Pansoft 10Q 2010 Q1 Quarterly report

U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

	þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
			For the quarterly period ended September 30, 2009

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ___________ to ___________.

Commission File Number 001-34168

Pansoft Company Limited

(Exact name of registrant as specified in its charter)

British Virgin Islands

(State or other jurisdiction of

incorporation or organization)

Not Applicable

(I.R.S. employer

identification number)

3/F Qilu Software Park Building

Jinan Hi-Tech Zone

Jinan, Shandong,

People’s Republic of China 250101

(Address of principal executive offices and zip code)

86-531-88871159

(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.

(1) Yes þ No o (2) Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

(1) Yes o 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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company þ

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of November 13, 2009 the Company has 5,438,232 common shares, par value $0.0059 per share, outstanding.

PANSOFT COMPANY LIMITED

FORM 10-Q

INDEX

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS		3

PART I.	FINANCIAL INFORMATION	4
Item 1.	Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4T.	Controls and Procedures	25

PART II.	OTHER INFORMATION	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 6.	Exhibits	26

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This document contains certain statements of a forward-looking nature. Such forward-looking statements, including but not limited to projected earnings and/or revenue growth, trends and strategies, future operating and financial results, financial expectations and current business indicators are based upon current information and expectations and are subject to change based on factors beyond the control of the Pansoft Company Limited (the “Company”). Forward-looking statements typically are identified by the use of terms such as “look,” “may,” “will,” “should,” “might,” “believe,” “plan,” “expect,” “anticipate,” estimate” and similar words, although some forward-looking statements are expressed differently. The accuracy of such statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including but not limited to the following:

	·	its dependence on a limited number of larger customers;
	·	political and economic factors in the People's Republic of China;
	·	the Company's ability to expand and grow its lines of business;
	·	unanticipated changes in general market conditions or other factors, which may result in cancellations or reductions in need for the Company's services;
	·	a weakening of economic conditions which would reduce demand for services provided by the Company and could adversely affect profitability;
	·	the acceptance in the marketplace of the Company's new lines of services;
	·	foreign currency exchange rate fluctuations;
	·	the Company's ability to identify and successfully execute cost control initiatives; or
	·	other risks outlined above and in the Company's other filings made periodically by the Company.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update this forward-looking information. Nonetheless, the Company reserves the right to make such updates from time to time by press release, periodic report or other method of public disclosure without the need for specific reference to this report. No such update shall be deemed to indicate that other statements not addressed by such update remain correct or create an obligation to provide any other updates.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Pansoft Company Limited

Condensed Consolidated Balance Sheets

	As of
	September 30, 2009		December31, 2008
	(Unaudited)		(Audited)
Assets
Current assets
Cash and cash equivalents	$	11,838,583	$	12,185,950
Accounts receivable, net of allowance for doubtful accounts $132,209 (2008: $152,070)		477,327		1,136,159
Unbilled revenue		4,018,440		2,221,142
Prepayments, deposits and other receivables		144,321		107,785
Inventory		170,673		68,348

Total current assets		16,649,344		15,719,384

Property and equipment, net		711,632		650,708
Deferred software development cost		18,311		73,287

Total assets	$	17,379,287	$	16,443,379

Liabilities
Current liabilities
Accounts payable and accrued liabilities	$	216,700	$	905,748
Deferred revenue		238,567		181,192
Income tax payable		1,992		192,470
Deferred income taxes		372,306		172,505

Total current liabilities		829,565		1,451,915

Deferred income taxes		19,661		18,531

Total liabilities		849,226		1,470,446

Stockholders' equity
Common stock (30,000,000 common shares authorized;
par value of $0.0059 per share; 5,438,232 shares issued
and outstanding as of September 30, 2009)		32,080		32,080
Additional paid-in capital		8,715,155		8,222,054
Retained earnings		6,782,389		5,711,114
Statutory reserves		363,063		363,063
Accumulated other comprehensive income		637,374		644,622
Total stockholders' equity		16,530,061		14,972,933

Total liabilities and stockholders' equity	$	17,379,287	$	16,443,379

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

Pansoft Company Limited

Unaudited Condensed Consolidated Statements of Income and Comprehensive Income

	For the three months ended September 30,						For the nine months ended September 30,
	2009			2008			2009			2008

Sales	$	2,205,469		$	2,171,038		$	5,145,375			3,548,302
Cost of sales		1,028,347			695,003			2,743,265			1,725,420

Gross profit		1,177,122			1,476,035			2,402,110			1,822,882

Expenses
General and administrative expenses		116,968			130,828			366,210			211,091
Selling expenses		94,620			8,506			216,414			15,037
Professional fees		129,781			27,112			300,168			88,649
Stock based compensation		151,127			38,815			493,101			38,815
Gain on disposition of property and equipment		(9	)		(154	)		(741	)		(1528	)
		492,487			205,107			1,375,152			352,064

Income from operations		684,635			1,270,928			1,026,958			1,470,818

Other income (expenses), net		(915	)		-			(4,687	)		537
Government grant		17			-			160,998			-
Finance cost		22			(455	)		-			(873	)
Interest income		38,060			27,555			101,648			70,032

Income before provision for income taxes		721,819			1,298,028			1,284,917			1,540,514
Income taxes		33,764			236,159			213,642			236,159

Net income		688,055			1,061,869			1,071,275			1,304,355

Other comprehensive (loss) income		10,469			58,851			(7,248	)		352,879

Total comprehensive income	$	698,524		$	1,120,720		$	1,064,027			1,657,234

Basic and diluted net income per share	$	0.13		$	0.23		$	0.20			0.30

Basic and diluted weighted average number of shares outstanding		5,438,232			4,525,189			5,438,232			4,334,582

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

Pansoft Company Limited

Unaudited Condensed Consolidated Statements of Shareholders' Equity

	Common Shares				Additional		Retained		Statutory		Accumulated Other
	Number		Amount		Paid In Capital		Earnings		Reserves		Comprehensive Income			Total

Balance at December 31, 2008 (Audited)		5,438,232	$	32,080	$	8,222,054	$	5,711,114	$	363,063	$	644,622		$	14,972,933
Foreign currency translation adjustment		-		-		-		-		-		(7,248	)		(7,248	)
Net income		-		-		-		1,071,275		-		-			1,071,275
Stock based compensation		-		-		493,101		-		-		-			493,101

Balance at September 30, 2009 (Unaudited)		5,438,232	$	32,080	$	8,715,155	$	6,782,389	$	363,063	$	637,374		$	16,530,061

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

Pansoft Company Limited

Unaudited Condensed Consolidated Statements of Cash Flows

	For the nine months ended September 30,
	2009			2008
Cash flows from operating activities
Net income	$	1,071,275		$	1,304,355
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes		200,860			236,159
Amortization of government grants		-			(115,673	)
Amortization and depreciation		196,520			225,830
Stock-based compensation		493,101			38,815
Gain on disposition of property and equipment		(741	)		(1,528	)
Changes in operating assets and liabilities:
Accounts receivable		657,603			(1,988,200	)
Unbilled revenues		(1,796,953	)		-
Prepayments, deposits and other receivables		(36,571	)		37,408
Inventory		(102,273	)		-
Work in progress		-			(49,132	)
Accounts payable and accrued liabilities		(687,904	)		(264,672	)
Government grants received, net		-			79,458
Deferred revenues		57,426			6,556
Income tax payable		(190,201	)		-

Cash used in operating activities		(137,858	)		(490,624	)

Cash flows from investing activities
Purchase of property and equipment		(204,184	)		(585,722	)
Proceeds from disposition of property and equipment		2,032			18,766

Cash used in investing activities		(202,152	)		(566,956	)

Cash flows from financing activities
Net proceeds from stock offering		-			7,648,549

Cash provided by financing activities		-			7,648,549

Effect of exchange rate changes on cash and cash equivalents		(7,357	)		214,622

(Increase) decrease in cash and cash equivalents		(347,367	)		6,805,591
Cash and cash equivalents, beginning of period		12,185,950			3,365,613

Cash and cash equivalents, end of period	$	11,838,583		$	10,171,204

Supplemental cash flow information
Interest received	$	101,648		$	56,987
Interest paid	$	-		$	874
Income tax paid	$	10,791		$	-

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

Pansoft Company Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

1. Nature of Operations and Basis of Presentation

Pansoft Company Limited ("the Company") was incorporated in June 2006 in the British Virgin Islands and acquired 100% of Pansoft Jinan Co. Ltd. ("Jinan") at the same time. Jinan was incorporated in Peoples' Republic of China ("PRC"). Upon acquisition by the Company, Jinan became a Foreign Investment Enterprise. Jinan is engaged in the development and marketing of accounting and enterprise resource planning (ERP) software primarily to resource and utility companies across the PRC.

