Orsus Xelent (ORSX) 10-Q 2010 Q1 Quarterly report

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 March 31, 2010

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

29th Floor, Tower B, Chaowai MEN Office Building

26 Chaowai Street, Chaoyang Disc.

Beijing, People’s Republic Of China 100020

(Address of principal executive offices, including zip code)

86-10-85653777

(Registrant’s telephone number, including area code)

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

Yes  x             No  ¨

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

Yes  ¨              No  x

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

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

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

Yes  ¨              No  x

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

Yes  ¨              No  x

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

Class	Outstanding at May 24, 2010
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 Operations 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	21
Item 4T - Controls and Procedures	21
Part II. Other Information	22
Item 1 - Legal Proceedings	22
Item 1A - Risk Factors	22
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3 - Defaults Upon Senior Securities	22
Item 4 – Removed and Reserved	22
Item 5 – Other Information	22
Item 6 - Exhibits	22
Signatures	24

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Orsus Xelent Technologies, Inc. and Subsidiaries

Consolidated Balance Sheets

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

	March 31, 2010		December 31,2009
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	10	$	374
Restricted cash		4		4
Notes Receivable		-		2,779
Accounts receivable		85,370		81,130
Trade deposit paid, net		6,658		5,875
Other current assets, net		28		29
Pledged deposit		1,290		1,290
Total current assets		93,360		91,481
Property, plant and equipment, net		170		178
Deferred tax asset		4,341		4,095
	$	97,871	$	95,754
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Short-term bank loans	$	9,391	$	9,390
Short-term loan payable		307		307
Accounts payable		7,669		7,652
Accrued expenses and other accrued liabilities		3,616		3,413
Trade deposits received		1,883		1,884
Due to shareholders		620		611
Income taxes payable		5,871		5,870
Other taxes payable		22,502		21,423
Liabilities for possible settlement to accounts payable		4,182		2,928
Total current liabilities		56,041		53,478
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 as of March 31, 2010 and December 31, 2009		30		30
Additional paid-in capital		3,209		3,209
Unappropriate retained earnings		1,042		1,042
Appropriated retained earnings		31,909		32,363
Accumulated other comprehensive income		5,640		5,632
Total stockholders’ equity		41,830		42,276
	$	97,871	$	95,754

See notes to consolidated financial statements.

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Orsus Xelent Technologies, Inc. and Subsidiaries

Consolidated Statements of Operation and Comprehensive Income

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

	Three months ended March 31,
	2010			2009
	(Unaudited)			(Unaudited)
Net sales	$	7,591			19,724
Cost of sales		6,995			16,632
Gross profit		596			3,092
Operating expenses:
Selling expenses		41			123
General and administrative expenses		27			266
Research and development expenses		5			17
Depreciation and amortization		8			23
Allowance for doubtful accounts		(251	)		-
Income from operations		766			2,663
Other income/(expenses)
Interest expense		(213	)		(222	)
Other (expenses)/income, net		(1,252	)		17
(Loss)/income before income tax expense		(699	)		2,458
Income tax (expenses)/benefit
Current tax expense		-			(323	)
Deferred taxes benefit		245			-
Net (loss)/income		(454	)		2,135
Other comprehensive income
Foreign currency translation adjustment		8			64
Comprehensive (loss)/income	$	(446	)		2,199
(Loss)/Earnings per share:
Basic and diluted	$	(0.02	)	$	0.07
Weighted average number of common shares outstanding – basic and diluted		29,756,000			29,756,000

See notes to consolidated financial statements.

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Orsus Xelent Technologies, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

	Three months ended March 31,
	2010			2009
	(Unaudited)			(Unaudited)
Cash flows from operating activities
Net (loss)/income	$	(454	)	$	2,135
Adjustments to reconcile net (loss)/income to net cash used in operating activities:
Deferred tax		(245	)		-
Depreciation and amortization		8			23
Loss due to liability for possible settlement to accounts payable		1,253			-
Changes in assets and liabilities:
Accounts receivable		(4,227	)		(4,545	)
Note receivable		2,779			-
Trade deposits paid, net		(783	)		8,116
Other current assets, net		-			48
Accounts payables		17			(6,375	)
Accrued expenses, other accrued liabilities and other tax payable		1,287			696
Due to shareholders		-			(250	)
Income tax payable		-			289
Net cash flows (used in)/provided by operating activities		(365	)		137
Cash flows from financing activities
Proceeds from banks and other loans		-			2,512
Repayment of bank loans		-			(2,687	)
Repayment of mortgage loans		-			(12	)
Net cash flows used in financing activities		-			(187	)
Net change in cash and cash equivalents		(365	)		(50	)
Effect of foreign exchange rate changes on cash and cash equivalent		1			-
Cash and cash equivalent - beginning of period		374			102
Cash and cash equivalent - end of period	$	10		$	52
Supplemental disclosure for cash flow information
Interest paid	$	-		$	43
Income taxes paid	$	-		$	34

See notes to consolidated financial statements.

