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
      1934For
      the quarterly period ended September 30,
      2008





 ̈
            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 small business issuer 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)


86-531-88871166


(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 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                                oNon-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





APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS
DURING THE PRECEDING FIVE YEARS




Check
whether the registrant filed all documents and reports required to be filed by
Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court.  Yes o No o





APPLICABLE
ONLY TO CORPORATE ISSUERS:




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


The
Company is authorized to issue 30,000,000 common shares, par value $0.0059 per
share.  As of the date of this report, the Company has issued
5,438,232 common shares.









PANSOFT
COMPANY LIMITED


FORM 10-Q





INDEX







SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS
            3PART
      I.
            FINANCIAL
      INFORMATION
            4Item
      1.
            Financial
      Statements.
            4Item
      2.
            Management’s
      Discussion and Analysis or Plan of Operation
            17Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            22Item
      4/4T.
            Controls
      and Procedures
            22PART
      II.
            OTHER
      INFORMATION
            23Item
      1.
            Legal
      Proceedings
            23Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            23Item
      3.
            Defaults
      Upon Senior Securities
            23Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            23Item
      5.
            Other
      Information
            23Item
      6.
            Exhibits
            23




2





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?痵 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.






3








PART
I.                      FINANCIAL
INFORMATION





Item
1.                      Financial
Statements.





Interim
Consolidated Balance Sheets


As at
September 30, 2008 and December 31, 2007






September
      30,2008
            
            
            December
      31,(Unaudited)
            
            
            2007AssetsCurrent
      assetsCash
      and cash equivalents
            
            $
            10,171,204
            
            
            $
            3,365,613Accounts
      receivable, net
            
            
            3,158,345
            
            
            
            1,180,854Prepayments,
      deposits and other receivables
            
            
            154,893
            
            
            
            111,444Work
      in progress
            
            
            51,803
            
            
            
            -Income
      tax receivable
            
            
            5,626
            
            
            
            5,236Total
      current assets
            
            
            13,541,871
            
            
            
            4,663,147Deferred
      cost
            
            
            -
            
            
            
            63,709Property
      and equipment, net
            
            
            657,183
            
            
            
            221,191Deferred
      software development cost
            
            
            92.048
            
            
            
            137,088Total
      assets
            
            $
            14,291,102
            
            
            $
            5,085,135LiabilitiesCurrent
      liabilitiesAccounts
      payable and accrued liabilities
            
            $
            200,859
            
            
            $
            425,156Deferred
      revenue
            
            
            15,136
            
            
            
            7,597Deferred
      government grants
            
            
            -
            
            
            
            34,272Deferred
      income tax payable
            
            
            237,815
            
            
            
            -Total
      current liabilities
            
            
            453,810
            
            
            
            467,025Commitments
      and contingenciesShareholders’
      equity
              Common
      shares (30,000,000 common shares authorized;par
      value of $0.0059 per share; 5,438,232 shares issuedand
      outstanding (2007 - 4,238,232))
            
            
            32,080
            
            
            
            25,000Additional
      paid-in capital
            
            
            8,057,857
            
            
            
            502,989Retained
      earnings
            
            
            4,854,520
            
            
            
            3,550,165Statutory
      reserves
            
            
            223,855
            
            
            
            223,855Accumulated
      other comprehensive income
            
            
            668,980
            
            
            
            316,101Total
      shareholders’ equity
            
            
            13,837,292
            
            
            
            4,618,110Total
      liabilities and shareholders’ equity
            
            $
            14,291,102
            
            
            $
            5,085,135




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





4


Interim
Consolidated Statements of Operations and Comprehensive Income


For the
Three and Nine Month Periods Ended September 30, 2008 and 2007


(Unaudited)







For
      the three month
              periods
      ended September 30,
            
            For
      the nine month
              periods
      ended September 30,2008
            
            2007
            
            2008
            
            2007Sales
            $
            2,171,038
            
            $
            1,448,029
            
            $
            3,548,302
            
            $
            3,032,739Cost
      of sales
            
            695,003
            
            
            662,203
            
            
            1,725,420
            
            
            1,738,873Gross
      profit
            
            1,476,035
            
            
            785,826
            
            
            1,822,882
            
            
            1,293,866ExpensesGeneral
      and administrative expenses
            
            130,828
            
            
            26,958
            
            
            211,090
            
            
            100,911Selling
      expenses
            
            8,506
            
            
            4,052
            
            
            15,037
            
            
            16,566Professional
      fees
            
            27,112
            
            
            30,462
            
            
            88,649
            
            
            30,462Stock
      option expense
            
            38,815
            
            
            -
            
            
            38,815
            
            
            -205,261
            
            
            61,472
            
            
            353,591
            
            
            147,939Income
      from operations
            
            1,270,774
            
            
            724,354
            
            
            1,469,291
            
            
            1,145,927Other
      income
            
            -
            
            
            -
            
            
            537
            
            
            64Finance
      cost
            
            (455
            
            
            (66
            )
            
            (873
            
            
            (257
            )Interest
      income
            
            27,555
            
            
            8,207
            
            
            70,032
            
            
            13,317Gain
      on disposition of property and equipment
            
            154
            
            
            8,209
            
            
            1,528
            
            
            9,629Loss
      on equity investment
            
            -
            
            
            (14,858
            )
            
            -
            
            
            (24,400
            )Income
      before provision for income taxes
            
            1,298,028
            
            
            725,846
            
            
            1,540,515
            
            
            1,144,280Provision
      for future income taxes
            
            236,159
            
            
            -
            
            
            236,159
            
            
            -Net
      income
            
            1,061,869
            
            
            725,846
            
            
            1,304,355
            
            
            1,144,280Other
      comprehensive income
            
            58,851
            
            
            45,540
            
            
            352,879
            
            
            100,399Comprehensive
      income
            $
            1,120,720
            
            $
            771,386
            
            $
            1,657,234
            
            $
            1,244,679Basic
      and diluted income per share
            $
            0.23
            