Prior to the incorporation of the Company, Jinan was 100% owned by employees who ultimately became the controlling shareholders of the Company. As such, the opening retained earnings presented on the consolidated balance sheet and statements of shareholders' equity are presented using the continuity of interest method of accounting. Under this method, all activities of Jinan are included in the consolidated financial statements of the Company as if the Company had been the parent company for all periods presented.

On September 8, 2008, the Company completed an initial public offering of 1,200,000 common shares at $7.00 per share. The Company shares started trading on NASDAQ Capital Market the next day. Prior to the completion of IPO, the Company completed a 169.5253-for-one stock split to be effected in the form of a stock dividend to holders of ordinary shares.

In December 2008, the Company established its subsidiary, Pansoft (Hong Kong) Limited ("Hong Kong") to serve the overseas customers.

The condensed consolidated financial statements do not include certain footnote disclosures and financial information normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and, therefore, should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2008.

2. Significant Accounting Policies

Basis of consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Jinan and Hong Kong. All inter-company accounts and transactions have been eliminated upon consolidation.

Cash and cash equivalents

Cash is comprised of cash on hand and at banks. Cash equivalents are short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to insignificant risk of change in value.

Accounts receivable

Accounts receivable are stated at original invoice amount less allowance made for doubtful receivables based on a review of all outstanding amounts at the period end. An allowance for doubtful receivables is made when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables. Bad debts are written off when identified. Bad debt expense for the three months ended September 30, 2009 was $Nil (2008 - $51,019), for the nine months ended September 30, 2009 was $Nil (2008 - $51,019)

Unbilled revenue

Unbilled revenue represents the accumulated unbilled amount of revenue recognized, based on the Company's revenue recognition policy.

Inventory

Inventory comprises hardware equipment and software purchased for reselling and is recorded at lower of cost and net realizable value.

Management periodically compares cost of inventory with market and records a reserve for obsolescence when necessary. The reserve for inventory obsolescence was $Nil at September 30, 2009 and December 31, 2008.

Pansoft Company Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Work in progress

Work in progress is the deferred costs of revenue relate to contracts and such costs are stated at actual production costs incurred to date, which primarily includes labor which is directly related to the contract. Work in progress is amortized to cost of revenues at the time revenue is recognized.

Software development cost capitalization

The costs for software system development under the projects for future sales to clients, which mainly consists of payroll cost, are capitalized once the technical feasibility is established after its designing stage is completed and the economic feasibility is established based on the customer ordering orientation. The cost capitalized is amortized over one year period when the sales occurred once the sale contracts are signed.

Property and equipment

Property and equipment are recorded at cost. Depreciation is provided over the expected useful lives of the property and equipment with 5% residual value using the following methods and annual rates:

Computer equipment	- 5 years straight line
Vehicles	- 5 years straight line
Office furniture	- 5 years straight line
Leasehold improvement	- 3 years straight line
Computer software	- 3 years straight line

Maintenance and repairs expenditures, which do not improve or extend an assets' productive life, are expensed as incurred.

Research and software development costs

Research costs are charged to expense as incurred. Software development costs incurred prior to the establishment of technological feasibility are expensed. Software development costs incurred between the establishment of technological feasibility and product release are capitalized, if material, and amortized over the estimated economic life of the product, which is generally three years. Research and development costs expensed for three months ended September 30, 2009 amounted to $18,299 (2008 - $18,282) and for nine months ended September 30, 2009 amounted to $54,886 (2008 - $53,708).The research and software development costs were included in cost of sales. These amounts are the amortization expense associated with capitalized software development cost. (Note 5)

Impairment of long-lived assets

Long-lived assets held for use are periodically reviewed for impairment when events or changes in circumstances indicate that their carrying value may not be recoverable. When the carrying value is not recoverable from future cash flows on an undiscounted basis and the carrying value exceeds the assets' fair value, an impairment loss is recorded for the excess of carrying value over fair value.

Government grants

Research grants received from PRC government agencies or private enterprises are recognized as deferred grants and offset against the corresponding research expenses as and when they are incurred for the research projects for which these grants are received.

Income taxes

The Company uses the liability method of accounting for income taxes. Under SFAS No. 109 "Accounting for Income Taxes" method, which was primarily codified into the Topic 740 “Income Taxes” in the ASC, income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Income tax assets and liabilities are measured using enacted rates expected to apply to income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on income tax assets and liabilities is reflected in operations in the period in which the change occurs. Valuation allowances are established when necessary to reduce future tax assets to the amount expected to be realized.

Pansoft Company Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

The Company adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109, "("FIN 48"), which was primarily codified into the Topic 740 “Income Taxes” in the ASC. The Company did not have any material unrecognized tax benefits and there was no effect on its financial condition or results of operations as a result of implementing FIN 48. The Company files income tax returns in the PRC jurisdictions. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months. As of the date of adoption of FIN 48, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the year. The Company's effective tax rate differs from the statutory rate primarily due to non-deductible expenses, temporary differences, and preferential tax treatment.

Value added taxes

Jinan calculates, collects from customers, and remits to governmental authorities value added taxes assessed by governmental authorities in connection with revenue-producing transactions with its customers. The Company reports these taxes on a net basis and does not include these tax amounts in revenue or cost of revenue. Jinan, as a consequence of being in the high-tech industry, sometimes receives special refunds of VAT remitted; this is included as a reduction of cost of sales.

Revenue recognition

The Company enters into software development contracts that are fixed fee arrangements to render specific software consulting, development, modification, training, and implementation and maintenance services. The percentage of completion method is applied to these contracts that involve the provision of services relating to the development or implementation of complex software applications, because these services are essential to the functionality of other elements in the arrangement.

Under this method, revenue is recognized using the percentage of completion basis and is calculated based on actual labor cost or labor hours incurred at specific milestones and compared to the estimated total labor cost or labor hours for the services under the arrangement, so long as persuasive evidence of an arrangement exists, certain milestones have been achieved or delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. Management regularly reviews underlying estimates of total expected labor costs or hours. If the Company does not have a sufficient basis to measure progress towards completion, revenue is recognized when final acceptance is received by the Company from the customer. Amounts received in advance of revenue are reported as deferred revenue on the consolidated balance sheet. When it is probable that total contract costs will exceed total contract revenue, the resultant loss is recognized in full immediately, without reference to the percentage of completion. To date, the Company has not experienced material losses on contracts in process or completed contracts. Revisions to contract revenue, contract costs and profit estimates, which can be significant, are reflected in the accounting period in which the relevant facts become known.

For software development contracts, the Company sometimes provides its customers with a limited warranty of approximately one year following the customer's initial acceptance of the completed project. The last 5% of the contract price is considered the milestone for the warranty period on such contracts. For these contracts with warranty clauses, 5% of the contract amount is not recognized as revenue or invoiced until the warranty period expires.

From time to time, the Company enters into general IT service arrangements with their customers, where the Company is obligated to perform professional services, such as unspecific upgrades and technical support. This revenue is recognized based on the actual service hours and the hourly rate agreed by clients in advance. Occasionally, such services were rendered to cover a specified period of time. This revenue is recognized over the term of the contract on a straight-line basis. Some of these arrangements are entered into agreements with customers who have engaged the Company to develop software systems. However, the general IT services are always arranged after the software development contracts are completed or may not be directly related to the system the Company developed for these customers under the software development contracts. There is no warranty provided for general IT service arrangements.