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ORSUS XELENT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

1.  ORGANIZATION

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

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

2. DESCRIPTION OF BUSINESS

The Company is principally engaged in the business of designing and distributing economically priced cellular phones for retail and wholesale distribution. The Company does not produce the products but outsourcing the manufacturing to third party factories and pay to the factories at a fixed price according to the production volume, therefore, there is no inventory held by the Company. In February 2004, the Company registered “ORSUS” with the State Administration for Industry and Commerce in the PRC as its trademark, which is also known as “Orsus Cellular” within the industry. In January 2007, the trademark “PROXLINK” was registered for the Company’s specialized application mobile series.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

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

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

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Principle of consolidation

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

Use of Estimates

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

Recently issued accounting pronouncements

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

ASU No. 2010-01—Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash. This Update clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this Update are effective for interim and annual periods ending on or after December 15, 2009 with retrospective application.

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

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

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

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

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4. RESTRICTED CASH

There are three blocked bank accounts with restricted cash with the amount of US$4 as of March 31, 2010. Two bank accounts are related to the legal disputes with two suppliers of BOXT. Shenzhen Songding Industry Ltd., (“Songding”) provides the battery chargers and Beijing Baoxin Packing Materials Co., Ltd. (“Baoxin”) provides the packing materials to BOXT. The third bank account was blocked because the loan from Beijing Rural Commercial Bank has been overdue since September 27, 2009, and the Company has not repaid any principle or interest. The balance of this account on March 31, 2010 was zero. (Refer to Note 13, “Commitments And Contingencies”.)

There are two blocked bank accounts with restricted cash with the amount of US$4 as of December 31, 2009, which related to Songding and Baoxin.

5. ACCOUNTS RECEIVABLE

The Company’s business relies on a few distributors. US$85,370 and US$81,130 of accounts receivable as of March 31, 2010 and December 31, 2009, respectively, mainly consisted of a balance of US$78,296 and US$75,616 due from Beijing Xingwang Shidai Commerce Co., Ltd. (“Xingwang”), the major distributor of the Company. The reason for the large accounts receivable balance as of March 31, 2010 and December 31, 2009 is due to a longer turnover cycle than in prior fiscal periods.  The main reason for longer turnover cycle is that the industry profits have decreased and as a result the middle -level distributors have been removed and the national -level distributor Xingwang  has to sell the products to direct customers (the retailers), whose turn-over rate is always slower than middle -level distributors.

The long aged account receivable to Xingwang is guaranteed by a third-party gurantee company licensed by the PRC government, Zhong Hui Guarantee Corporation (“Zhonghui”). On December 25, 2008, Xingwang entered into an irrevocable Credit Guarantee Contract (the “Guarantee Contract”) with Zhonghui and BOXT under which Zhonghui agreed to guarantee up to Renminbi (“RMB”) 300 million (equivalent to US$43,885), for the principal debt, fine, damages arising out of breach of contract, and costs incurred for realizing those legal rights including but not limited to legal proceeding fees, attorney fees and travel expenses arising out of the distributor agreement entered into by BOXT and Xingwang. The Guarantee Contract was effective as of December 25, 2008 and provides a guarantee for all of the accounts receivable that are or may become outstanding from Xingwang to BOXT from January 1, 2008 through December 31, 2008. On December 31, 2009, the guarantee contract expired. A new guarantee contract was signed between BOXT, Xingwang Shidai and Zhonghui on January 1, 2010 and provides a guarantee for all the accounts receivable that are or may become outstanding from Xingwang to BOXT from January 1, 2008 through December 31, 2010. Since this account receivable is guaranteed by above mentioned guarantee agreement, no allowance for doubtful accounts is accrued.

