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 June 30,
      2009





 ̈
            Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934
              For
      the transition period from ___________ to
  ___________.






Commission
File Number   001-34168




Pansoft Company
Limited


(Exact
name of registrant as specified in its charter)





British Virgin Islands
                  (State
      or other jurisdiction of
                  incorporation
      or organization)
                Not Applicable
                  (I.R.S.
      employer
                  identification
      number)





3/F
Qilu Software Park Building


Jinan
Hi-Tech Zone


Jinan,
Shandong,


People’s Republic of China
250101


(Address
of principal executive offices and zip code)


86-531-88871159


(Registrant’s
telephone number, including area code)





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




(1)
Yes  þ
 No  o
        (2) Yes  þ No  o




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




(1)
Yes o    No 
o




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




Large
      accelerated
      filer                                           
      o
            Accelerated
      filer                                
      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




As of
July 31, 2009 the Company has 5,438,232 common shares, par value $0.0059 per
share, outstanding.












PANSOFT
COMPANY LIMITED


FORM 10-Q





INDEX






SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS
                    
                    
                    3PART
      I.
                    FINANCIAL
      INFORMATION
                    
                    
                    4Item
      1.
                    Financial
      Statements
                    
                    
                    4Item
      2.
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    
                    
                    20Item
      3.
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    
                    
                    24Item
      4T.
                    Controls
      and Procedures
                    
                    
                    24PART
      II.
                    OTHER
      INFORMATION
                    
                    
                    25Item
      2.
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    
                    
                    25Item
      6.
                    Exhibits
                    
                    
                    25







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





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




3




PART
I.                      FINANCIAL
INFORMATION







Item
1.          Financial
Statements.






Pansoft Company Limited


Condensed
Consolidated Balance Sheets





As
      ofJune
      30,2009
                          
                          December
      31, 2008(Unaudited)
                          
                          (Audited)AssetsCurrent assetsCash and cash equivalents
                          
                          $
                          11,330,991
                          
                          
                          $
                          12,185,950Accounts receivable, net of allowance for doubtful accounts $134,320
      (2008: $152,070)
                          
                          
                          912,260
                          
                          
                          
                          1,136,159Unbilled revenue
                          
                          
                          3,094,845
                          
                          
                          
                          2,221,142Prepayments, deposits and other receivables
                          
                          
                          203,143
                          
                          
                          
                          107,785Inventories
                          
                          
                          145,978
                          
                          
                          
                          68,348Total
      current assets
                          
                          
                          15,687,217
                          
                          
                          
                          15,719,384Property
      and equipment, net
                          
                          
                          719,838
                          
                          
                          
                          650,708Deferred
      software development cost
                          
                          
                          36,600
                          
                          
                          
                          73,287Total
      assets
                          
                          $
                          16,443,655
                          
                          
                          $
                          16,443,379LiabilitiesCurrent
      liabilitiesAccounts payable and accrued liabilities
                          
                          $
                          176,547
                          
                          
                          $
                          905,748Deferred revenue
                          
                          
                          226,741
                          
                          
                          
                          181,192Income tax payable
                          
                          
                          1,597
                          
                          
                          
                          192,470Deferred income taxes
                          
                          
                          339,168
                          
                          
                          
                          172,505Total
      current liabilities
                          
                          
                          744,053
                          
                          
                          
                          1,451,915Deferred income taxes
                          
                          
                          19,192
                          
                          
                          
                          18,531Total  liabilities
                          
                          
                          763,245
                          
                          
                          
                          1,470,446Stockholders'
      equityCommon
      stock (30,000,000 common shares authorized; par
      value of $0.0059 per share; 5,438,232 shares issued and outstanding
      as of June 30,
      2009)
                          
                          
                          32,080
                          
                          
                          
                          32,080Additional
      paid-in
      capital
                          
                          
                          8,564,028
                          
                          
                          
                          8,222,054Retained
      earnings
                          
                          
                          6,094,334
                          
                          
                          