Advertising Costs

The advertising costs are charged to expenses when incurred and are included in selling expenses. The advertising costs for the three months ended September 30, 2009 was $16,685 (2008 - $Nil).

The advertising costs for the nine months ended September 30, 2009 was $16,685 (2008 - $Nil).

Pansoft Company Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Foreign exchange

The Company's functional currency is the Chinese RMB and its reporting currency is the U.S. dollar. The financial statements of the Company's foreign subsidiaries have been translated into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency Translation", which was primarily codified into the Topic 830 “Foreign Currency Matters” in the ASC. All asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital transaction occurred. Statements of operations amounts have been translated using the average exchange rate for theperiod. The resulting translation adjustments are reported under other comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income”, which was primarily codified in the Topic 220 “Comprehensive Income” in the ASC.The following exchange rates were used:

	September30, 2009		December 31, 2008		September 30, 2008
Period end RMB U.S. Dollar exchange rate		6.8263		6.8225		6.7899
Average period RMB U.S. Dollar exchange rate		6.8324		6.9477		6.8375

The foreign currency translation adjustment of $10,469 (2008 - $58,851) has been reported as other comprehensive income in the consolidated statements of income for three months ended September 30, 2009. For the nine months ended September 30, 2009, the foreign currency translation adjustment of $7,248 (2008 - $352,879) has been reported as other comprehensive loss (2008 - income) in the consolidated statement of income.

Although the Chinese government regulations now allow convertibility of RMB for current account transactions, significant restrictions still remain. Hence, such translations should not be construed as representations that RMB could be converted into U.S. dollars at that rate or any other rate.

Substantially all the Company's revenue and expenses are denominated in RMB. The Company's RMB cash inflows are sufficient to service its RMB expenditures. For financial reporting purposes, the Company uses U.S. dollars. The value of the RMB against U.S. dollars and other currencies may fluctuate and is affected by, among other things, changes in China's political and economic conditions. Any significant revaluation of RMB may materially affect the Company's financial condition in terms of U.S. dollar reporting.

Use of estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Stock-based compensation

The Company records stock-based compensation in accordance with SFAS 123(R), “Share-Based Payments”, which was primarily codified into the Topic 718 “Compensation-Stock Compensation”, that requires the measurement and recognition of compensation expense based on estimated fair values for all share-based awards made to employees and directors, including stock options.

Comprehensive income

Comprehensive income is the sum of net income and other comprehensive income reported in the consolidated statements of income and comprehensive income. Other comprehensive income or loss includes accumulated foreign currency translation gains and losses. The Company has reported the components of comprehensive income on its consolidated statements of shareholders' equity.

Earnings per share

In accordance with SFAS No. 128 "Computation of Earnings per Share," which was primarily codified into the Topic 260 “Earnings Per Share”, basic earnings per share is computed by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted average number of common shares and dilutive shares outstanding during the period using the treasury stock method.

Pansoft Company Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Fair value measurements

ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The carrying values of cash and cash equivalents, trade receivables and payables, and short-term debts approximate their fair values due to their short maturities.

The financial assets and liabilities of the Company subject to fair value measurements and the necessary disclosures are as follows:

Fair Value Measurements Using								Assets/Liabilities
	Level 1		Level 2		Level 3		At Fair Value
Cash equivalents	$	9,126,401		-		-	$	9,126,401

Reclassifications

Certain prior period balances have been reclassified to conform to the current period’s financial statement presentation. These reclassification had no impact on previously reported financial position, results of operations or cash flows.

3. Recently Changes in Accounting Standards

Recent accounting pronouncement adopted

In June 2009, the FASB established the FASB Accounting Standards CodificationTM (ASC) as the single source of authoritative U.S generally accepted accounting principles (GAAP) recognized by the FASB to be applied to nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The ASC superseded all previously existing non-SEC accounting and reporting standards, and any prior sources of U.S. GAAP not included in the ASC or grandfathered are not authoritative. New accounting standards issued subsequent to June 30, 2009 are communicated by the FASB through Accounting Standards Updates (ASUs). The ASC did no change current U.S. GAAP but changes the approach by referencing authoritative literature by topic (each a “Topic”) rather than by type of standard. The ASC has been effective for the Company effective July 1, 2009. Adoption of the ASC did not have a material impact on the Company's Condensed Consolidated Financial Statements, but references in the Company's Notes to Consolidated Financial Statements to former FASB positions, statements, interpretations, opinions, bulletins or other pronouncements are now presented as references to the corresponding Topic in the ASC.

Effective January 1, 2009, the first day of fiscal 2009, the Company adopted FASB ASC 350-30 and ASC 275-10-50 (formerly FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142 ("SFAS 142"), “Goodwill and Other Intangible Assets.” The Company will apply ASC 350-30 and ASC 275-10-50 prospectively to intangible assets acquired subsequent to the adoption date. The adoption of these revised provisions had no impact on the Company's Condensed Consolidated Financial Statements.

Effective January 1, 2009, the Company adopted FASB ASC 815-10-65 (formerly SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities”), which amends and expands previously existing guidance on derivative instruments to require tabular disclosure of the fair value of derivative instruments and their gains and losses., This ASC also requires disclosure regarding the credit-risk related contingent features in derivative agreements, counterparty credit risk, and strategies and objectives for using derivative instruments. The adoption of this ASC did not have a material impact on the Company's Condensed Consolidated Financial Statements.

During 2008, the Company adopted FASB ASC 820-10 (formerly FSP FAS 157-2, "Effective Date of FASB Statement 157"), which deferred the provisions of previously issued fair value guidance for nonfinancial assets and liabilities to the first fiscal period beginning after November 15, 2008. Deferred nonfinancial assets and liabilities include items such as goodwill and other nonamortizable intangibles. Effective January 1, 2009, the Company adopted the fair value guidance for nonfinancial assets and liabilities. The adoption of FASB ASC 820-10 did not have a material impact on the Company's Condensed Consolidated Financial Statements.

Pansoft Company Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Effective January 1, 2009, the Company adopted FASB ASC 810-10-65 (formerly SFAS 160, "Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51"), which amends previously issued guidance to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as equity. Among other requirements, this Statement requires that the consolidated net income attributable to the parent and the noncontrolling interest be clearly identified and presented on the face of the consolidated income statement. The adoption of the provisions in this ASC did not have a material impact on the Company's Condensed Consolidated Financial Statements.

Effective January 1, 2009, the Company adopted FASB ASC 805-10, (formerly SFAS 141R, "Business Combinations"), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in an acquiree and the goodwill acquired. In addition, the provisions in this ASC require that any additional reversal of deferred tax asset valuation allowance established in connection with our fresh start reporting on January 7, 1998 be recorded as a component of income tax expense rather than as a reduction to the goodwill established in connection with the fresh start reporting. The Company will apply ASC 805-10 to any business combinations subsequent to adoption.

Effective January 1, 2009, the Company adopted FASB ASC 805-20 (formerly FSP FAS 141R-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies"), which amends ASC 805-10 to require that an acquirer recognize at fair value, at the acquisition date, an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period. If the acquisition-date fair value of such an asset acquired or liability assumed cannot be determined, the acquirer should apply the provisions of ASC Topic 450, Contingences, to determine whether the contingency should be recognized at the acquisition date or after such date. FSP The adoption of ASC 805-20 did not have a material impact on the Company's Condensed Consolidated Financial Statements.

Effective July 1, 2009, the Company adopted FASB ASC 825-10-65 (formerly FASB Staff Position (“FSP”) No. FAS 107-1 and Accounting Principles Board 28-1, "Interim Disclosures about Fair Value of Financial Instruments"), which amends previous guidance to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The adoption of FASB ASC 825-10-65 did not have a material impact on the Company's Condensed Consolidated Financial Statements.