6. TRADE DEPOSIT PAID, NET

US$6,658 and US$5,875 of trade deposit was paid to suppliers on March 31, 2010 and December 31, 2009, is payment in advance to suppliers, which consisted of the following:

	March 31, 2010			December 31, 2009
	(US$’000)			(US$’000)
	(Unaudited)
Trade deposit paid	$	6,787		$	6,004
Less: allowance for doubtful accounts		(129	)		(129	)
Total	$	6,658		$	5,875

During the year ended December 31, 2009, the Company wrote off total trade deposit paid with balance of US$11,937 to two suppliers, Beijing Runyu Kebo Trading Co., Ltd. (“Runyu Kebo”) of US$11,686 and Beijing Kebo Hongyuan Trading Center. (“Kebo Hongyuan”) of US$251, which were liquidated by Beijing Industry and Commerce Bureau, as of December 31 2009.

During the three months ended March 31, 2010, the written-off trade deposit from Kebo Hongyuan has been reversed in the amount of US$251, because the Company collected the amount from Kebo Hongyuan’s remaining assets. Meanwhile, the Company accrued US$129 as a provision towards its other vendors with the accounts aged over three years.

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7. OTHER CURRENT ASSETS, NET

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

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

	March 31, 2010			December 31, 2009
	(US$’000)			(US$’000)
	(Unaudited)
Other current assets	$	1,815		$	1,816
Less: allowance for doubtful accounts		(1,787	)		(1,787	)
Total	$	28		$	29

8. PLEDGED DEPOSIT

US$1,290 of pledged deposits at March 31, 2010 and US$1,290 of pledged deposits at December 31, 2009 were paid to Zhonghui, a guarantee company, in September 2008 as a pledge for US$6,874 (RMB47,000) of bank loans. Refer to Note 10, “Short-term Bank Loans” for more discussion of the bank loans.

9. PROPERTY, PLANT AND EQUIPMENT, NET

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

	March 31, 2010			December 31,  2009
	US$’000			US$’000
	(Unaudited)
Moulds		4			4
Leasehold improvements		131			131
Office equipment		323			323
Motor vehicles		303			303
		761			761
Less: Accumulated depreciation		(591	)		(583	)
		170			178

The depreciation expenses were US$8 and US$23 for the three months ended March 31, 2010 and 2009, respectively.

10. SHORT-TERM BANK LOANS

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

At March 31, 2010	Amount (RMB’000)	Annual interest rate	Term	Guarantee provided by
	(Unaudited)
Loan from Beijing Rural Commercial Bank	47,000 (US$6,875)	10.08%	From September 28, 2008 to September 27, 2009	Director Liu Yu; A guarantee company; pledged deposit of US$1,290
Loan from Huaxia Bank	17,200 (US$2,516)	6.3720%	From February 20,2009 to February 20, 2010	Director Liu Yu; Two third party companies; Distributor Xingwang.
Total	64,200 (US$9,391)

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

Interest expense incurred for the three months ended March 31, 2010 and 2009 were US$213 and US$222, respectively.

US$6,875 of a loan from Beijing Rural Commercial Bank was originally due on September 27, 2009. The Company is currently negotiating an extension of the term with the bank. The penalty interest rate on the principal and interest in default is 130% of the contracted interest rate and is chargeable from the due date of the principal. The Company accrued US$190 in penalty interest for the three months ended March 31, 2010, and US$425 in penalty interest from September 28, 2009 to March 31, 2010.

US$2,516 of a loan from Huaxia Bank was due on February 20, 2010.  The Company is currently negotiating an extension of the term with the bank. The penalty interest rate on the principal and interest in default is 150% of the contracted interest rate and is chargeable from the due date of the principal. The Company estimates that the possible penalty amount is insignificant and the extension agreement will be entered soon and Huaxia Bank will not charge the penalty interest to the Company. No penalty interest expense is accrued as of March 31, 2010.

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

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

12.  AMOUNT DUE TO SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

(a) Name and relationship of shareholders

Related party	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

	March 31, 2010		December 31, 2009
	US$’000		US$’000
	(Unaudited)
Due to shareholders
Mr. Liu Yu		411		402
Mr. Wang Xin		209		209
		620		611
Bank loans guaranteed by Mr. Liu Yu		9,391		9,390

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

13.  COMMITMENTS AND CONTINGENCIES

(a) Operating lease commitments

As of March 31, 2010, the Company had non-cancelable operating leases with one-year terms for its office premises, under which the expected rental payment due within the next year was US$40.

(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 with VAT invoices issued to PRC tax authorities for VAT purposes.  For the three months ended March  31, 2010 and 2009, there were sales amounting to US$6,258 and US$19,724 respectively, for which VAT invoices have not yet been issued.