                          5,711,114Statutory
      reserves
                          
                          
                          363,063
                          
                          
                          
                          363,063Accumulated
      other comprehensive income
                          
                          
                          626,905
                          
                          
                          
                          644,622Total
      stockholders' equity
                          
                          
                          15,680,410
                          
                          
                          
                          14,972,933Total
      liabilities and stockholders' equity
                          
                          $
                          16,443,655
                          
                          
                          $
                          16,443,379





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




4





Pansoft
Company Limited


Unaudited
Condensed Consolidated Statements of Income and Comprehensive
Income




For
      the three months ended
                                                          June
      30,
                                                        
                                                        
                                                        For
      the six months ended
                                                          June
      30,2009
                                                        
                                                        
                                                        2008
                                                        
                                                        
                                                        2009
                                                        
                                                        
                                                        2008Sales
                                                        
                                                        $
                                                        1,517,820
                                                        
                                                        
                                                        $
                                                        819,258
                                                        
                                                        
                                                        $
                                                        2,939,906
                                                        
                                                        
                                                        
                                                        1,377,264Cost
      of sales
                                                        
                                                        
                                                        946,876
                                                        
                                                        
                                                        
                                                        536,659
                                                        
                                                        
                                                        
                                                        1,714,918
                                                        
                                                        
                                                        
                                                        1,030,417Gross
      profit
                                                        
                                                        
                                                        570,944
                                                        
                                                        
                                                        
                                                        282,599
                                                        
                                                        
                                                        
                                                        1,224,988
                                                        
                                                        
                                                        
                                                        346,847ExpensesGeneral
      and administrative expenses
                                                        
                                                        
                                                        89,205
                                                        
                                                        
                                                        
                                                        66,893
                                                        
                                                        
                                                        
                                                        249,242
                                                        
                                                        
                                                        
                                                        80,262Selling expenses
                                                        
                                                        
                                                        59,697
                                                        
                                                        
                                                        
                                                        3,467
                                                        
                                                        
                                                        
                                                        121,794
                                                        
                                                        
                                                        
                                                        6,532Professional fees
                                                        
                                                        
                                                        86,826
                                                        
                                                        
                                                        
                                                        28,565
                                                        
                                                        
                                                        
                                                        170,387
                                                        
                                                        
                                                        
                                                        61,537Stock based compensation
                                                        
                                                        
                                                        170,053
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        341,974
                                                        
                                                        
                                                        
                                                        -Gain on disposition of property and equipment
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (732
                                                        )
                                                        
                                                        
                                                        (1374
                                                        )405,781
                                                        
                                                        
                                                        
                                                        98,925
                                                        
                                                        
                                                        
                                                        882,665
                                                        
                                                        
                                                        
                                                        146,957Income
      from operations
                                                        
                                                        
                                                        165,163
                                                        
                                                        
                                                        
                                                        183,674
                                                        
                                                        
                                                        
                                                        342,323
                                                        
                                                        
                                                        
                                                        199,890Other
      income (expenses), net
                                                        
                                                        
                                                        (3,772
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (3,772
                                                        )
                                                        
                                                        
                                                        537Government
      grant
                                                        
                                                        
                                                        14,656
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        160,981
                                                        
                                                        
                                                        
                                                        -Finance
      cost
                                                        
                                                        
                                                        367
                                                        
                                                        
                                                        
                                                        (205
                                                        )
                                                        
                                                        
                                                        (22
                                                        )
                                                        
                                                        
                                                        (419
                                                        )Interest
      income
                                                        
                                                        
                                                        24,062
                                                        
                                                        
                                                        
                                                        28,352
                                                        
                                                        
                                                        
                                                        63,588
                                                        
                                                        
                                                        
                                                        42,477Income
      before provision for income taxes
                                                        
                                                        
                                                        200,476
                                                        
                                                        
                                                        
                                                        211,821
                                                        
                                                        
                                                        
