,409	3.87	%	(1,409	)	(100.00	%)
Total	1,986	4.00	%	3,210	8.83	%	(1,224	)	(38.13	%)

For the three months ended June 30, 2008, our operating expenses were $1,307,000.

	Three months ended June 30, 2008			Three months ended June 30, 2007			Comparison
	$’000	% of revenue		$’000	% of revenue		$’000		%
Sales & marketing	122	0.42	%	134	0.82	%	(12	)	(8.96	%)
General & admin	1,135	3.93	%	420	2.57	%	715		170.24	%
R&D	26	0.09	%	243	1.49	%	(217	)	(89.30	%)
Depreciation	24	0.08	%	35	0.21	%	(11	)	(31.43	%)
Allowance for obsolete inventories	-	-		272	1.66	%	(272	)	(100.00	%)
Allowance for trading deposit receivables	-	-		194	1.19	%	(194	)	(100.00	%)
Total	1,307	4.52	%	1,298	7.94	%	9		0.69	%

Sales and marketing expenses

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

For the six months ended June 30, 2008, sales and marketing expenses were $225,000, or 0.45% of the revenues, which are roughly equal to the numbers for the corresponding period in 2007.

R&D expense

Our R&D expenses were $141,000 or 0.28% of total revenues for the six months ended June 30, 2008, which represents a decrease of $155,000 or 52.36%, as compared with $296,000 and 0.81% of total revenues in the same period of 2007. The decrease was a result of the impact of the restructuring among telecommunications operators, which demonstrates that the Company incurred little R&D expense related to custom products.

General and administrative expenses

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

For the six months ended June 30, 2008, the total general and administrative expenses were $1,571,000, or 3.17% of total revenues, representing an increase of $992,000 or 171.33% as compared to $579,000, or 1.59% of the total revenues, for the corresponding period in 2007. The sharp increase was primarily a result of the Company granting employees stock options, which led to related compensation costs.

Gross Profit and Gross Profit Margin

For the six months ended June 30, 2008, our gross profit was $6,384,000, reflecting a decrease of $459,000, as compared to $6,843,000 for the same period of last year. In addition, our gross profit margin for the reporting period was 12.87%, representing a decrease of 5.95% as compared to 18.82% for the same period of 2007.

The change of gross profit margin growth is attributable to:

intensified competition in the domestic market and a decline in the gross margin of products sold during the period. When competing with foreign brands in the market, domestic brands usually focus on sales of low-priced products as a strategy to increase their market presence and secure originally-owned distribution to create conditions for future development, but this results in higher sales of low-margin products;

the pending structural adjustment of operators. In the first quarter of 2008, there were few high-margin customized orders generated from the operators sector while the operators were focused on their restructuring.

Net income

For the six months ended June 30, 2008, our net income was $3,423,000 or a net profit margin of 6.90%, representing an increase of $727,000, or 26.97%, as compared to $2,696,000, or a net profit margin of 7.41% in the same period of 2007.

For the three months ended June 30, 2008, our net income was $1,506,000 or a net profit margin of 5.21%, representing an increase of $57,000, or 3.93%, as compared to $1,449,000, or a net profit margin of 8.85% in the same period of 2007.

LIQUIDITY AND SOURCE OF CAPITAL

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

As of June 30, 2008, we had current assets of $88,931,000. Current assets are mainly comprised of accounts receivable of $72,241,000, trade deposits paid of $9,428,000, cash and cash equivalents of $1,558,000, pledged deposits of $1,256,000 and other current assets of $4,448,000. Our current liabilities of $49,651,000 included accounts payable of $24,026,000, trade deposits received of $1,907,000, short-term bank loans of $9,541,000, short-term loans from a non-financial institution of $57,000, mortgage loan of $45,000, accrued expenses and other accrued liabilities of $9,564,000, tax payables of $3,975,000, amounts due to directors of $408,000, and provision for warranty of $128,000.

We offer two different trading terms to our customers, i.e. cash-on-delivery and on credit terms within 45-90 days. As of June 30, 2008, our accounts receivable had increased by $14,498,000 to $72,241,000, as compared to $57,743,000 as of December 31, 2007.

As of June 30, 2008, our trade deposits paid were $9,428,000, which represented an increase of $8,598,000 as compared to $839,000 as of December 31, 2007. The increase was due to a larger portion of trade deposits paid or early payments that went to suppliers to seek lower prices of materials or products from them. In order to arrange for the timely delivery of goods and ensure our market share, we agreed to adjust the prepayment.