            $
            0.17
            
            $
            0.30
            
            $
            0.27Basic
      and diluted weighted average number of shares outstanding
            
            4,525,189
            
            
            4,238,232
            
            
            4,334,582
            
            
            4,238,232





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






5







Interim
Consolidated Statements of Shareholders’ Equity


For the
Nine Months Ended September 31, 2008


(Unaudited)





Common
      Shares
              
              Additional
              
              Retained
              
              Statutory
              
              Accumulated
      OtherNumber
              
              Amount
              
              Paid-in
      Capital
              
              Earnings
              
              Reserves
              
              Comprehensive
      Income
              
              TotalBalance
      at December 31, 2007
              
              
              4,238,232
              
              $
              25,000
              
              $
              502,989
              
              $
              3,550,165
              
              $
              223,855
              
              $
              316,101
              
              $
              4,618,110September 8,
      2008 shares issued for cash at $7.00
              
              
              1,200,000
              
              
              7,080
              
              
              8,392,920
              
              
              
              
              
              
              
              
              
              
              
              8,400,000Costs
      related to issuance of common stock
              
              
              
              
              
              
              
              
              (876,987
              
              
              
              
              
              
              
              
              
              
              
              (876,987
              )Issuance
      of warrants
              
              
              
              
              
              
              
              
              120
              
              
              
              
              
              
              
              
              
              
              
              120Stock
      option expense
              
              
              
              
              
              
              
              
              38,815
              
              
              
              
              
              
              
              
              
              
              
              38,815Net
      income
              
              
              
              
              
              
              
              
              
              
              
              1,304,355
              
              
              
              
              
              
              
              
              1,304,355Foreign
      currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              352,879
              
              
              353,019Balance
      at Sept 30, 2008
              
              
              5,438,232
              
              $
              32,080
              
              $
              8,057,857
              
              $
              4,854,520
              
              $
              223,855
              
              $
              668,980
              
              $
              13,837,292




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






6


Interim
Consolidated Statements of Cash Flows


For the
Nine Months Period Ended September 30, 2008 and 2007


(Unaudited)





For
      the nine months ended September 30,2008
            
            
            2007Cash
      flows from operating activitiesNet
      income
            
            $
            1,304,355
            
            
            $
            1,144,280Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Provision
      for future income taxes
            
            
            236,159
            
            
            
            -Government
      grants amortization
            
            
            (115,673
            )
            
            
            (73,597
            )Amortization
            
            
            225,830
            
            
            
            283,808Stock
      option expense
            
            
            38,815
            
            
            
            -Gain
      on disposition of property and equipment
            
            
            (1,528
            )
            
            
            (9,629
            )Loss
      on equity investment
            
            
            -
            
            
            
            24,400Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (1,988,200
            )
            
            
            (678,334
            )Prepayments,
      deposits and other receivables
            
            
            37,408
            
            
            
            (131,544
            )Work
      in progress
            
            
            (49,132
            )
            
            
            -Accounts
      payable and accrued liabilities
            
            
            (264,672
            )
            
            
            1,449Government
      grants received, net
            
            
            79,458
            
            
            
            -Government
      grants repayment
            
            
            -
            
            
            
            (21,704
            )Deferred
      revenue
            
            
            6,556
            
            
            
            (9,144
            )Net
      cash (used in) provided by operating activities
            
            
            (490,624
            )
            
            
            529,985Cash
      flows from investing activitiesCapitalized
      development cost
            
            
            -
            
            
            
            (172,720
            )Purchase
      of property and equipment
            
            
            (585,722
            )
            
            
            (37,768
            )Proceeds
      from disposition of property and equipment
            
            
            18,766
            
            
            
            43,595Net
      cash used in investing activities
            
            
            (566,956
            )
            
            
            (166,893
            )Cash
      flows from financing activitiesNet
      proceeds from stock offering
            
            
            7,648,549
            
            
            
            -Dividends
      paid
            
            
            -
            
            
            
            (257,433
            )Net
      cash provided by (used in) financing activities
            
            
            7,648,549
            
            
            
            (257,433
            )Effect
      of exchange rate changes on cash
            
            
            214,622
            
            
            
            51,497





Increase
      in cash and cash equivalents
            
            
            6,805,591
            
            
            
            157,156Cash
      and cash equivalents, beginning of period
            
            
            3,365,613
            
            
            
            1,342,075Cash
      and cash equivalents, end of period
            
            $
            10,171,204
            
            
            $
            1,499,231Supplemental
      cash flow informationInterest
      received
            
            $
            56,987
            
            
            $
            13,317Interest
      paid
            
            $
            874
            
            
            $
            257




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






7







Notes
to Interim Consolidated Financial Statements


For the
Three And Nine Month Ended September 30, 2008


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.




The interim
consolidated financial statements are unaudited but, in the opinion of
management, reflect all adjustments necessary for a fair statement of the
Company’s consolidated financial position, results of operations and cash flows
for the periods presented. These adjustments consist of normal, recurring items.
The results of operations for any interim period are not necessarily indicative
of results for the full year.




The interim
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 S-1 for the year ended December 31,
2007.




2.       Significant
Accounting Policies







Cash
and cash equivalents




Cash is
comprised of cash on hand.  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, 2008
amounted to $ 51,019 (2007 – $ Nil), for nine months ended September 30, 2008
amounted to $ 51,019 (2007 - $ Nil).


Work
in progress




Work in
progress is the deferred costs of revenue related to contracts in progress 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.


Management
periodically evaluates the realizability of work in progress and records a
reserve for obsolescence when necessary. The reserve for work in progress
obsolescence was $ Nil at September 30, 2008 and December 31,
2007.