                                                        563,098
                                                        
                                                        
                                                        
                                                        242,485Income
      taxes
                                                        
                                                        
                                                        110,382
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        179,878
                                                        
                                                        
                                                        
                                                        -Net
      income
                                                        
                                                        
                                                        90,094
                                                        
                                                        
                                                        
                                                        211,821
                                                        
                                                        
                                                        
                                                        383,220
                                                        
                                                        
                                                        
                                                        242,485Other
      comprehensive (loss) income
                                                        
                                                        
                                                        11,343
                                                        
                                                        
                                                        
                                                        109,511
                                                        
                                                        
                                                        
                                                        (17,717
                                                        )
                                                        
                                                        
                                                        294,028Total
      comprehensive income
                                                        
                                                        $
                                                        101,437
                                                        
                                                        
                                                        $
                                                        321,332
                                                        
                                                        
                                                        $
                                                        365,503
                                                        
                                                        
                                                        
                                                        536,513Basic
      and diluted net income per share
                                                        
                                                        $
                                                        0.02
                                                        
                                                        
                                                        $
                                                        0.05
                                                        
                                                        
                                                        $
                                                        0.07
                                                        
                                                        
                                                        
                                                        0.06Basic
      and diluted weighted average number of shares outstanding
                                                        
                                                        
                                                        5,438,232
                                                        
                                                        
                                                        
                                                        4,238,232
                                                        
                                                        
                                                        
                                                        5,438,232
                                                        
                                                        
                                                        
                                                        4,238,232





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




5





Pansoft
Company Limited


Unaudited
Condensed Consolidated Statements of Shareholders' Equity





Common
      Shares
                      
                      
                      Additional
                      
                      
                      Retained
                      
                      
                      Statutory
                      
                      
                      Accumulated OtherNumber
                      
                      
                      Amount
                      
                      
                      Paid
      In Capital
                      
                      
                      Earnings
                      
                      
                      Reserves
                      
                      
                      Comprehensive
      Income
                      
                      
                      TotalBalance
      at December 31, 2008 (Audited)
                      
                      
                      5,438,232
                      
                      
                      
                      32,080
                      
                      
                      
                      8,222,054
                      
                      
                      
                      5,711,114
                      
                      
                      
                      363,063
                      
                      
                      
                      644,622
                      
                      
                      
                      14,972,933Foreign
      currency translation adjustment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (29,060
                      )
                      
                      
                      (29,060
                      )Net
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      293,126
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      293,126Stock
      based compensation
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      171,921
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      171,921Balance
      at
                        March
      31, 2009 (Unaudited)
                      
                      
                      5,438,232
                      
                      
                      $
                      32,080
                      
                      
                      $
                      8,393,975
                      
                      
                      $
                      6,004,240
                      
                      
                      $
                      363,063
                      
                      
                      $
                      615,562
                      
                      
                      $
                      15,408,920Foreign
      currency translation adjustment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      11,343
                      
                      
                      
                      11,343Net
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      90,094
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      90,094Stock
      based compensation
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      170,053
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      170,053Balance
      at
                        June
      30, 2009 (Unaudited)
                      
                      
                      5,438,232
                      
                      
                      $
                      32,080
                      
                      
                      $
                      8,564,028
                      
                      
                      $
                      6,094,334
                      
                      
                      $
                      363,063
                      
                      
                      $
                      626,905
                      
                      
                      $
                      15,680,410





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





6




Pansoft
Company Limited


Unaudited
Condensed Consolidated Statements of Cash Flows





For
      the six months ended June 30,2009
                                  
                                  
                                  2008Cash
      flows from operating activitiesNet
      income
                                  
                                  $
                                  383,220
                                  
                                  
                                  $
                                  242,485Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Deferred
      income taxes
                                  
                                  
                                  167,493
                                  
                                  
                                  
                                  -Amortization
      of government grants
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (115,673
                                  )Amortization
      and depreciation
                                  