As of June 30, 2008, our other accounts receivable were $4,448,000, which represented an increase of $252,000, as compared to $4,196,000 as of December 31, 2007. It is mainly composed of prepaid deposits for investment of $4,272,000 for acquiring the production facility.

As of June 30, 2008, our accounts payable were $24,026,000, which represented an increase of $13,172,000 or 121.36%, as compared to $10,854,000 as of December 31, 2007.

As of June 30, 2008, accrued expenses and liabilities were $9,564,000, demonstrating growth of $1,516,000 or 18.84%, as compared to $8,048,000 as of December 31, 2007. The increase was due to an outstanding tax of $8,255,000 caused by the time difference between USGAAP and PRCGAAP while determining the value-added tax (VAT).

As of June 30, 2008, tax payable was $3,975,000, which was attributable mainly to income tax and the tax deferred by Xelent.

As of June 30, 2008, 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”). Our activities in the operation are mainly denominated in RMB. In the accounting period, RMB currency is quoted officially against USD currency according to a floating exchange rate. However, the appreciation of the RMB against USD did not create currency exchange risk for the Company because we had few USD in stock.

CASH FLOWS

As of June 30, 2008, we had cash and cash equivalents of $1,558,000. This represented a decrease of $1,370,000 or 46.79% as compared to $2,928,000 as of December 31, 2007. The decrease in cash flow was caused by expenditures to address fierce competition and high inflation as well as some initial investment made to some ongoing new projects.

As of June 30, 2008, our aggregate short-term bank loans of $9,541,000 was comprised of $2,563,000 from Huaxia Bank, $6,978,000 from Beijing Rural Bank, and short-term loan of $57,000 from a non-financial institution, which is unsecured, interest-free, and is repayable on September 19, 2008.

In addition, we had a mortgage loan of $122,000 to purchase a company car in 2007. It had $45,000 outstanding and payable as of June 30, 2008.

Our gearing ratio, calculated as total debts over total assets, was 55.66% as of June 30, 2008. It increased slightly compared to 49.58% as of December 31, 2007.

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 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, including, but not limited to, ceasing production, going out of business, dissolving the business, having its business license withdrawn, and filing for bankruptcy.

OFF BALANCE SHEET ARRANGEMENTS

As of June 30, 2008, we had no off-balance sheet arrangements.

CONTRACTUAL COMMITMENTS

We are obligated to make future payments under various contracts, including purchase and operating leases. The Company does not have any long-term debt or capital lease obligations. The following table summarizes the Company’s contractual obligations at June 30, 2008, reported by maturity of obligation.

	Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	$	000	$	000	$	000	$	000	$	000

Operating Lease Obligations		117		112		5		-		-
Purchase Obligations		820		820		-		-		-

Total		937		932		5		--		--

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. Bank loans at June 30, 2008 were $9,541,000. The interest rate for the six months ended June 30, 2008 was charged at 8.964% to 10.343% per annum.

Item 4. Controls and Procedures.

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

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

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

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)

None.

(c)

None.

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, 2008.

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		Contract of Suretyship, dated June 20, 2007, between Yayuncun Branch of Beijing Rural Commercial Bank and Beijing Orsus Xelent Technology & Trading Company Limited (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 12, 2007)

10.2		X180 Mobile Terminal Purchase Contract, dated May 31, 2007, among Unicom Huasheng Telecommunication Technology Co., Ltd., Dalian Daxian Distribution Company and Beijing Orsus Xelent Technology & Trading Company Limited (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 6, 2007)

Exhibit Number

Exhibit Description

10.3		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)

14.1		Code of Business Conduct and Ethics (incorporated by reference from Exhibit 14 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on February 7, 2007)

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

SIGNATURES

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


	ORSUS XELENT TECHNOLOGIES, INC.

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


	By:	/s/ Zhao Hongwei
		Zhao Hongwei Chief Financial Officer

DATED: August 14, 2008

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		Contract of Suretyship, dated June 20, 2007, between Yayuncun Branch of Beijing Rural Commercial Bank and Beijing Orsus Xelent Technology & Trading Company Limited (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 12, 2007)

10.2		X180 Mobile Terminal Purchase Contract, dated May 31, 2007, among Unicom Huasheng Telecommunication Technology Co., Ltd., Dalian Daxian Distribution Company and Beijing Orsus Xelent Technology & Trading Company Limited (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 6, 2007)

10.3		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)

14.1		Code of Business Conduct and Ethics (incorporated by reference from Exhibit 14 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on February 7, 2007)

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