Property and equipment




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




Building
and
improvements                                               -  20   years
straight-line


Computer
equipment                                                           -   5    years
straight-line


Vehicles                                                              
                  -   5    years
straight-line


Office
furniture                                                          
          -   5    years
straight-line


Computer
software                                                     
        -   3    years
straight-line




Maintenance
and repair 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, 2008 amounted to $ 18,282 (2007 - $ 16,543) and for nine
months ended September 30, 2008 amounted to $ 53,708 (2007 - $
223,450). The research and software development costs were included in cost of
sales. These amounts are the annual amortization expense associated with
capitalized software development cost (note 4).
  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, 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.
  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”), on January 1, 2007. 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 period. The Company’s effective tax rate differs from the
federal 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 r
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 the
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 over
the term of the contract on a straight-line basis. Some of these arrangements
are entered into 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.
Overall, the revenue from the general IT service agreements represented less
than 5% of the Company’s revenue.


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". 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 transactions occurred. Statements of operations amounts have been
translated using the average exchange rate for the period. The resulting
translation adjustments are reported under other comprehensive income in
accordance with SFAS No. 130, "Reporting Comprehensive Income." The following
exchange rates were used:




September
      30,2008
            
            
            December
      31, 2007
            
            
            September
      30,2007Period
      end RMB U.S. Dollar exchange rate:
            
            
            6.7899
            
            
            
            7.2946
            
            
            
            7.4928Average
      third quarter RMB U.S. Dollar exchange rate
            
            
            6.8375
            
            
            
            7.6072
            
            
            
            7.5562







The foreign
currency translation adjustment of $ 58,851 (2007 - $ 45,540) has been reported
as other comprehensive income in the consolidated statements of operations for
three months ended September 30, 2008.
For nine months ended September 30, 2008, the foreign currency translation
adjustment of $ 352,879
(2007 - $ 100,399) has been reported as other comprehensive income in the
consolidated statements of operations.














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 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 operations 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," 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.




Fair value of
financial instruments




The estimated
fair value of financial instruments disclosed in the consolidated financial
statements has been determined by using available market information
and appropriate valuation methodologies. The carrying value of all current
assets and current liabilities approximates fair value because of their
short-term nature.




Effective
January 1, 2008, the Company adopted SFAS 157 “Fair Value Measurements” for
financial assets and liabilities. This standard defines fair value, provides
guidance for measuring fair value and requires certain disclosures. This
standard does not require any new fair value measurements, but rather applies to
all other accounting pronouncements that require or permit fair value
measurements. This standard does not apply measurements related to share-based
payments, nor does it apply to measurements related to inventory.




SFAS 157
discusses valuation techniques, such as the market approach (comparable market
prices), the income approach (present value of future income or cash flows), and
the cost approach (cost to replace the service capacity of an asset or
replacement cost). The statement utilizes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels. The following is a brief description of those three
levels:





Level
      1:
            Observable
      inputs such as quoted prices (unadjusted) in active markets for identical
      assets orliabilities.




Level
      2:
            Inputs
      other than quoted prices that are observable for the asset or liability,
      either directly or indirectly.  These include quoted prices for
      similar assets or liabilities in active markets and quoted prices for
      identical or similar assets or liabilities in markets that are not
      active.




Level
      3:
            Observable
      inputs that reflect the reporting entity’s own
  assumptions.




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


Fair
      Value Measurements Using
            
            
            Assets/LiabilitiesLevel
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            At
      Fair ValueCash  equivalents
            
            $
            1,778,806
            
            
            
            -
            
            
            
            -
            
            
            $
            1,778,806





SFAS No. 159,
“The Fair Value Option for Financial Assets and Financials Liabilities —
Including an Amendment of FASB Statement No.115" issued by FASB in
February 2007, this standard permits measurement of certain financial
assets and financial liabilities at fair value. If the fair value option is
elected, the unrealized gains and losses are reported in earnings at each
reporting date. Generally, the fair value option may be elected on an
instrument-by-instrument basis, as long as it is applied to the instrument in
its entirety. The fair value option election is irrevocable, unless a new
election date


Recent
accounting pronouncements




In December
2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS No.
141(R)") which revised SFAS No. 141, "Business Combinations". SFAS No. 141(R)
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in the acquirer and the
goodwill acquired. SFAS No. 141(R) also establishes disclosure requirements
which will enable users to evaluate the nature and financial effects of the
business combination. This standard is effective for fiscal years beginning
after December 15, 2008. As the provisions of SFAS No. 141(R) are applied
prospectively, the impact of this standard cannot be determined until the
transactions occur.
  In December
2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated
Financial Statements". SFAS No. 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to
the noncontrolling interest, changes in a parent's ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS No. 160 also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. This
standard is effective for fiscal years beginning after December 15, 2008. The
impact of this standard cannot be determined until the transactions
occur.
  In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities" ("SFAS No. 161"). SFAS No. 161 amends and expands the
disclosure requirements of FASB Statement 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133") to require qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit risk-related contingent features in
derivative agreements. The Statement is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008.
Early application is encouraged. The Company is currently evaluating the impact
of the adoption of SFAS No. 161.
  In May 2008,
the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles.” SFAS No. 162 identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with GAAP. SFAS No. 162 is effective 60 days following the Securities
and Exchange Commission’s approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity
with Generally Accepted Accounting Principles.” The Company is currently
evaluating the potential impact of the adoption of SFAS No.
162.
  In May 2008,
the FASB issued FASB FSP APB 14-1, “Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)”. FSP APB 14-1 requires the issuer of certain convertible debt
instruments that may be settled in cash (or other assets) on conversion to
separately account for the liability (debt) and equity (conversion option)
components of the instrument in a manner that reflects the issuer’s
non-convertible debt borrowing rate. Such separate accounting also requires
accretion of the resulting discount on the liability component of the debt to
result in interest expense equal to an issuer‘s nonconvertible debt borrowing
rate. In addition, the FSP provides for certain changes related to the
measurement and accounting related to derecognition, modification or exchange.
FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on
a retroactive basis. The impact of this standard cannot be determined until the
transactions occur.
  In June 2008,
the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities.” FSP EITF 03-6-1
addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included in
the earnings allocation in computing income per share under the two-class method
pursuant to SFAS No. 128, “Earnings per Share.” This guidance establishes that
unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings per share
pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008.
Furthermore, all prior period earnings per share data presented shall be
adjusted retrospectively to conform to the provisions of FSP EITF 03-6-1. The
impact of this standard cannot be determined until the transactions
occur.