                                  
                                  127,390
                                  
                                  
                                  
                                  140,245Stock-based
      compensation
                                  
                                  
                                  341,974
                                  
                                  
                                  
                                  -Gain
      on disposition of property and equipment
                                  
                                  
                                  (732
                                  )
                                  
                                  
                                  (190
                                  )Changes
      in operating assets and liabilities:Accounts
      receivable
                                  
                                  
                                  222,457
                                  
                                  
                                  
                                  (86,124
                                  )Unbilled
      revenues
                                  
                                  
                                  (876,055
                                  )
                                  
                                  
                                  -Prepayments,
      deposits and other receivables
                                  
                                  
                                  (95,454
                                  )
                                  
                                  
                                  (77,079
                                  )Inventories
                                  
                                  
                                  (77,685
                                  )
                                  
                                  
                                  -Work
      in progress
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (49,132
                                  )Accounts
      payable and accrued liabilities
                                  
                                  
                                  (727,852
                                  )
                                  
                                  
                                  (248,996
                                  )Government
      grants received, net
                                  
                                  
                                  -
                                  
                                  
                                  
                                  79,458Deferred revenues
                                  
                                  
                                  45,750
                                  
                                  
                                  
                                  4,174Income
      tax payable
                                  
                                  
                                  (190,575
                                  )
                                  
                                  
                                  -Cash
      used in operating activities
                                  
                                  
                                  (680,069
                                  )
                                  
                                  
                                  (110,832
                                  )Cash
      flows from investing activitiesPurchase
      of property and equipment
                                  
                                  
                                  (160,692
                                  )
                                  
                                  
                                  (531,058
                                  )Proceeds
      from disposition of property and equipment
                                  
                                  
                                  732
                                  
                                  
                                  
                                  17,428Cash
      used in investing activities
                                  
                                  
                                  (159,960
                                  )
                                  
                                  
                                  (513,630
                                  )Effect
      of exchange rate changes on cash and cash equivalents
                                  
                                  
                                  (14,930
                                  )
                                  
                                  
                                  193,157Decrease in cash and cash
      equivalents
                                  
                                  
                                  (854,959
                                  )
                                  
                                  
                                  (431,305
                                  )Cash
      and cash equivalents, beginning of period
                                  
                                  
                                  12,185,950
                                  
                                  
                                  
                                  3,365,613Cash and cash equivalents, end
      of period
                                  
                                  $
                                  11,330,991
                                  
                                  
                                  $
                                  2,934,308Supplemental cash flow
      informationInterest
      received
                                  
                                  $
                                  63,588
                                  
                                  
                                  $
                                  42,477Interest
      paid
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  419Income
      tax paid
                                  
                                  $
                                  10,789
                                  
                                  
                                  $
                                  -




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







7





1.       
Nature of Operations and Basis of Presentation





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




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




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





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





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





2.Significant Accounting
Policies




Basis of consolidation




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




Cash
and cash equivalents





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




Accounts
receivable





Accounts
receivable are stated at original invoice amount less allowance made for
doubtful receivables based on a review of all outstanding amounts at the period
end.  An allowance for doubtful receivables is made when there is
objective evidence that the Company will not be able to collect all amounts due
according to the original terms of the receivables.  Bad debts are
written off when identified. No bad debt expense was recorded for 3 months ended
and 6 months ended June 30, 2009 and 2008, respectively.





Unbilled
revenue




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




Inventories




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




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





8


Work in progress





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




Software
development cost capitalization





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





Property and equipment




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




Computer
      equipment
              -   5   years
      straight lineVehicles
              -   5   years
      straight lineOffice
      furniture
              -   5   years
      straight lineLeasehold
      improvement
              -   5   years
      straight lineComputer
      software
              -   5   years
      straight line
  Maintenance
and repairs expenditures, which do not improve or extend an assets' productive
life, are expensed as incurred.