Effective July 1, 2009, the Company adopted FASB ASC 320-10-65 (formerly FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments"). Under ASC 320-10-65, an other-than-temporary impairment must be recognized if the Company has the intent to sell the debt security or the Company is more likely than not will be required to sell the debt security before its anticipated recovery. In addition, ASC 320-10-65 requires impairments related to credit loss, which is the difference between the present value of the cash flows expected to be collected and the amortized cost basis for each security, to be recognized in earnings while impairments related to all other factors to be recognized in other comprehensive income. The adoption of ASC 320-10-65 did not have a material impact on the Company's Condensed Consolidated Financial Statements.

Effective July 1, 2009, the Company adopted FASB ASC 820-10-65 (formerly FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly"), which provides guidance on how to determine the fair value of assets and liabilities when the volume and level of activity for the asset or liability has significantly decreased when compared with normal market activity for the asset or liability as well as guidance on identifying circumstances that indicate a transaction is not orderly. The adoption of ASC 820-10-65 did not have a material impact on the Company's Condensed Consolidated Financial Statements.

Effective July 1, 2009, the Company adopted FASB ASC 855-10 (formerly SFAS 165, “Subsequent Events”), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued. Adoption of ASC 855-10 did not have a material impact on the Company's Condensed Consolidated Financial Statements.

New accounting pronouncement to be adopted

In December 2008, the FASB issued ASC 715, Compensation – Retirement Benefits (formerly FASB FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”), which expands the disclosure requirements about plan assets for defined benefit pension plans and postretirement plans. The Company is required to adopt these disclosure requirements in the fourth quarter of 2009. It is expected the adoption of these disclosure requirements will have no material effect on the Company's Consolidated Financial Statements.

Pansoft Company Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140,” (not yet reflected in FASB ASC). SFAS No. 166 limits the circumstances in which a financial asset should be derecognized when the transferor has not transferred the entire financial asset by taking into consideration the transferor’s continuing involvement. The

standard requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. The concept of a qualifying special-purpose entity is removed from SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments

of Liabilities,” along with the exception from applying FIN 46(R), “Consolidation of Variable Interest Entities.” The standard is effective for the first annual reporting period that begins after November 15, 2009 (i.e. the Company's fiscal year beginning January 1, 2010), for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. It is expected the adoption of this Statement will have no material effect on the Company's Consolidated Financial Statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” (not yet reflected in FASB ASC). The standard amends FIN No. 46(R) to require a company to analyze whether its interest in a variable interest entity (“VIE”) gives it a controlling financial interest. A company must assess whether it has an implicit financial responsibility to ensure that the VIE operates as designed when determining whether it has the power to direct the activities of the VIE that significantly impact its economic performance. Ongoing reassessments of whether a company is the primary beneficiary are also required by the standard. SFAS No. 167 amends the criteria to qualify as a primary beneficiary as well as how to determine the existence of a VIE. The standard also eliminates certain exceptions that were available under FIN No. 46(R). This Statement will be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 (i.e. the Company's fiscal year beginning January 1, 2010), for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. Comparative disclosures will be required for periods after the effective date. As such, the Company will adopt this Statement for interim and annual periods ending after January 1, 2010. It is expected the adoption of this Statement will have no material effect on the Company's Consolidated Financial Statements.

In August, 2009, the FASB issued ASC Update No. 2009-05 (“Update 2009-05”) to provide guidance on measuring the fair value of liabilities under FASB ASC 820 (formerly SFAS 157, "Fair Value Measurements"). The Company is required to adopt Update 2009-05 in the fourth quarter of 2009. It is expected the adoption of this Update will have no material effect on the Company's Consolidated Financial Statements.

In October 2009, the FASB concurrently issued the following ASC Updates:

ASU No. 2009-14 - Software (Topic 985): Certain Revenue Arrangements That Include Software Elements (formerly EITF Issue No. 09-3) . This standard removes tangible products from the scope of software revenue recognition guidance and also provides guidance on determining whether software deliverables in an arrangement that includes a tangible product, such as embedded software, are within the scope of the software revenue guidance.

ASU No. 2009-13 - Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (formerly EITF Issue No. 08-1). This standard modifies the revenue recognition guidance for arrangements that involve the delivery of multiple elements, such as product, software, services or support, to a customer at different times as part of a single revenue generating transaction. This standard provides principles and application guidance to determine whether multiple deliverables exist, how the individual deliverables should be separated and how to allocate the revenue in the arrangement among those separate deliverables. The standard also expands the disclosure requirements for multiple deliverable revenue arrangements.

These Accounting Standards Updates should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. Alternatively, an entity can elect to adopt these standards on a retrospective basis, but both these standards must be adopted in the same period using the same transition method. The Company expects to apply this standard on a prospective basis for revenue arrangements entered into or materially modified beginning January 1, 2011. The Company is currently evaluating the potential impact these standards may have on its financial position and results of operations.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company's Condensed Consolidated Financial Statements upon adoption.

Pansoft Company Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

4. Property and Equipment

September 30, 2009
	Cost		Accumulated Depreciation		Net Book Value
		(Unaudited)		(Unaudited)		(Unaudited)

Computer equipment	$	1,051,847	$	446,298	$	605,549
Vehicles		192,708		144,017		48,691
Office furniture		11,490		8,665		2,825
Leasehold improvement		35,570		2,816		32,754
Computer software		28,676	$	6,863	$	21,813
Total	$	1,320,291	$	608,659	$	711,632

December 31, 2008
	Cost		Accumulated Depreciation		Net Book Value
		(Audited)		(Audited)		(Audited)

Computer equipment	$	957,625	$	322,514	$	635,111
Vehicles		171,852		159,640		12,212
Office furniture		8,738		8,395		343
Leasehold improvement		-		-		-
Computer software		5,520	$	2,478	$	3,042
Total	$	1,143,735	$	493,027	$	650,708

Total depreciation expense for the three months ended September 30, 2009 was $50,831 (2008 - $67,304) with $38,795 (2008 - $59,038) included in cost of sales, $11,802 (2008 - $8,266) in general and administrative expenses, and $234 (2008 - $Nil) in selling expenses.

Total depreciation expense for the nine months ended September 30, 2009 was $141,634 (2008 - $172,122) with $111,722 (2008 - $140,833) included in cost of sales, $29,288 (2008 - $31,289) in general and administrative expenses, and $624 (2008 - $Nil) in selling expenses.

5. Software Development Cost

	September 30, 2009		December 31, 2008
		(Unaudited)		(Audited)

Software development cost	$	219,737	$	219,861
Less: accumulated amortization		201,426		146,574
	$	18,311	$	73,287

Amortization expense for the three months ended September 30, 2009 was $18,299 (2008 - $18,282) and for nine months ended September 30, 2009 was $54,886 (2008 - $53,708). The amortization expense was included in cost of sales.

6. Statutory Reserves

In accordance with the laws and regulations of the PRC, all wholly-owned foreign invested enterprises have to set aside a portion of their net income each year as statutory reserves. The proportion of allocation for reserve funds is no less than 10 percent of the profit after tax until the accumulated amount of allocation for statutory surplus reserve funds reaches 50 percent of the registered capital. Statutory reserves represent restricted retained earnings. Statutory reserves are to be utilized to offset prior years' losses, or to increase its share capital. When a limited liability company converts its statutory reserves to capital in accordance with a shareholders' resolution, the Company will either distribute new shares in proportion to the number of shares held by each shareholder, or increase the par value of each share. Except for the reduction of losses incurred, any other usage should not result in this reserve balance falling below 25% of the registered capital. The funds accumulated by Jinan as of September 30, 2009 and December 31, 2008 were $363,063, no additional reserves have been taken during the first three quarters of fiscal 2009.

Pansoft Company Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

7. Income Taxes

The Company files income tax returns in the PRC. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.