3.       Property
and Equipment








Accumulated
            
            
            September
      30, 2008Cost
            
            
            Amortization
            
            
            Net
      Book ValueComputer
      equipment
            
            $
            960,788
            
            
            $
            324,352
            
            
            $
            636,436Vehicles
            
            
            172,678
            
            
            
            153,910
            
            
            
            18,768Office
      furniture
            
            
            8,780
            
            
            
            8,436
            
            
            
            344Computer
      software
            
            
            3,778
            
            
            
            2,143
            
            
            
            1,635Total
            
            $
            1,146,024
            
            
            $
            485,841
            
            
            $
            657,183







Accumulated
            
            
            December
      30, 2007Cost
            
            
            Amortization
            
            
            Net
      Book ValueBuilding
      and improvements
            
            $
            17,033
            
            
            $
            1,136
            
            
            $
            15,897Computer
      equipment
            
            
            327,787
            
            
            
            163,174
            
            
            
            164,613Vehicles
            
            
            160,730
            
            
            
            121,984
            
            
            
            38,746Office
      furniture
            
            
            7.814
            
            
            
            7,814
            
            
            
            -Computer
      software
            
            
            3,122
            
            
            
            1,187
            
            
            
            1,935Total
            
            $
            516,486
            
            
            $
            295,295
            
            
            $
            221,191




Total
amortization expense for the three months ended September 30, 2008 was $ 67,304
(2007 -$ 19,557)
with $ 59,038 (2007 - $ 16,424) included in cost of sales, $ 8,266 (2007 - $
3,111) in general and administrative expenses and $Nil (2007 - $ 22) offset by
government grants. Total amortization expense for the nine months ended
September 30, 2008 was $ 172,122 (2007 - $ 60,358) with $ 140,833 (2007 - $
46,744) included in cost of sales, $ 31,289 (2007 – $ 10,400) in general and
administrative expense and $Nil (2007 - $ 3,214) offset by government
grants.




4.       Software
Development Cost





September
      30,2008
            
            
            December
      31, 2007Software
      development cost
            
            $
            220,916
            
            
            $
            205,632Less:
      accumulated amortization
            
            
            128,868
            
            
            
            68,544$
            92,048
            
            
            $
            137,088




Amortization
expense for the three months ended September 30, 2008 was $ 18,282 (2007 - $
190,795) and for the nine months ended September 30, 2008 was $ 53,708 (2007 - $
223,450). The amortization expense was included in cost of
sales.







5.       Deferred
Government Grants


Pursuant to
several research projects approved by the PRC government, the Company received
grants from the government to cover research costs associated with these
research projects. The grants were amortized against the corresponding research
and development expenses as and when they are incurred for the research projects
for which these grants are received. The amortization of the grants recorded as
a reduction of cost of sales and administrative expense for the three months
ended September 30, 2008 was $ Nil (2007 - $ Nil) and for the nine months ended
September 30, 2008 was


$ 115,673
(2007 - $ 73,597).


.6.      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.
Pursuant to the IPO, the Company issued 1,200,000 shares of common stock for a
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 $ 120
proceeds from issuance of underwriter warrants and is included in additional
paid in capital. The costs of the offering totaled to $ 876,987 and are included
in additional paid in capital.


Warrants




Following
is a summary of the warrant activity:





Number
      of WarrantOutstandingDecember
      31, 2007Granted
            
            
            120,000Exercised
            
            
            -September
      30, 2008
            
            
            120,000




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 ?癙ool”). 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 options will
vest at a rate of 20% per year for five years and have a per share exercise
price equal to the fair market value of one of common shares on the date of
grant. For those granted on the date of the closing of the IPO, the exercise
price was be $7.00 per share. The options have a life of five
years.




During
the quarter, 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 the stock options was determined to be $4.39 per stock option using the
Black-Scholes option-pricing model with the following assumptions:




Expected
life                                               5
years


Expected
volatility                                    
     75%


Risk fee
interest
rate                                    2.98%


Dividend
rate                                                  
  0%




A total
of $38,815 was included in the stock based compensation expense for both three
months and nine months ended September 30, 2008. As of September 30, 2008, there
were approximately $ 1,371,000 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 4.75years.




Stock
option summary:


Outstanding Stock
      options
            Exercisable
      OptionsExercisePrice
            Number
            Average Remaining Contractual
      Life
            AveragePrice
            ExerciseNumber$
      7.00
            321,000
            4.75
      years
            $
      7.00
            -







7.       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 reserve is calculated based on year end financial
performance. 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 fund accumulated by Jinan as at
September 30, 2008 was $ 223,855 (RMB 1,825,359) and December 31, 2007 was $
223,855 (RMB 1,825,359).




8.       Income
Taxes


The Company
utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.


The Company
adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109", (“FIN
48”), on January 1, 2007. 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.
  In 2007,
Pansoft’s operating subsidiary Jinan was subject to the enterprise income tax at
the reduced applicable rate of 7.5%, as it was classified as a “software
enterprise” and “high-technology enterprise”.
  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 foreign investment enterprises (“FIE”s) 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 is currently applying for the re-approval for the
special enterprise status in order to enjoy the preferential rate.
  Before it can
obtain its re-approval of the status, it is subject to the new unified income
tax rate.  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.
  The benefit
of the tax holiday for the nine months ended September 30, 2008 and 2007 was $
Nil as a result of losses reported for Chinese tax purposes and therefore, the
benefit of the tax holiday on earnings per share for the nine months ended
September 30, 2008 and 2007 was $ Nil.