The sales revenue of the three months ended March 31, 2010 and 2009 was US$7,591 and US$19,724, respectively, representing US$1,291 and US$3,353 output VAT, respectively. Meanwhile, the input VAT for which the invoice had been received was US$214 and US$1,111for the three months ended March 31, 2010 and 2009, respectively. Therefore, the net accrued VAT payable is US$1,077 and US$2,242 for the three months ended March 31, 2010 and 2009 respectively.

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

As there is little tax payment made during the years, the accumulated VAT payable is US$22,502 and US$21,423 as of March 31, 2010 and December 31, 2009, respectively.

Furthermore, BOXT reports its revenue for PRC Enterprise Income Tax (“EIT”) purposes when VAT invoices are issued rather than when goods are delivered, although EIT payable is fully provided for all sales. 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.

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.

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According to a March 20, 2009 valuation report issued by an independent professional appraiser, the fair value of the undiscounted maximum potential amount of future payments as of December 31, 2009 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 March 31, 2010 did not materially differ from the same figure as of December 31, 2009. Management believes it is not probable BOXT will need to fulfill any obligation under this contract.

Litigation

There are two legal disputes with two suppliers of BOXT. Shenzhen Songding Industry Ltd., (“Songding”) provides battery chargers and Beijing Baoxin Packing Materials Co., Ltd. (“Baoxin”) provides packing materials to BOXT. The legal disputes with abovementioned suppliers arose because the Company did not accept accessories and materials supplied by Songding and Baoxin due to quality issues. The management of BOXT determined to cease payment to Songding and Baoxin accordingly.

The dispute between Baoxin and BOXT commenced in arbitration initiated by Baoxin on October 2006 which was arbitrated by the Beijing Arbitration Commission on October 24, 2006. BOXT is obligated to pay Baoxin US$246. Currently, BOXT and Baoxin are in the process of the final negotiation based on the arbitration result. As such, Baoxin applied to the court for property preservation and one of BOXT’s bank accounts has been blocked accordingly. BOXT has recorded the arbitration result as an account payable to the supplier after the arbitration. The balance of account payable to Baoxin as of March 31, 2010 is US$36.

The dispute between Songding and BOXT is still pending for final arbitration. Songding has argued for BOXT to pay the amount of US$281 to Songding. Songding prepared the arbitration application on December 28, 2009 and applied to the court for property preservation to block the bank account of BOXT. The application was formally accepted by the Beijing arbitration commission on January 12, 2010. Since Songding applied for the property preservation to the court, one of BOXT’s bank accounts is blocked accordingly. The balance of account payable to Songding as of March 31, 2010 is US$54.

Warranty

During the three months ended March 31, 2010, we made no allowance for warranty for product problems because, during this period, post-sale services for newly-launched products were undertaken by OEM factories rather than the Company. Therefore, allowances were not made accordingly for these post-sale services.

Overdue Bank Loan

The Company currently has an overdue bank loan of US$6,875 from Beijing Rural Commercial Bank and US$2,516 from Huaxia Bank that were loaned on March 31, 2010. The Company is negotiating an extension of the term of the loan with the banks.  The Company accrued US$425 in penalty interest from September 28, 2009 to March 31, 2010.

14.  UNAPPROPRIATED RETAINED EARNINGS

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 three months ended March 31, 2010, BOXT made appropriations to this statutory reserve of US$0 due to net loss incurred for the period. The accumulated balance of the dedicated reserve at BOXT as of March 31, 2010 and December 31, 2009 were US$1,042 and US$1,042, respectively.

15.  STOCK OPTIONS

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

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

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

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

A summary of the share option plan activity during the three month period ended March 31, 2010 is presented below:

	Number of share options
	(Unaudited)
As of January 1, 2010		614,000
Granted		-
Exercised		-
Cancelled/lapsed		-
As of March 31, 2010		614,000

16.  LIABILITIES FOR POSSIBLE SETTLEMENT FOR ACCOUNTS PAYABLE

Liabilities for possible settlement for accounts payable of US$4,182 is arising from the provision of penalty for unpaid accounts payable to suppliers at March 31, 2010. In the purchase contracts signed between suppliers and the Company since 2006, an agreed term between BOXT and the suppliers acknowledges that any outstanding payment which exceeds the agreed payment schedule will be imposed on an additional 0.3% per day delayed payment penalty based on principle amount of contract liability. However, since some of such purchase contracts were signed before 2006, according to relevant PRC civil laws and regulations, if the creditors did not claim for the right in writing to the Company within two years since the date on which the liability was due, the periods of prescription will be expired after two years from the date on which the liability was due. We noted that  meanwhile, no  legal letters related to this liability (0.3% penalty arising from the outstanding payment.) were issued from our suppliers in past 4 years. However, the Company felt it was prudent to accrue this liability based on the terms of the contract. As of March 31, 2010, the Company accrued a possible penalty for the purchase contracts signed after March 31, 2008 based on such penalty term with amount of US$4,182. US$1,252 of such possible liability was accrued during the three months ended March 31, 2010.