Research and software development
costs




Research
costs are charged to expense as incurred.  Software development costs
incurred prior to the establishment of technological feasibility are
expensed.  Software development costs incurred between the
establishment of technological feasibility and product release are capitalized,
if material, and amortized over the estimated economic life of the product,
which is generally three years. Research and development costs expensed for the
three months ended June 30, 2009 amounted to $18,297 (2008 - $17,965) and for
the six months ended June 30, 2009 amounted to $36,587 (2008 - $35,426).The
research and software development costs are included in cost of sales. These
amounts are the amortization expense associated with capitalized software
development cost. (Note 5)




Impairment of long-lived assets




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




Government grants




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




9





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 year. The Company's
effective tax rate differs from the statutory rate primarily due to
non-deductible expenses, temporary differences, and preferential tax
treatment.




Value added taxes




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




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




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




From time
to time the Company enters into general IT service arrangements with their
customers where the Company is obligated to perform professional services, such
as unspecific upgrades and technical support. This revenue is recognized based
on the actual service hours and the hourly rate agreed by clients in advance.
Occasionally, such services were rendered over  a specified period of
time. In this case 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, these 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.




10




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 transaction 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:




June
      30, 2009
                      
                      
                      December
      31, 2008
                      
                      
                      June
      30, 2008Period
      end RMB U.S. Dollar exchange rate
                      
                      
                      6.8307
                      
                      
                      
                      6.8225
                      
                      
                      
                      6.8591Average
      period RMB U.S. Dollar exchange rate
                      
                      
                      6.8331
                      
                      
                      
                      6.9477
                      
                      
                      
                      6.9572
  The
foreign currency translation adjustment of $11,343 (2008 - $109,511) has been
reported as other comprehensive income in the consolidated statements of income
for three months ended June 30, 2009. For the six months ended June 30, 2009,
the foreign currency translation adjustment of $17,717 (2008 - $294,028) has
been reported as other comprehensive income in the consolidated statement of
income.




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




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




Use of estimates




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




Stock-based
compensation




The
Company records stock-based compensation in accordance with SFAS 123(R),
"Share-Based Payments," which requires the measurement and recognition of
compensation expense based on estimated fair values for all share-based awards
made to employees and directors, including stock options.




Comprehensive income




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




Earnings per share





In
accordance with SFAS No. 128 "Computation of Earnings per Share," 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.





11




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 or liabilities.




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 follows:




Fair Value Measurements Using
            
            Assets/LiabilitiesLevel
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            At
      Fair ValueCash equivalents
            
            $
            8,256,186
            
            
            
            -
            
            
            
            -
            
            
            $
            8,256,186





3.        Recently
Changes in Accounting Standards




In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), “Business Combinations” (“FAS141R”).FAS141R replaces Statement of
Financial Accounting Standards No. 141, “Business Combinations”
(“FAS 141”), although it retains the fundamental requirement in
FAS 141 that the acquisition method of accounting be used for all business
combinations.FAS141R
establishes principles and requirements for how the acquirer in a business
combination (a) recognizes and measures the assets acquired, liabilities
assumed and any noncontrolling interest in the acquiree, (b) recognizes and
measures the goodwill acquired in a business combination or a gain from a
bargain purchase and (c) determines what information to disclose regarding
the business combination.FAS141R applies prospectively to business combinations for which
the acquisition date is on or after the beginning of the Company’s 2009 fiscal
year. Adoption of FAS 141R did not have a material impact on the Company’s
financial position, results of operations or cash flows.