In 2007, Pansoft's operating subsidiary Jinan was subject to the enterprise income tax at the reduced applicable rate of 7.5%, as Jinan was classified as a "software enterprise" and "high-technology enterprise" business. The Company was able to enjoy a further reduction to 0% due to being a foreign investment enterprise ("FIE").

On March 16, 2007, The National People's Congress of China passed "The Law of the People's Republic of China on Enterprise Income Tax" (the "Enterprise Income Tax Law"). The Enterprise Income Tax Law became effective on January 1, 2008. This new law eliminated the existing preferential tax treatment that is available to the FIEs but provides grandfathering of the preferential tax treatment currently enjoyed by the FIE's. Under the new law, both domestic companies and FIE's are subject to a unified income tax rate of 25%. Jinan's two-year tax holiday ended in December 2007 and is currently eligible for the 50% exemption from tax for the years ending December 31, 2008 through December 31, 2010 under the grandfathering provisions in the Enterprise Income Tax Law.

A reconciliation of consolidated corporate income taxes at the statutory rate of 12.5% (2008: 12.5%) and the Company's effective income tax expense for the nine months ended September 30, 2009 and 2008 are shown as follows:

	For the nine months ended September 30,
	2009		2008
	(Unaudited)		(Audited)
Income before provision for income taxes	$	1,284,917	$	1,540,514
Income tax at statutory rate		160,614		192,564

Temporary difference and other		53,028		237,815
Valuation allowance		-		(194,220	)
Income tax provision	$	213,642	$	236,159

Current income taxes	$	12,782	$	-
Deferred income taxes		200,860		236,159
Total income tax provisions	$	213,642	$	236,159

The significant components of deferred tax assets (liabilities) are as follows:

	September 30, 2009 (Unaudited)
	Current			Non-current			Total
Timing difference on revenue recognition	$	(470,365	)	$	-		$	(470,365	)
Write off of accounts receivable		16,526			-			16,526
Plant, equipment and capitalized software cost		-			(19,661	)		(19,661	)
Other temporary differences		81,533			-			81,533
Net deferred income tax liabilities	$	(372,306	)	$	(19,661	)	$	(391,967	)

	December 31, 2008 (Audited)
	Current			Non-current			Total
Timing difference on revenue recognition	$	(286,063	)	$	-		$	(286,063	)
Write off of accounts receivable		28,859			-			28,859
Plant, equipment and capitalized software cost		-			(18,532	)		(18,532	)
Other temporary differences		84,700			-			84,700
Net deferred income tax liabilities	$	(172,505	)	$	(18,532	)	$	(191,036	)

Pansoft Company Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

8. Shareholders' Equity

Common stock

On July 21, 2008, The Company's Board of Directors approved a 169.529280-for-1 stock split of the Company's common stock, whereby each share held by holders of record as of July 21, 2008 was subdivided into 169.529280 shares. The effects of this common stock split have been retroactively applied to the accompanying consolidated financial statement and notes thereto. On September 8, 2008, the Company completed an initial public offering ("IPO") on NASDAQ.

Warrants

The following table shows the number of warrants with other information as of September 30, 2009:

Outstanding Warrants			Exercisable Warrants
Weighted Average Exercise Price	Number	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price	Exercise Number
$ 8.4	60,000	2.95 years	$ 8.4	-

Transactions involving the Company's warrant issuance are summarized as follows:

	Number of Shares		Weighted Average Price Per Share

Outstanding at December 31, 2008		120,000		$8.4
Granted		-		-
Exercised		-		-
Canceled		(60,000)		$8.4
Outstanding at September 30, 2009		60,000		$8.4

Pursuant to the IPO, the Company issued 1,200,000 shares of common stock for gross proceeds of $8,400,000 and issued 120,000 underwriter warrants. Each warrant entitles the holder to purchase one common share for a price of $ 8.40 per share for a period of four years following the closing of the IPO. The unit price for each Underwriter warrant is $ 0.001. The Company received proceeds of $ 120 from the issuance of underwriter warrants which is included in additional paid-in capital. The costs of the offering totaled to $876,987 and are included in additional paid-in capital.

On August 31, 2009 the underwriter had returned 60,000 warrants to the Company and relinquished any ownership rights to the 60,000 warrants.

Stock options

The Company has authorized the establishment of a pool for stock options effective on August 12, 2008 for its directors and employees (the "Pool"). The Pool contains 604,248 options to purchase common shares. It provides additional compensation incentives for high levels of performance and productivity by management, other key employees of the Company and directors.

The following table shows the number of stock options with other information as of September 30, 2009:

Outstanding Stock Options			Exercisable Options
Weighted Average Exercise Price	Number	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price	Exercise Number
$ 7.00	314,000	4 years	$ 7.00	-
$ 2.74	39,000	2.86 years	$ 2.74	-
$ 5.20	14,000	2.64 years	$ 5.20	-
$ 6.48	367,000	3.83 years	$ 6.48	-

Pansoft Company Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

The Company estimates the fair value of stock options using the Black-Scholes valuation model, consistent with the provisions of SFAS No. 123(R), "Share-Based Payment" (SFAS No. 123(R)) and SAB No. 107, which was primarily codified to the Topic 718 “Compensation – Stock Compensation”. Key inputs and assumptions used to estimate the fair value of stock options include the grant price of the award, the expected option term, volatility of the Company's stock and the risk-free rate. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company.

The fair value of each stock option grant was estimated at the date of grant using a Black-Scholes option pricing model. The following table summarized the options granted in 2008 and 2009.

The assumptions used in the stock option valuation are as follow:

Grant Date	September 8, 2008	December 13, 2008	December 13, 2008	May 22, 2009
Number of option	321,000	31,000	15,000	14,000
Exercise Price	$7.00	$2.74	$2.74	$5.20
Expected Life	5	3	5	3
Volatility	75%	75%	75%	14%
Risk free rate	2.98%	1.05%	1.55%	2.98%
Dividend yield	0%	0%	0%	0%
Option value	$4.39	$1.39	$1.72	$0.73

Transactions involving stock options issued to non employees are summarized as follows:

	Number of Shares		Weighted Average Price Per Share

Outstanding at December 31, 2008:		367,000		$6.47
Granted		14,000		$5.2
Exercised		-		-
Expired		(14,000)		$4.87
Outstanding at September 30, 2009:		367,000		$6.48

In September 2008, the Company granted 321,000 options to its directors, management and key employees at an exercise price of $7.00, vesting at a rate of 20% per year for five years. The fair value of these stock options was determined to be $4.39 per stock option. In December 2008, the Company granted 46,000 options to its directors, financial advisor and Interim CFO at an exercise price of $2.74. The vesting rate is 33% per year for two years and 34% for one year for the options granted to the directors and advisor and at the rate of 20% per year for five years for the options granted to Interim CFO. The fair value of these stock options was determined to be $1.39 and 1.72 per stock option, respectively. In August 19, 2009, the Company granted 140,000 options to its new appointed director. The grant date of the stock options granted was stated as May 22, 2009, and at an exercise price of $5.20. The vesting rate is 33% per year for two years and 34% for one year. The fair value of these stock options was determined to be $0.73 per stock option. The stock option granted had been approved during the Annual Meeting of Shareholders held on July 20, 2009.

In May 22 2009, one of the directors resigned form the board. The resigned director owned 7,000 stock options that granted on September 2008 with the exercise price of $7.00, vesting at a rate of 20% per year for five years and 7,000 stock options with the exercise price of $2.74, vesting at a rate 33% per year for two years and 34% for one year. The director shall have a period of three months commencing with the date of resignation, during which to exercise this option. The resigned director did not exercise any stock options before the end of the Expiration Date August 21, 2009. The stock option would be expired and no longer be exercisable at any time after the Expiration Date.

A total of $151,127 and $38,815 was included in the stock option expense for the 3 months ended September 30, 2009 and 2008, respectively. As of September 30, 2009 and December 31, 2008, there was approximately $842,206 and $1,276,028, respectively of unrecognized compensation costs related to the non-vested share-based arrangements granted under the Company's stock option plan. Those costs are expected to be recognized over a weighted-average period of approximately 3.83 years and 4.61 years as of September 30, 2009 and December 31, 2008, respectively.