17.  PENSION COSTS

As stipulated by the PRC regulations, the Company maintains a defined contribution retirement plan for all of its employees who are residents of the PRC.  All retired PRC employees of the Company are entitled to an annual pension equivalent to their basic annual salary upon retirement.  The Company contributed to a state sponsored retirement plan approximately 20% of the 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$17 and US$22 for the three months ended March 31, 2010 and 2009 respectively.

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The pension paid for three months ended March 31, 2010 and 2009 is US$51 and US$0 respectively;

18.  INCOME TAXES

The Company and its subsidiaries file separate income tax returns.

The United States of America

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

British Virgin Islands

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

Hong Kong

UFI and OXTHK are incorporated in Hong Kong. UFI and OXTHK did not earn any income that was derived in Hong Kong for the three months ended March 31, 2010 and 2009 and therefore was not subject to Hong Kong Profits Tax. The payments of dividends by Hong Kong companies are not subject to any Hong Kong withholding tax.

PRC

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

The Company’s effective income tax rate was 0% and 13.14% for the three-month periods ended March 31, 2010 and 2009, respectively. The difference between the effective tax rate and the statutory tax rate primarily represented the tax effects on the non-taxable income and non-deductible expenses.

The Company had deferred tax assets of approximately $4,341 and $4,095 as of March 31, 2010 and December 31, 2009, respectively, which arose from allowance for doubtful accounts and provision for liability for possible settlement to accounts payable. The Company had no other temporary differences as of March 31, 2010 and December 31, 2009.

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

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

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19.  (LOSS)/EARNINGS PER SHARE

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

	Three months ended March 31,
	2010			2009
	(Unaudited)			(Unaudited)
Numerator used in basic net income per share:
Net (loss)/income		(454	)		2,135
Shares (denominator):
Weighted average common shares outstanding		29,756,000			29,756,000
Plus: weighted average incremental shares from assumed exercise of options		-			-
Weighted average common shares outstanding used in computing diluted net income per common share		29,756,000			29,756,000
(Loss)/Earnings per common share-basic and diluted	$	(0.02	)	$	0.07

As of March 31, 2010 and 2009, the Company had 614,000 outstanding options that could potentially dilute basic income per share in the future, but which were excluded in the computation of diluted income per share in the periods presented, as their effect would have been anti-dilutive since the exercise price of these options was higher than average market price during three months ended March 31, 2010 and 2009.

20.  CONCENTRATIONS AND CREDIT RISKS

At March 31, 2010 and December 31, 2009, the Company had a credit risk exposure of uninsured cash in banks of approximately US $10 and US$374, respectively.  To limit exposure to credit risk relating to deposits, the Company primarily places cash deposits only with large financial institutions in the PRC with acceptable credit ratings.

During the three months ended March 31, 2010, the Company was engaged principally in the design and trading of cellular phones to two primary distributors in the PRC.  The Company’s policy is that the sole agent arrangement gives the dealers more incentive to promote the Company’s products and reduce the Company’s exposure to the distribution market.

The Company buys certain major materials from one major supplier (over 82% of materials purchased). In addition, the Company subcontracts material purchasing and assembly works of cellular phones primarily to two subcontracting factories. The diversification of suppliers will reduce the risk of increasing production cost.

(a) During the three months ended March 31, 2010 and 2009, the Company’s operating revenue was mainly derived from two distributors. For three months ended March 31, 2010 and 2009, 82.4% and 100%, respectively, of total revenue was derived from our largest distributor Xingwang. There was no trade deposit received from Xingwang as of March 31, 2010 and 2009. Accounts receivable from Xingwang were US$78,296 and US$75,616 as of March 31, 2010 and December 31, 2009, respectively. As mentioned in note 5, “Accounts Receivable”, in year 2008, a guarantee company provided a guarantee up to US$43,829 (RMB300 million) for the accounts receivable from Xingwang for two years from the date they are due.  The agreement has been renewed and re-signed as of January 20, 2010, and the guaranteed period was extended to the year ended December 31, 2010.