A
reconciliation of consolidated corporate income taxes at the statutory rate of
12.5% (2007 – 7.5%) and the Company’s effective income tax expense for nine
months ended September 30, 2008 and 2007 is as follows:




2008
            
            
            2007Income
      before provision for income taxes
            
            $
            1,540,515
            
            
            $
            1,144,280Income
      tax at statutory rate
            
            
            192,564
            
            
            
            85,821Temporary
      difference and other
            
            
            237,815
            
            
            
            (71,663
            )Effect
      of tax exemption
            
            
            -
            
            
            
            (14,158
            )Valuation
      allowance
            
            
            (194,220
            )
            
            
            -Provision
      for income taxes
            
            $
            236,159
            
            
            $
            -




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


Sept.
      30
            
            
            Dec.
      312008
            
            
            2007Timing
      difference on percentageof
      completion revenue recognition
            
            $
            (255,822
            )
            
            $
            (84,106
            )Timing
      difference on writeoff
      of accounts receivable
            
            
            40,359
            
            
            
            41,666Plant,
      equipment andcapitalized
      software cost
            
            
            (17,981
            )
            
            
            (24,786
            )Other
      temporary differences
            
            
            (4,371
            )
            
            
            49,457Effect
      of tax exemption
            
            
            -
            
            
            
            17,769Net
      future income tax liabilities
            
            $
            (237,815
            )
            
            $
            -







9.      Commitments
and Contingencies


On September
30, 2008, the Company was committed to annual operating lease payments for
rental office and employee residence of$25,261.  These
leases are renewed on an annual basis.




10.    Financial
Instruments







Concentrations
      of credit risk




Financial
instruments that potentially subject the Company to concentrations of credit
risk are primarily cash equivalents. The Company maintains cash and cash
equivalents with high quality financial institutions and invests in low risk
bank’s short term products.




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.




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, 2008, three customers individually comprised 28%, 21%
and 12% of revenue, compared with 69%, 4% and 1% respectively in 2007. The
subsidiaries of the Company’s three major customers accounted for another 19% of
revenue (2007 – 23%).


For nine
months ended September 30, 2008, three customers individually comprised 28%, 17%
and 11% of revenue, compared with 53%, 9% and 5% respectively in 2007. The
subsidiaries of the Company’s three major customers accounted for another 27% of
revenue (2007 – 28%).
  There were
three customers that individually comprise 27%, 14% and 10% of account
receivable on September 30, 2008. Three customers individually made up 20%, 16%
and 16% of account receivable at December 31, 2007.
  12.     Segmented
Information








The Company
has one operating segment, being the development and implementation of
accounting and ERP applications.  All of Company’s assets and
operations are located in the PRC and Hong Kong.











Item
2.                      Management’s Discussion and Analysis
or Plan of Operation




The
following discussion and analysis of the Company’s financial condition and
results of operations should be read in conjunction with the Company’s unaudited
interim consolidated financial statements and the related notes included
elsewhere in this report.  This discussion contains forward-looking
statements that involve risks and uncertainties.  Actual results and
the timing of selected events could differ materially from those anticipated in
these forward-looking statements as a result of various factors.




Overview




We are a
leading developer of ERP software and professional services for participants in
China’s oil and gas industry.  We have developed specific ERP software
systems for PetroChina Company Limited and China National Petroleum Corporation,
its state-owned parent company (together, “PetroChina”) and China Petrochemical
Corporation/China Petroleum and Chemical Corporation and Sinopec Group, its
state-owned parent company (together, “Sinopec”).  We are developing
an ERP software development platform and  tend to serve for
small-to-medium sized businesses (“SMEs”) in China.  In this platform,
we combine solutions developed for our most sophisticated clients with network
applications and developed “PanSchema”, through an Internet-based,
software-as-a-service model designed to customize cost-effective software
solutions for Chinese SMEs, though it is yet to be a significant revenue
source.




The
accompanying unaudited consolidated interim financial statements reflect all
normal recurring adjustments which, in the opinion of management, are necessary
for a fair statement of the results for the interim periods presented. Results
for the three and nine months ended September 30, 2008 are not necessarily
indicative of the results expected for the full fiscal year or for any future
period. These financial statements have been prepared in accordance with
generally accepted accounting principles in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These financial statements should be read in conjunction
with the consolidated financial statements and related notes for the year ended
December 31, 2007.




Overview
of Business Operations in the Third Quarter and First Nine Months of
2008




We
generate revenue through software systems development, integration and the
provision of related support services. Our revenue during the fiscal quarter and
nine months ended September 30, 2008, reflects the seasonal nature of our
business. Our revenue has been subject to high seasonality, and the revenue
recognized in the first six months of the year is usually smaller in proportion
to that for the whole year. The same is true this year due to our clients’
budgeting and planning schedule. Nevertheless, we continued to experience steady
demand for our services and also continued to generate revenue through the
provision of our services to our petro-industrial client base during the three
and nine month periods ended September 30, 2008.




Operating
Results




The
consolidated financial statements presented herein set forth key components of
our results of operations for the periods indicated, both in dollars and as a
percentage of sales revenue and key components of our revenue for the periods
indicated in dollars. The financial data for the three months and nine months
ended Septmber 30, 2008 reflect the operating results of the Company, in
comparison with the financial data for the same period in 2007.