Pansoft Company Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

9. Commitments

The Company was obligated under operating leases requiring minimum rentals as of September 30, 2009 as follows:

	(Unaudited)
Payable within:
- Remainder of 2009	$	11,403
- 2010		21,696
- 2011		5,424
Total minimum lease payments	$	38,523

10. Financial Instruments

Concentrations of credit risk

Accounts receivable potentially subject the Company to concentrations of credit risk. Management is of the opinion that any risk of accounting loss is significantly reduced due to the financial strength of the Company's major customers. The Company performs ongoing credit evaluations of its customers' financial condition and evaluates management performance based on proceeds collected from projects. Consequently, exposure to credit risk is limited accordingly.

The credit risk on the cash equivalents is limited because the counterparties are banks with high credit ratings.

Currency risk

The Company is exposed to currency risk as the Company's business is carried out in RMB and the Company maintains RMB denominated bank accounts but uses U.S. dollars as its reporting currency. Unfavorable changes in the exchange rate between RMB and U.S. dollars may result in a material effect on accumulated other comprehensive income recorded as a charge in shareholders' equity. The Company does not use derivative instruments to reduce its exposure to foreign currency risk.

In addition, the RMB is not a freely convertible currency. The Company's subsidiaries are allowed to pay outstanding current account obligations in foreign currency but must present the proper documentation to a designated foreign exchange bank. There is no certainty that all future local currency can be repatriated.

11. Economic Dependence

For three months ended September 30, 2009, three customers individually comprised 35%, 30% and 12% of revenue, compared with 28%, 21% and 12% respectively in 2008. The subsidiaries of the Company's three major customers accounted for 9% of revenue (2008 – 19%).

For nine months ended September 30, 2009, three customers individually comprised 35%, 26% and 11%of revenue, compared with 28%, 17% and 11% respectively in 2008. The subsidiaries of the Company's three major customers accounted for 17% of revenue (2008 – 27%).

There were three customers that individually comprise 35%, 23% and 19% of account receivable as of September 30, 2009. Three customers individually made up 31%, 24% and 15% of account receivable of December 31, 2008.

12. Segmented Information

The Company applies the provisions of Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information". The Company views its operations and manages its business as one segment: the design, development, implementation and servicing of ERP systems. Factors used to identify the Company's single operating segment include the organizational structure of the Company and the financial information available for evaluation by the chief operating decision-maker in making decisions about how to allocate resources and assess performance. The Company operates predominantly in one geographical area, the PRC.

13. Subsequent Events

The Company has evaluated events subsequent to the balance sheet date through November 13, 2009, which represents the issue date of this Form 10-Q. There were no events or transactions occurring during the subsequent event reports period which requires recognition or disclosure in the financial statements.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This report contains "Forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 which provides a "Safe harbor" for these types of statements. To the extent statements in this report involve, without limitation, our expectations for growth, estimates and outlook of future revenue, expenses, profit, cash flow, balance sheet items or any other guidance on future periods, these statements are forward-looking statements. Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from any results, level of activity, performance or achievements expressed or implied by any forward-looking statement. We assume no obligation to update any forward-looking statements. The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Company's financial statements and the related notes included elsewhere in this report and in our annual report on Form 10-K, as amended, for the year ended December 31, 2008 as filed with the Securities and Exchange Commission.

Overview

We are a leading developer and provider of integrated ERP software solutions, development on demand and services in China. Our clientele base includes sophisticated Chinese businesses, especially those operating in China's gas and oil industry. Our solutions and services are designed to (i) enable centralized financial and accounting activity management for large corporations with operations spreading throughout China and internationally; (ii) improve decision efficiency, budget control and cash flow management; and (iii) prevent fraud. While our solutions initially centered upon accounting matters, we have expanded our solutions to address other business operational needs such as planning, statistics, process control, business intelligence, equipment management and other business needs. Our solutions enable our customers to implement company-wide solutions by integrating business activities ranging from a company's headquarters down to its various subsidiaries and other operational units. Our major clients, PetroChina (PetroChina Company Limited and China National Petroleum Corporation, its state-owned parent company) and Sinopec (China Petrochemical Corporation/China Petroleum and Chemical Corporation and Sinopec Group, its state-owned parent company) are large oil and refinery firms formed following the Chinese government's decision to decentralize the oil and gas industry within China. Each company is ranked in the Fortune 500.

Overview of Business Operations in the Third Quarter and First Nine Months of 2009

We generate revenue through software systems development, integration and provision of related support services. Our revenue during the fiscal quarter and nine month period ended September 30, 2009 reflect the seasonality nature of our business. Our revenue has been subject to high seasonality and the revenue recognized in the first nine months of the year is usually the smaller in proportion of that for the whole year in most cases, so does in this year, due to our clients’ budgeting and planning schedule. Nevertheless, we continued to experience steady demand for our services from and also to generate revenue through the provision of our services to our oil industrial client base during the three and nine months ended September 30, 2009.

The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the results for the three month and nine months ended September 30, 2009. These financial statements have been prepared in accordance with generally accepted accounting principles in the United States. These financial statements should be read in conjunction with the related notes for the period ended September 30, 2009 included elsewhere in this Form-10Q.

Operating Results

The condensed and consolidated financial statements presented in this report set forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of sales revenue, as well as key components of our revenue for the periods indicated in dollars. The financial data for the three and nine months ended September 30, 2009 reflect the operating results of the Company, in comparison with the financial data for the same period in 2008.

Summary of Gross Margin

	(Unaudited)												(Unaudited)
In USD	For The Three Months Ended September 30												For The Nine Months Ended September 30
	2009			2008			Change			%			2009			2008			Change			%
Sales	$	2,205,469		$	2,171,038		$	34,431			1.6	%	$	5,145,375		$	3,548,302		$	1,597,073			45.0	%
Cost of Sales	$	1,028,347		$	695,003		$	333,344			48.0	%	$	2,743,265		$	1,725,420		$	1,017,845			59.0	%
Gross Profit	$	1,177,122		$	1,476,035		$	-298,913			-20.3	%	$	2,402,110		$	1,822,882		$	579,228			31.8	%
Gross Margin		53.4	%		68.0	%		-14.6	%					46.7	%		51.4	%		-4.7	%

Revenue

During the third quarter of 2009, large software system integration and development projects comprised a higher proportion of total revenue. The total value of our revenue was $2,205,469 reflecting a 1.6% slight increase from $2,171,038 in third quarter of 2008. The flat revenue increase in this period comparing to the same period in 2008 was due to the seasonality nature of our revenue pattern. The large proportion of revenue is usually recognized in the last quarter of a year. During the first nine months of 2009, revenue in total value was $5,145,375 reflecting a 45% increase from $3,548,302 in the first nine months of 2008. The significant increase in our sales was due to a large sales contract with our major client in the first quarter of 2009 to provide equipment for system implementation and new business contract signed by our new Hong Kong branch, in addition to the organic growth with our running projects as well as natural extension of the large system projects completed in the past.

Cost of sales

Our cost of revenue increased by $333,344, or 48%, to $1,028,347, for the three months ended September 30, 2009, from $695,003 for the same period in 2008. Our cost of revenue for the nine months ended September 30, 2009 was $2,743,265, reflecting a 59% increase from $1,725,420 for the same period in 2008. The large increase in cost as compared to the increase in revenue due to increase employees’ compensation cost, which comprises a major part of our operating cost, as result of recruitment of a large number of employees (nearly doubled our project implementation and development team) to match the demand from the fast business growth.