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

	The three months ended March 31,
	2010		2009
	%		%
	(Unaudited)		(Unaudited)
Supplier A		82		56
Supplier B		18		44
		100		100

Advances to the above suppliers were US$4,599 and US$3,815 as of March 31, 2010 and December 31, 2009, respectively. Accounts payable owed to the above suppliers were US$17 and US$0 as of March 31, 2010 and December 31, 2009, respectively.

(c) The Company’s revenue for the three months ended March 31, 2010 and 2009, respectively, were all derived from the PRC. Geographical information of the carrying amount of long-lived assets is as follows:

	March 31, 2010		December 31,2009
	US$’000		US$’000
	(Unaudited)
PRC		168		176
Hong Kong		2		2
Total long-lived assets		170		178

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

21.  SUBSEQUENT EVENTS

Management has considered all events occurring through May 24, 2010, the date the financial statements have been issued, and has determined that there are no such events that are material to the financial statements, or all such material events have been fully disclosed.

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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”). Please refer the following chart for the relationship between the Company’s subsidiaries :

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

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

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 great efforts in its marketing 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 the 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.

Business Review

The Company sold 57,200 cell phone units and 266,000 units during the first quarter of 2010 and 2009 respectively. For the three months ended March 31, 2010, the Company generated revenue of US$7,591,000, representing a decrease of 61.51% as compared to US$19,724,000 for the same period in 2009. Meanwhile, the Company achieved a gross profit margin of 7.85%, a decrease of 7.83% as compared to 15.68% earned for the same period in 2009. The Company believes this decrease is due to the fact that our major customers didn’t get several large orders from their customers since two main reasons; externally, the request volume of GSM was decreased in the first quarter of 2010 due to the market reason; internally, only two new products were launched in the first quarter of 2010, will lead to the reduction of the sales orders. 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.  100% of the products the Company sold in this quarter were priced below RMB1,000 (approximately US$146).

The Company clearly understands that the cell phone market in PRC might face certain difficulties in 2010. However, we also believe the situation may be improved in the coming days because of market developments due-to the reorganization of PRC telecom carriers and the market demand for new 3G technologies.

Based on the above situation, the Company will develop the business per the three operation strategies below:

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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.

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 three months ended March 31, 2010 and 2009, respectively (in thousand US$):

	Three months ended						Three months ended
	March 31, 2010						March 31, 2009						Comparison
	(US$000)			% of Revenue			(US$000)			% of Revenue			(US$000)			%
Net sales		7,591			100.00	%		19,724			100.00	%		(12,133	)		(61.51	)%
Cost of sales		6,995			92.15	%		16,632			84.32	%		(9,637	)		(57.94	)%
Sales expenses		41			0.54	%		123			0.62	%		(82	)		(66.67	)%
General & administrative expenses		27			0.36	%		266			1.35	%		(239	)		(89.85	)%
Research and development expenses		5			0.07	%		17			0.09	%		(12	)		(70.59	)%
Depreciation and amortization		8			0.11	%		23			0.12	%		(15	)		(65.22	)%
Allowance for doubtful accounts		(251	)		(3.31	)%		-			-			(251	)		100.00	%
Interest expenses		(213	)		(2.81	)%		(222	)		(1.13	)%		9			4.05	%
Other (expenses)/income, net		(1,252	)		(16.50	)%		17			0.09	%		(1,269	)		7466.06	%
Income before income tax expense		(699	)		(9.21	)%		2,458			12.46	%		(3,157	)		(128.45	)%
Current tax expense		-			-			(323	)		(1.64	)%		323			(100.00	)%
Deferred taxes benefit		245			3.23	%		-			-			245			100.00	%
Net (loss)/income		(454	)		(5.98	)%		2,135			10.82	%		(2,589	)		(121.27	)%

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Net sales

Our revenue was US$7,591,000 for the three months ended March 31, 2010, representing a decrease of 61.51% compared to US$19,724,000 for the same period in 2009.

As stated in the Business Review section above, despite the global economic turmoil, we believe China's economy has begun to improve gradually. However, it seems that the economy has mainly focused on large-scale projects instead of the consumer goods markets, as the sector has experienced a much slower recovery. 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 three months ended March 31, 2010, the Company’s sales were primarily attributable to the following products:

Cellular phones model	Three months ended March 31, 2010
	Amount (US$’000)		% of total revenue
DX796		5,376		70.82	%
LM7100B		1,333		17.56	%
DX5388		882		11.62	%
Total		7,591		100.00	%

Customer Segments

For the three months ended March 31, 2010, our sales in the aggregate amount of US$6,258,000 were derived from Beijing Xingwang Shidai Tech & Trading Co., Ltd. (“Xingwang”).  Xingwang has been our most important distributor for a long period of time. It is one of the largest distributors in mainland China and has sales networks in major cities across the PRC.