Summary of Gross
Margin




For the three months ended
      September 30,
            
            
            For the nine months ended
      September 30,2008
            
            
            2007
            
            
            Change
            
            
            %
            
            
            2008
            
            
            2007
            
            
            Change
            
            
            %(Unaudited)
            
            
            (Unaudited)
            
            
            US$
            
            
            
            
            
            (Unaudited
            
            
            (Unaudited)
            
            
            US$Sales
            
            $
            2,171,038
            
            
            $
            1,448,029
            
            
            $
            723,009
            
            
            
            50
            %
            
            $
            3,548,302
            
            
            $
            3,032,739
            
            
            $
            515,563
            
            
            
            17
            %Cost
      of Sales
            
            
            695,003
            
            
            
            662,203
            
            
            
            32,800
            
            
            
            5
            %
            
            
            1,725,420
            
            
            
            1,738,873
            
            
            
            (13,453
            )
            
            
            (1
            %)Gross
      Margin
            
            $
            1,476,035
            
            
            $
            785,826
            
            
            $
            690,209
            
            
            
            88
            %
            
            $
            1,822,882
            
            
            $
            1,293,866
            
            
            $
            529,016
            
            
            
            41
            %GM
      Ratio
            
            
            68
            %
            
            
            54
            %
            
            
            
            
            
            
            
            
            
            
            51
            %
            
            
            43
            %





During
the third quarter of 2008, revenue from large-scale software systems integration
projects comprised a higher proportion of total revenue. Our total revenues were
$ 2,171,038, a 50%
increase from $ 1,448,029in the third quarter of
2007. During the first nine months of 2008, total revenues were $ 3,548,302, a 17% increase from
$3,032,739 in the
first nine months of 2007. Due to the seasonality of our business, our revenues
increased significantly in the third quarter of 2008 compared to previous
quarters of the same year.




Cost of
sales




Our cost
of sales increased by $32,800, or 5% to $695,003 for the three months ended
September 30, 2008, from $662,203 for the same period in 2007. Our cost of sales
for the nine months ended September 30, 2008 was $1,725,420, a 1% decrease from
$1,738,873 for the same period in 2007, as a result of cost control measures
designed to contain total employee salaries, which is the major part of our cost
of sales.




Gross
Profit





For the
three months ended September 30, 2008, our gross profit increased to $1,476,035
from $785,826 for the same period in 2007, an 88% increase. For the three months
ended September 30, 2008, our gross profit as a percentage of revenue increased
to 68%, from 54% for the same period in 2007. This increase in gross profit
margin was mainly due to revenue growth in the third quarter of 2008. For the
nine months ended September 30, 2008, our gross profit increased to $1,822,882
from $ 1,293,865 for the same period in 2007, a 41% increase. For the nine
months ended September 30, 2008, our gross profit as a percentage of revenue
increased to 51%, from 43% for the same period in 2007. This increase in gross
profit margin was mainly due to increased revenue growth in the third quarter of
2008.




Summary of
Expenses





For the Three Months Ended
      September 30,
            
            
            For the Nine Months Ended
      September 30,2008
            
            
            2007
            
            
            Change
            
            
            %
            
            
            2008
            
            
            2007
            
            
            Change
            
            
            %(Unaudited)
            
            
            (Unaudited)
            
            
            US
      $
            
            
            
            
            
            (Unaudited)
            
            
            (Unaudited)
            
            
            US
      $G/A
      expenses
            
            $
            130,828
            
            
            $
            26,958
            
            
            $
            103,870
            
            
            
            385
            %
            
            $
            211,090
            
            
            $
            100,911
            
            
            $
            110,179
            
            
            
            109
            %Selling
      expenses
            
            
            8,506
            
            
            
            4,052
            
            
            
            4,454
            
            
            
            110
            %
            
            
            15,037
            
            
            $
            16,566
            
            
            
            (1,529
            )
            
            
            (9
            %)Professional
      fees
            
            
            27,112
            
            
            
            30,462
            
            
            
            (3,350
            )
            
            
            (11
            %)
            
            
            88,649
            
            
            $
            30,462
            
            
            
            58,187
            
            
            
            191
            %Stock
      option expense
            
            
            38,815
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            38,815
            
            
            
            
            
            
            
            38,815Total
            
            $
            205,261
            
            
            $
            61,472
            
            
            $
            143,789
            
            
            
            234
            %
            
            $
            353,591
            
            
            $
            147,939
            
            
            $
            205,652
            
            
            
            139
            %





Administrative
Expenses




Administrative
expenses consist primarily of compensation and benefits to our general
management, finance and administrative staff, professional advisor fees, audit
fees and other expenses incurred in connection with general operations. For the
three months ended September 30, 2008, our administrative expenses increased
to $130,828 from
$26,958 for the three
months ended September 30, 2007, a 385% increase. The increase in administrative
expenses was mainly attributable to an increase in our administrative business
trips and activities due to the initiation of our IPO as well as business
expansion.






For the
nine months ended September 30, 2008, our administrative expenses increased to
$211,090 from $100,911 for the nine months
ended September 30, 2007, a 109% increase. The increase is attributable to the
factors referenced in previous paragraph The administrative expenses as a
percentage of our revenue were 6%. This amount increased from 3% in the same
period in 2007 due to factors referenced in the previous paragraph.