Gross Profit

For the three months ended September 30, 2009, our gross profit was $1,177,122, compared to $1,476,035 for the same period in 2008, reflecting a 20.3% decrease. For the three months ended September 30, 2009 our gross profit as a percentage of revenue decreased to 53.4%, from 68% for the same period in 2008. This 14.6% decrease in gross profit margin was mainly due to increase in cost associated with faster business growth in the third quarter of 2009. For the nine months ended September 30, 2009, our gross profit was $2,402,110, compared to $1,822,882 for the same period in 2008, reflecting a 31.8% increase. For the nine months ended September 30, 2009, our gross profit as a percentage of revenue was 46.7%, slight decrease from 51.4% for the same period in 2008.

Summary of Operating Expenses

	(Unaudited)												(Unaudited)
In USD	For The Three Months Ended at September 30												For The Nine Months Ended at September 30
Expenses	2009			2008			Change $			%			2009			2008			Change $		%
General and administrative expenses		116,968			130,828			(13,860	)		-10.6	%		366,210			211,091			155,119		73.5	%
Selling expenses		94,620			8,506			86,114			1012.4	%		216,414			15,037			201,377		1339.2	%
Professional fees		129,781			27,112			102,669			378.7	%		300,168			88,649			211,519		238.6	%
Stock based compensation		151,127			38,815			112,312			289.4	%		493,101			38,815			454,286		1170.4	%
Gain on disposition of property and equipment		(9	)		(154	)		145			-94.2	%		(741	)		(1,528	)		787		-51	%
		492,487			205,107			287,380			140.1	%		1,375,152			352,064			1,023,088		290.6	%

Operating Expense

Operating expenses consist primarily of general and administrative expenses, selling expenses, professional fees and stock option expense and other expenses incurred in connection with general operations. Administrative expenses consist primarily of compensation and benefits to our management, finance and administrative staff. Professional fee covers expenses for legal counsel and other advisor fees, audit fees and service charges associated with corporate publicity and investor relations. For the three months ended September 30, 2009, our operating expenses increased to $492,487 from $205,107 for the three month period ended at September 30, 2008, or a 140% increase. For the three months ended September 30, 2009, our general and administrative expenses slightly decreased to $116,968, from $130,828 or the three months ended September 30, 2008, or a 10.6% decrease. The increase in selling expenses (by 1012%, from the period to period) was primarily due to the overhead allocation to the newly established sales and marketing department. Operating expenses also included a increase of 379% in the expenses for professional fee for the services relating to our SEC compliance requirement and publicity in the U.S., accounted for 26% of the total operating expenses, and 290% increase in the non-cash expense of stock options issued to our employees, accounted for 31% of our total operating expenses. These expenses contributed significantly to the total increase of our operating expenses during this period as compared to the same period in 2008 in which we did not incur any such expenses.

For the nine months ended September 30, 2009, our administrative expenses increased to $366,210, from $211,091 for the nine months ended September 30, 2008, or a 73.5% increase, from a period to a period due to the bonus payment in the first quarter to the employees for their performance in 2008. Our selling expense increased significantly for the nine months ended September 30, 2009 as compared to the same period in 2008 for the same reason stated above. Additionally, for the same reason stated above, the professional fee and stock option cost allocated increased significantly, 238% and 1170% respectively, in this period as new expense items as compared to the same period in 2008.

Summary of Other Income and Expenses

	(Unaudited)												(Unaudited)
	For Three Months Ended												For nine Months Ended
	September 30,												September 30,
	2009			2008			Change			%			2009			2008			Change			%
Income from operations		684,635			1,270,928			(586,293	)		-46.1	%		1,026,958			1,470,818			(443,860	)		-30.2	%
Other income (expenses), net		(915	)		0			(915	)					(4,687	)		537			(5,224	)		-972.8	%
Government grant		17			0			17						160,998						160,998
Finance cost		22			(455	)		477			-104.8	%					(873	)		873			-100.0	%
Interest income		38,060			27,555			10,505			38.1	%		101,648			70,032			31,616			45.1	%
Income before provision from income taxes		721,819			1,298,028			(576,209	)		-44.4	%		1,284,917			1,540,514			(255,597	)		-16.6	%
Provision for current income taxes		397			0			397						12,782						12,782
Provision for deferred income taxes		33,367			236,159			(202,792	)		-85.9	%		200,860			236,159			(35,299	)		-14.9	%
Net income		688,055			1,061,869			(373,814	)		-35.2	%		1,071,275			1,304,355			(233,080	)		-17.9	%
Other comprehensive (loss) income		10,469			58,851			(48,382	)		-82.2	%		(7,248	)		352,879			(360,127	)		-102.1	%
Comprehensive income		698,524			1,120,720			(422,196	)		-37.7	%		1,064,027			1,657,234			(593,207	)		-35.8	%

Income from Operations

Income from operations was $684,635, for the three months ended September 30, 2009, a 46% decrease from $1,270,928 for the same period in 2008 because of a large increase in stock option cost amortized and professional fees paid in the third quarter of 2009. For the nine months ended September 30, 2009, income from operations was $1,026,958, or a 30.2% decrease from $1,470,818 for the same period in 2008 because of high revenue growth in first nine months of 2009.

Income before Provision of Income Tax

As a result of the factors described above, income before tax provision was $721,819 for the three months ended September 30, 2009, decreased by 44.4% from $1,298,028 for the same period in 2008. For the nine months ended September 30, 2009, income before tax provision was $1,284,917, decreased by 16.6% from $1,540,514 for the same period in 2008, mainly due to non-cash charge for stock options and professional fees.

Income Tax Expense

Pansoft Jinan is a Foreign Investment Enterprise or FIE engaged in the advanced technology industry which entitles it to a two-year exemption from income tax before 2008 and then started to pay income tax at the rate of 12.5%, 50% cut from the regular income tax rate, due to its FIE tax deduction status granted by PRC tax authorities. Current income tax expense for the three months ended September 30, 2009 was $397. The deferred income tax provision for the three months ended September 30, 2009 was $33,367 as result of temporary differences. No tax provision was required in the same period in 2008. For the nine months ended September 30, 2009, current income tax expense was $12,782 and deferred income tax for the future income expense was $200,860.

Net Income and Comprehensive Income

As a result of the factors described above, net income was $688,055 for the three months ended September 30, 2009, a decrease of $373,814, or 35.2%, from 1,061,869 for the same period in 2008. Comprehensive income for the three months ended September 30, 2009 was $698,524, a decrease of 37.7% from $1,120,720 for the same period in 2008. The decrease was due to a much smaller currency exchange gain of $10,469 that was included in other comprehensive income in this reporting period because of the relatively flat exchange rate between that US dollar and Chinese RMB. In contrast, there was a currency exchange gain of $58,851 in the same period in 2008. For the nine months ended September 30, 2009, net income of $1,071,275 decreased by $233,080, or 17.9% from $1,304,355 for the same period in 2008. In the same period, comprehensive income was $1,064,027, decreased by 35.8% from $1,657,234 for the same period in 2008 due to the unfavorable currency exchange rate.

Liquidity and Capital Resources

Cash Flows and Working Capital

As of September 30, 2009, we had cash and cash equivalents of $11,838,583

A large proportion of our cash and cash equivalents consist of proceeds from the IPO which was completed in September 2008. Such proceeds have been reserved for potential future strategic transactions, including potential mergers and acquisitions, and investment in developing new businesses or customer bases. Management believes that the Company's current available working capital should be adequate to sustain its operations at current levels through at least the next twelve months and will provide the Company with the funds necessary to execute its business expansion strategies.

Comparison of Nine months Ended September 30, 2009 and 2008

Net cash used by operating activities totaled $137,858 for the nine months ended September 30, 2009, an decrease of $352,766 compared to cash used in operations of $490,624 for the nine months ended September 30, 2008. This decrease resulted primarily from the following changes in operating assets and liabilities:

	$657,603 decrease in accounts receivable
	$1,796,953 increase in unbilled revenues

	$36,571 increase in prepayments, deposits and other receivables
	$102,273 increase in inventories

	$687,904 decrease in accounts payable and accrued liabilities
	$57,426 increase in deferred revenue

Account receivable is the revenue recognized based on percentage completion of the projects and has been billed to the client. The decrease in accounts receivable was due to the fact that the contract payments from major customers have picked up during the first nine months in 2009.while we experienced rapid revenue growth. Unbilled revenue represents accumulated unbilled amount of revenue recognized, based on the Company's revenue recognition policy. The increase in unbilled revenue was due to the fact that large proportion of the revenue recognized has yet been invoiced to our client.