	Three months ended March 31, 2010
	Amount (US$’000)		% of total revenue
Beijing Xingwang Shidai Tech & Trading Co., Ltd.		6,258		82.44	%
Tianjin Tongguang		1,333		17.56	%
Total		7,591		100.00	%

Gross Margin

For the three months ended March 31, 2010, gross margin was US$596,000, representing a decrease of US$2,496,000 in gross margin when compared to the same period of 2009.  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 7.85% as compared to 15.68% for the same period of 2009.

Selling expenses

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

For the three months ended March 31, 2010, selling expenses were US$41,000, or 0.54% of revenues, representing a US$82,000 decrease compared with US$123,000 for the corresponding period in 2009.

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

Research and Development (R&D) expenses

For the three months ended March 31, 2010, R&D expenses were US$5,000, or 0.07% of revenue, representing a decrease of US$12,000 or 70.59%, compared with the numbers for the corresponding period in 2009. 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 March 31, 2010, total general and administrative expenses were US$27,000, or 0.36% of total revenues, representing a decrease of US$239,000, or 89.85% as compared to US$266,000, or 1.35% of the total revenues for the corresponding period in 2009.

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

Interest expenses

For the three months ended March 31, 2010, interest expenses decrease by US$9,000 compared with same period in 2009. The decrease is mainly due to the bank loan of $117,000 (RMB800,000) was repaid by us in February 2009.

Provision for income taxes

For the three months ended March 31, 2009, the Company incurred income tax expense of US$323,000; and for the three months ended March 31, 2010, the Company had no current income tax expense since it incurred net loss for the period, but generated a deferred tax benefit in the amount of US$245,000 which arose from allowance for doubtful accounts and provision for liability for possible settlement to accounts payable.

Other (expenses) income, net

For the three months ended March 31, 2010, other expenses amounted to US$1,252,000, representing a decrease of US$1,269,000 compared with other income of US$17,000 for the same period in 2009. The significant decrease is due to penalty interests accrued for the overdue bank loan. See Note 10 to the consolidated financial statements attached to this Form 10-Q.

Net income

For the three months ended March 31, 2010, our net loss was US$454,000 or a net loss margin of 5.98%, representing a decrease of US$2,589,000, or 121.27%, as compared to US$2,135,000, or a net profit margin of 10.82% in the same period of 2009. 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 the current economic environment, turnover days of accounts receivable due from these distributors are longer. The Company has not provided certain bad debt provision to the significant accounts receivable balance considering historical good cooperation relationship with these distributors and we believe no provision is needed because accounts receivable is guaranteed by Zhonghui as of March 31, 2010.

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

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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 and Huaxia Bank at March 31, 2010. The Company is negotiating an extension of the term with the banks.

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

As of March 31, 2010, we had current assets of US$93,360,000. Current assets are mainly comprised of accounts receivable of US$85,370,000, trade deposit paid of US$6,658,000, cash and cash equivalents of US$10,000, restricted cash of US$4,000, pledged deposit of US$1,290,000 and other current assets of US$28,000.

As of March 31, 2010, our current liabilities were US$56,041,000 and included accounts payable of US$7,669,000, trade deposits received of US$1,883,000, short-term bank loans of US$9,391,000, short-term loan payable of US$307,000, accrued expenses and other accrued liabilities of US$3,616,000,other taxes payable of US$22,502,000, liabilities for possible settlement to accounts payable of US$4,182,000, income taxes payable of US$5,871,000 and amounts due to shareholders of US$620,000.

We offer two different trading terms to our customers: cash-on-delivery or credit terms of 45-120 days.  As of March 31, 2010, our accounts receivable had increased by US$4,240,000 to US$85,370,000, as compared to US$81,130,000 on December 31, 2009. The increase in accounts receivables was mainly due to a longer turn over period in the current economic recession environment. We will pay close attention to the liquidity progress of our distributors. As previously disclosed, in order to reduce the risks of default, we have limited terms of credit to our major distributor in the Master Distributor Agreement and have the third-party guarantee company to guarantee the accounts receivable due from this major distributor.