Summary of Other Income and
Expenses





For the Three Months Ended
      September 30,
            
            
            For the Nine Months Ended
      September 30,2008
            
            
            2007
            
            
            Change
            
            
            %
            
            
            2008
            
            
            2007
            
            
            Change
            
            
            %(Unaudited)
            
            
            (Unaudited)
            
            
            US
      $
            
            
            
            
            
            (Unaudited)
            
            
            (Unaudited)
            
            
            US
      $Income
      from operations
            
            $
            1,270,774
            
            
            $
            724,354
            
            
            $
            546,420
            
            
            
            75
            %
            
            $
            1,469,291
            
            
            $
            1,145,927
            
            
            $
            323,364
            
            
            
            28
            %Other
      income
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            
            
            
            
            537
            
            
            
            64
            
            
            
            473
            
            
            
            739
            %Finance
      cost
            
            
            (455
            )
            
            
            (66
            )
            
            
            (389
            )
            
            
            589
            %
            
            
            (873
            )
            
            
            (257
            )
            
            
            (616
            )
            
            
            240
            %Interest
      income
            
            
            27,555
            
            
            
            8,207
            
            
            
            19,348
            
            
            
            236
            %
            
            
            70,032
            
            
            
            13,317
            
            
            
            56,715
            
            
            
            426
            %Gain
      on disposition of
              Property
      and equipment
            
            
            154
            
            
            
            8,209
            
            
            
            (8,055
            )
            
            
            (98
            %)
            
            
            1,528
            
            
            
            9,629
            
            
            
            (8,101
            )
            
            
            (84
            %)Loss
      on equity investment
            
            
            0
            
            
            
            (14,858
            )
            
            
            14,858
            
            
            
            (100
            %)
            
            
            0
            
            
            
            (24,000
            )
            
            
            24,000
            
            
            
            (100
            %)Income
      for income taxes
            
            $
            1,298,028
            
            
            $
            725,846
            
            
            $
            572,182
            
            
            
            79
            %
            
            $
            1,540,515
            
            
            $
            1,144,280
            
            
            $
            396,235
            
            
            
            35
            %Provision
      for future income taxes
            
            
            (236,159
            )
            
            
            0
            
            
            
            (236,159
            )
            
            
            
            
            
            
            (236,159
            )
            
            
            0
            
            
            
            (236,159
            )Net
      income
            
            $
            1,061,869
            
            
            $
            725,846
            
            
            $
            336,023
            
            
            
            46
            %
            
            $
            1,304,355
            
            
            $
            1,144,280
            
            
            $
            160,075
            
            
            
            14
            %Other
      Comprehensive income
            
            
            58,851
            
            
            
            45,540
            
            
            
            13,311
            
            
            
            29
            %
            
            
            352,879
            
            
            
            100,399
            
            
            $
            252,480
            
            
            
            251
            %Comprehensive
      income
            
            $
            1,120,720
            
            
            $
            771,386
            
            
            $
            349,334
            
            
            
            45
            %
            
            $
            1,657,234
            
            
            $
            1,244,679
            
            
            $
            412,555
            
            
            
            33
            %




Income from
Operations






Income
from operations was $1,270,774 for the three months
ended September 30, 2008, a 75% increase from $724,354 for the same period in
2007. Income from operations was $1,469,291 for the nine months
ended September 30, 2008, a 28% increase from $1,145,927for the same period
in 2007 because of increased revenue growth in the first nine months of 2008.
However, the margin increase was not as high as the revenue growth due to large
expenses incurred for the IPO process and higher salaries paid to
developers.







Income Tax
Expense




Jinan is
an FIE engaged in the advanced technology industry. Therefore, the Company is
entitled to a two-year exemption from income tax followed by a 50% tax reduction
for the next three years. Income tax expense for the three and nine months ended
September 30, 2008 was Nil due to a loss reported for PRC tax purposes. For the
same period in 2007, income tax expense was Nil because we were granted the FIE
tax exemption by PRC tax authorities.




Interest
Income




Interest
income was $27,555 for the three months ended September 30, 2008 and $70,032 for
the nine months ended September 30, 2008, a 236% increase from negative interest
income for the three month period ended September 30, 2007 and a 426% increase
for the nine months ended September 30, 2007. The increase in interest income
was mainly due to improved cash fund management and investment in selected bank
certificate programs with relatively higher returns and little risk for
principals




Net
Income




As a
result of the factors described above, net income was $1,061,869 for the three
months ended September 30, 2008, an increase of $336,023 or 46% from the same
period in 2007. For the nine months ended September 30, 2008, net income was
$1,304,355 an increase of $ 160,075 or 14% from the same period in
2007.




Liquidity
and Capital Resources




Cash Flows and Working
Capital




As of
September 30, 2008, we had cash and cash equivalents of $10,171,204




Our cash
and cash equivalents substantively increased due to the proceeds from the IPO.
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 strategy.




Comparison of nine months
ended September 30, 2008 and 2007





Net cash
used in operating activities totaled $489,440 for the nine months ended
September 30, 2008, compared to net cash provided by operations of $529,986 for
the nine months ended September 30, 2007. This change of cash flow from
operation resulted primarily from the following changes in operating assets and
liabilities:





·
            $1,988,200
      increase in accounts receivables;


·
            $37,408
      increase in prepayments, deposits and other
  receivables;


·
            $49,132
      increase in work in progress;


·
            $264,672
      decrease in accounts payable and accrued
  liabilities;


·
            $79,458
      decrease in net government grants received;
and


·
            $6,556
      increase in deferred revenue.





The
increase in accounts receivable was due to the fact that project payments from
our major customers slowed down during the first nine months of 2008. The
decrease in prepayments, deposits and other receivables resulted from a
reduction in capitalized IPO related expenses and a write-off of a receivable
from a law suit settlement. The increase in work in progress resulted from
substantial software development work in a project for a major customer for
which the contract had not yet been signed. The decrease in accounts
payable and accrued liabilities is the result of a reduction in employee bonuses
because revenue targets were not achieved. The increase in deferred revenue
was the result of payments from customers for which revenue was not earned or
recognized.





Net cash
used in investing activities was $568,140 for the nine months ended September
30, 2008, compared to net cash used in investing activities of $166,893 for the
nine months ended September 30, 2007. The cash used in investing activities for
the nine months ended September 30, 2008 consisted of computer equipment related
to software development. The cash used for investing activities during the nine
months ended September 30, 2007 consisted of the purchase software development
costs and computer equipment.