The increase in prepayments, deposits and other receivables resulted from more deposit or prepayment to kick off projects from our clients.

The increase in inventories was resulted from the fact that the hardware equipment purchased for clients and has not been expensed to our cost of sales.

The decrease in accounts payable and accrued liabilities is the result of more payments made for these liabilities.

Deferred revenue represents advance payments not recognized as revenue. The increase was resulted from the increase of advanced payments for such projects.

Net cash used investing activities was $202,152 for the nine months ended September 30, 2009, compared to net cash used in investing activities of $566,956 for the nine months ended September 30, 2008. The cash used in investing activities for the nine months ended September 30, 2009 mainly occurred to acquire computer equipment for software development projects.

Cash flows from financing activities amounted to nil for the three months ended September 30, 2009.

The Company's working capital increased from $14,267,469 as of December 31, 2008 to $15,819,779 as of September 30, 2009.

Total current assets at September 30, 2009 amounted to $16,649,344, a decrease of $929,960 compared to $15,719,384 at December 31, 2008. The slight decrease was mainly due to decrease in the cash and equivalent account.

Current liabilities amounted to $829,565 on September 30, 2009 decreased by $622,350 compared to $1,451,915 at December 31, 2008. This decrease is mainly attributed to a decrease of in accounts payable and accrued liabilities in this period. Accounts payable and accrued liabilities mainly consisted of payables for management bonus, salary accruals and audit fees. The Company paid out most of fiscal 2008 outstanding account payable balance and employee bonus accrual during first half year of 2009. In addition, the Company accrued $391,967 for both current and deferred income taxes.

The current ratio decreased from 21.64 at September 30, 2008 to 20.1 at September 30, 2009. The Company's management believes the current ratio indicates strong operating liquidity and expansion investment funds available for Company use.

Seasonality of Our Sales

Historically, the Company's operating results and operating cash flows were subject to seasonal variations. The Company's revenues recognized in the first two quarters are usually lower in proportion of that for the whole year. This is due to the fact that the Company generates revenue primarily through software systems development, integration and provision of related support services provided to large oil businesses in China. It is common for our large clients to sign large contracts in later quarters, especially fourth quarter of a year. We expect this pattern to continue and possibly increase as a result of new market opportunities and new client development.

Inflation

Inflation did not materially affect our business or the results of our operations.

Off-Balance Sheet Arrangements

We did not have any off-balance arrangements.

Business Outlook

For the nine months ended September 30, 2009, our revenue was $5.1 million, a 45% increase compared to $3.5 million of revenue reported during the same period in 2008. We continue to reiterate our projection of 40% annual revenue growth made in the beginning of 2009 based on accomplishments achieved so far this year and the expectation that a large proportion of our revenue will be recognized in the last quarter in 2009. Achievement of this projection is dependent on successful conclusion of certain contracts that are awaiting final approval with major customers during the fourth quarter.

In the third quarter 2009, our net income decreased as compared to that in the same period in 2008, primarily due to increases in non-cash charges of option expense and professional service charges, which together account for 57% of total operating costs in the third quarter 2009, and represent an increase of 290% and 379%, respectively, from the same period in 2008. Additionally, the small top line growth was mainly driven by a difference in the timing of revenue recognition. Costs for most on-going projects was front-loaded in the early quarters, while a large proportion of our revenue can only be recognized when the contracts are concluded which we expect will occur in the last quarter of the fiscal year. We expect our profit margins to improve significantly once this fourth quarter revenue is recognized.

We believe that demand for our services will continue to grow as a result of our brand name and reputation for delivering high quality services at competitive prices in the ERP industry in China. We intend to continue delivering solid revenue and to ramp up our development capacity focusing on building a pipeline of new business by leveraging our significant technology and application know-how in providing customized and system integration services. Meanwhile, we will continue to maintain our corporate policy of controlling and reducing costs and expenses. With a strong cash reserve, we are seeking potential acquisition targets that will allow us to enter into new markets and further expand our revenue base and improve profit margin.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Concentrations of credit risk

Accounts receivable potentially subject the Company to concentrations of credit risk. Management is of the opinion that any risk of accounting loss is significantly reduced due to the financial strength of the Company's major customers. The Company performs ongoing credit evaluations of its customers’ financial condition and evaluates management performance based on proceeds collected from projects. Consequently, exposure to credit risk is accordingly limited.

Currency risk

The Company is exposed to currency risk as the Company's business is carried out in RMB and the Company maintains RMB denominated bank accounts but uses U.S. dollars as its reporting currency. Unfavorable changes in the currency exchange rate between RMB and U.S. dollars may result in a material effect on accumulated other comprehensive income recorded as a charge in shareholders' equity. The Company does not use derivative instruments to reduce its exposure to foreign currency risk.

Market risk

Our market risks at September 30, 2009 have not changed materially from those discussed in Item 7A of our Form 10-K for the year ended December 31, 2008 on file with the Securities and Exchange Commission.

Item 4T. Controls and Procedures

Disclosure Controls and Procedures

As of September 30, 2009, the Company carried out an evaluation, under the supervision and with the participation of management, including the Company's principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on the foregoing, the principal executive officer and the principal financial officer concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective.

Changes in internal control over financial reporting

There have been no changes in our internal controls over financial reporting or in other factors during the third quarter of 2009 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

PART II. OTHER INFORMATION

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

We received net proceeds of $8,392,920 from our IPO in September 2008. As of September 30, 2009, such proceeds were maintained in our cash account and invested in low-risk certificate of bank deposits issued by banks in China. Given the current world-wide financial crisis and economic recession, we have taken a strong precautionary position in our capital spending and investment decisions and therefore have not used our proceeds from the IPO. When the timing and the specific opportunity become feasible and available in the future, we intend to use such proceeds to invest in new projects or acquire new businesses, or otherwise use it for general corporate purposes

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

The Company held its 2009 annual meeting of stockholders on July 20, 2009. At the meeting, each of the three proposals submitted for shareholder approval as set out in the Company's proxy and information statement was approved.

Specifically, the shareholders

1. Elected Paul Gillis as the Class I Board of Directors to replace Mr. Chong Chen, the previous Class I director, who resigned from the Board of Directors for personal reasons, with voting on the proposal as follows:

***	FOR	% VOTED FOR	WITHHELD	% VOTED WITHHELD
PAUL GILLIS	4,849,125	99.20%	39,314	0.80%

Paul Gillis will serve for a term of three years expiring at the 2012 annual meeting of stockholders or until his successor shall have been elected and qualified.

Each of Messrs. Hu Wang, Guoqiang Lin, Tony Luh and Samuel Shen continued their terms of office following our annual meeting of stockholders.

2. Approved and ratified (i) the Company's 2008 Stock Incentive Plan and (ii) certain outstanding options to purchase an aggregate of 367,000 shares of Common Stock, previously granted under the 2008 Stock Plan, with voting on the proposal as follows:

***	FOR	AGAINST	ABSTAIN	BROKER NON-VOTES
TOTAL SHARES VOTED	3,898,726	28,327	1,300	960,087

3. Ratified the appointment of AGCA, Inc. as the Company's independent registered public accounting firm for the fiscal year ending December 31, 2009, with voting on the proposal as follows:

***	FOR	AGAINST	ABSTAIN	BROKER NON-VOTES
TOTAL SHARES VOTED	4,887,440	1,000	0	0

Item 6. Exhibits

The following exhibits are filed herewith:

Number		Exhibit

31.1		Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PANSOFT COMPANY LIMITED

November 13, 2009	By:	/s/ Allen Zhang
		Allen Zhang
		Interim Chief Financial Officer
		(Principal Financial and Accounting Officer)

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