As of March 31, 2010, our trade deposit paid was US$6,658,000, which represented an increase of US$783,000 as compared with US$5,875,000 as of December 31, 2009. The increase was primarily because the bank acceptances were endorsed to the supplier.

As of March 31, 2010, our accounts payable were US$7,669,000, which represents an increase of US$17,000, or 0.22%, as compared to US$7,652,000 as of December 31, 2009. The increase was mainly because raw materials purchasing occurred in the first quarter of 2010.

As of March 31, 2010, accrued expenses and liabilities were US$3,616,000, representing an increase of US$203,000 or 5.95%, compared to US$3,413,000 as of December 31, 2009. The increase was mainly due to the accrual of loan interests in the amount of US$213,000.

As of March 31, 2010, income taxes payable was US$5,871,000, representing an increase of US$1,000 or 0.02%, compared to US$5,870,000 as of December 31, 2009, which is due to the change in the foreign currency exchange rate.

As of March 31, 2010, cash and bank balances were mainly denominated in Renminbi (“RMB”). Our revenue and expenses, assets and liabilities are mainly denominated in RMB and U.S. Dollars (“USD”). The Company operations are mainly denominated in RMB.

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

CASH FLOWS

As of March 31, 2010, we had cash and cash equivalents of US$10,000. This represented a decrease of US$364,000 when compared with US$374,000 as of December 31, 2009. During the three months ended March 31, 2010, 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.  The two above mentioned loans have been overdue as of March 31, 2010, and management is discussing with the bank for a new extension, please refer to Note 10.

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As of March 31, 2010, our aggregate short term loans were US$9,698,000, which were comprised of US$2,516,000 from Huaxia Bank, US$6,875,000 from Beijing Rural and Commercial Bank and US$307,000 from a third party company.

OFF BALANCE SHEET ARRANGEMENTS

As of March 31, 2010, we had no off-balance sheet arrangements.

Item 3.                   Quantitative and Qualitative Disclosures About Market Risk.

Market risk is the sensitivity of income to changes in interest rates, foreign exchanges, commodity prices, equity prices and other market-driven rates or prices. The Company, in the normal course of doing business, is exposed to market risk through changes in interest rates with respect to bank loans. Aggregate bank loans as of March 31, 2010, were US$9,391,000. The interest rate for the three months ended March 31, 2010 was charged at 6.372% to 10.080% per annum.

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.

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PART II – OTHER INFORMATION

Item 1.  Legal Proceedings.

There are two legal disputes with two suppliers of BOXT. Shenzhen Songding Industry Ltd., (“Songding”) provides battery chargers and Beijing Baoxin Packing Materials Co., Ltd. (“Baoxin”) provides packing materials to BOXT. The legal disputes with abovementioned suppliers arose because the Company did not accept accessories and materials supplied by Songding and Baoxin due to quality issues. The management of BOXT determined to cease payment to Songding and Baoxin accordingly.

The dispute between Baoxin and BOXT commenced in arbitration initiated by Baoxin on October 2006 which was arbitrated by the Beijing Arbitration Commission on October 24, 2006. BOXT is obligated to pay Baoxin US$246,000. Currently, BOXT and Baoxin are in the process of the final negotiation based on the arbitration result. As such, Baoxin applied to the court for property preservation and one of BOXT’s bank accounts has been blocked accordingly. BOXT has recorded the arbitration result as an account payable to the supplier after the arbitration. The balance of account payable to Baoxin as of March 31, 2010 is US$36,000.

The dispute between Songding and BOXT is still pending for final arbitration. Songding has argued for BOXT to pay the amount of US$281,000 by. BOXT recorded an account payable to the supplier in the amount of US$200,000 as of December 31, 2008. Songding prepared the arbitration application on December 28, 2009 and applied to the court for property preservation to block the bank account of BOXT. The application was formally accepted by the Beijing arbitration commission on January 12, 2010. Since Songding applied for the property preservation to the court, one of BOXT’s bank accounts is blocked accordingly. The balance of account payable to Songding as of March 31, 2010 is US$54,000.

Item 1A. Risk Factors.

Not required.

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

(a)           None.

(b)           Not applicable.

(c)           None.

Item 3.  Defaults Upon Senior Securities.

None.

Item 4.  Removed and Reserved.

Item 5.  Other Information.

(a)           None.

(b)           There were no material changes to the procedures by which security holders may recommend nominees to the registrant's board of directors during the fiscal quarter ended March 31, 2010.

Item 6.  Exhibits.

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

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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:  May 24, 2010

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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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