Cash
flows provided by financing activities amounted to $7,648,549 for the nine
months ended September 30, 2008, compared with net cash used in financing
activities of $257,433 for the nine months ended September 30, 2007. The cash
provided by financing activities during the nine months ended September 30, 2008
was from the net proceeds of the IPO in the third quarter. The cash used in
financing activities during the nine months ended September 30, 2007 was for the
payment of dividends.





The
Company’s working capital substantially increased from $4,196,122 at December
31, 2007 to $13,088,061 at September 30, 2008 due to the proceeds from the
IPO which were added to the cash account.




Total
current assets at September 30, 2008 amounted to $13,541,871, an increase of
$8,878,724 compared to $4,663,147 at December 31, 2007. The substantial increase
was mainly due to the addition of IPO proceeds to the cash account.




Current
liabilities amounted to $453,810 on September 30, 2008, compared to $467,025 at
December 31, 2007. Although the amount did not change significantly, the
composite of the current liabilities has changed. Accounts payable and accrued
liabilities decreased by $224,297. Accounts payable and accrued liabilities
primarily consisted of payables for management bonus, salary accruals and audit
fees. The Company paid out most of fiscal 2007 outstanding account payable
balance and employee bonus accrual during first nine months of 2008. On the
other hand, the Company accrued $237,815 payable future income taxes due to the
timing difference of recognizing revenue.




The
current ratio increased from 9.98 at December 31, 2007 to 29.8 at September 30,
2008. The substantial change in the Company’s current ratio primarily resulted
from the addition of IPO proceeds to the cash account. Management believes this
changed 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 may be even more drastic, as a result of new market
opportunity and new client development.




Inflation




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




Off-Balance
Sheet Arrangements




We do not
have any off-balance arrangements




Markets
and Outlook




Although
China’s economy is cooling down, and its annual growth rate is now less than 10%
for the first time in the last 10 years due to the current world wide financial
crisis, the Company believes the demand for its services will remain strong as
the oil industry in China. The Company does not expect the financial crisis to
have a significant negative impact on its fourth quarter 2008 and 2009 revenue.
Management believes that the Company’s balance sheet is strong and that it
possesses a competitive position in its market. The Company’s management
believes that its revenues will increase at least 5% over 2007





The
Company is focusing on developing new business by leveraging its advanced
technology and applications development know-how on relating to customization
and system integration services, by continuing to develop knowledge of the
markets it is in, and expanding its reach into new areas. The Company
anticipates it will provide customization, integration services and solutions to
large clients in new industries to distinguish it from other competitors that
are selling generic software products in this competitive market. More and more,
large businesses have selected IT service providers as their business strategic
partners to build their own competitive advantages. These businesses are
Pansoft’s potential clientele.





With
strong cash position at hand, The Company is currently looking for potential
merger and acquisition targets that will allow the Company to enter different
markets.





Looking
forward, management believes that demand for its services will continue to grow
as the Company ramps up its development capacity. As a result of the Company’s
brand name and reputation in the ERP industry for delivering high quality
services at competitive prices in China, management believes that it will
continue to deliver solid revenue and profitability growth.









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
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.




Item
4/4T.                      Controls and
Procedures





Disclosure
Controls and Procedures





As of
September 30, 2008, 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
were no changes in the Company’s internal control over financial reporting (as
defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) during the
quarter ended September 30, 2008 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.






PART
II.                      OTHER
INFORMATION





Item
1.                      Legal
Proceedings




None.




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




None.




Item
3.                      Defaults
Upon Senior Securities




None.




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




None.




Item
5.                      Other
Information




None.




Item
6.                      Exhibits




The
following exhibits are filed herewith:







Number
            
            Exhibit3.1
            
            Memorandum
      of Association of Pansoft Company Limited*3.2
            
            Articles
      of Association of Pansoft Company Limited*4.1
            
            Specimen
      Certificate for Common Shares*10.1
            
            Form
      of Technology Development (Commission) Contract for Pansoft (Jinan) Co.,
      Ltd.*10.2
            
            Form
      of Product Purchase and Sales Contract for Pansoft (Jinan) Co.,
      Ltd.*10.3
            
            Form
      of Labor Contract for Pansoft (Jinan) Co., Ltd.*10.4
            
            Form
      of Confidentiality Agreement for Pansoft (Jinan) Co.,
  Ltd.*10.5
            
            Form
      of Co-operation for Pansoft (Jinan) Co. Ltd.*10.6
            
            Translation
      of Trust Agreement for Hugh Wang’s beneficial ownership of Timesway shares
      on behalf of PJCL employees*10.7
            
            Translation
      of Acquisition Agreement with PJCL*10.8
            
            Translation
      of Trust Agreement between Hugh Wang and Conrad Tsang*10.9
            
            Translation
      of Technology Development (Commission) Contract with Xinjiang Sales Branch
      of China National Petroleum Corporation, Ltd.*10.10
            
            Translation
      of PetroChina International Co. LTD (CHINAOIL) SAP System Optimization
      Project Contract*10.11
            
            Translation
      of Technology Service Contract between Shengli Oil Field Administration
      and Pansoft (Jinan) Company, Ltd. (Contract for the Maintenance of
      Financial Information System)*10.12
            
            Translation
      of Technology Service Contract between Shengli Oil Field Branch of Sinopec
      and Pansoft (Jinan) Company, Ltd.*10.13
            
            Translation
      of China National Petroleum Budget Management Information Project between
      Financial Management Company of China National Petroleum Corporation and
      Pansoft (Jinan) Company, Ltd.*10.14
            
            Translation
      of Technology Service Contract between Shengli Oil Field Administration
      and Pansoft (Jinan) Company Ltd.*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.**





*           Incorporated
by reference to the Company’s Registration Statement on Form S-1, Registration
No. 333-150922.


**           Filed
herewith.












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 LIMITEDNovember
      14, 2008
            By:
            /s/
      Allen ZhangAllen
      ZhangVice
      President of Finance(Principal
      Financial and Accounting Officer)