In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, “Noncontrolling Interests in Consolidated Financial Statements”
(“FAS 160”). FAS 160 amends ARB 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary, commonly
referred to as minority interest. Among other matters, FAS 160 requires
(a) the noncontrolling interest be reported within equity in the balance
sheet and (b) the amount of consolidated net income attributable to the
parent and to the noncontrolling interest to be clearly presented in the
statement of income. Further, paragraph 31 of ARB 51, as amended by FAS 160,
requires that the noncontrolling interest continue to be attributed its share of
losses even if that attribution results in a deficit noncontrolling interest
balance.  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
February 2008, the FASB issued FASB Staff Position No. FAS 157-2 (FSP 157-2),
Effective Date of FASB Statement No. 157 . FSP 157-2 deferred the effective date
of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the financial statements
on a recurring basis, until fiscal years beginning after November 15, 2008. As a
result of FSP 157-2, the Company adopted SFAS 157 for the Company’s nonfinancial
assets and nonfinancial liabilities on January 1, 2009.  The adoption
of SFAS 157 for nonfinancial assets and nonfinancial liabilities did not have a
material impact on the Company’s financial position, results of operations or
cash flows.







12





In March
2008, the FASB issued FAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities,” which requires enhanced disclosures about an entity’s
derivative and hedging activities. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. The Company adopted FAS No. 161 on January 1, 2009. Since FAS 161 only
provides for additional disclosure requirements, there was no impact on the
Company’s results of operations and financial position.





In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, The
Hierarchy of Generally Accepted Accounting Principles (“FAS 162"). This Standard
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 generally
accepted accounting principles. FAS 162 directs the hierarchy to the entity,
rather than the independent auditors, as the entity is responsible for selecting
accounting principles for financial statements that are presented in conformity
with generally accepted accounting principles. The Standard is effective 60 days
following SEC approval of the Public Company Accounting Oversight Board
amendments to remove the hierarchy of generally accepted accounting principles
from the auditing standards. FAS 162 did not have an impact on the Company’s
financial statements.





In
May 2008, the FASB issued SFAS No. 163, Accounting for Financial
Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60
(SFAS 163). This statement clarifies accounting for financial guarantee
insurance contracts by insurance enterprises under FASB Statement No. 60,
Accounting and Reporting by Insurance Enterprises. SFAS 163 is effective for
fiscal years, and interim periods within those years, beginning after
December 15, 2008. The Company adopted FAS No. 163 on January 1, 2009.
Because the Company does not issue financial guarantee insurance contracts, the
adoption of this standard did not have an effect on the Company’s financial
position or results of operations.





In April
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the
Useful Life of Intangible Assets, which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No.
142,  Goodwill and Other Intangible Assets.  This Staff
Position is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. Early
adoption is prohibited. Application of this FSP is not currently applicable to
the Company.





In May
2008, the FASB issued FASB Staff Position (FSP) APB 14-1, Accounting for
Convertible Debt That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement)  ("FSP 14-1"). FSP 14-1 was effective for financial
statements issued for fiscal years beginning after December 15, 2008, i.e. the
Company’s fiscal 2009. The FSP includes guidance that convertible debt
instruments that may be settled in cash upon conversion should be separated
between the liability and equity components, with each component being accounted
for in a manner that will reflect the entity's nonconvertible debt borrowing
rate when interest costs are recognized in subsequent periods. However, because
the Company does not have convertible debt, the adoption of this standard did
not have an effect on the Company’s financial position or results of
operations.




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.





In
September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, Disclosures About
Credit Derivatives and Certain Guarantees. FSP FAS 133-1 and FIN 45-4 is
intended to improve disclosures about credit derivatives by requiring more
information about the potential adverse effects of changes in credit risk on the
financial position, financial performance and cash flows of the sellers of
credit derivatives. FSP FAS 133-1 and FIN 45-4 is effective for fiscal years
beginning after November 15, 2008.  The Company do not expect that the
adoption of FSP FAS 133-1 and FIN 45-4 will have a material impact on the
Company’s financial position, results of operations or cash flows.





In
September 2008, the FASB ratified EITF No. 08-5, Issuer’s Accounting for
Liabilities Measured at Fair Value With a Third-Party Credit Enhancement .. EITF
08-5 provides guidance for measuring liabilities issued with an attached
third-party credit enhancement (such as a guarantee). It clarifies that the
issuer of a liability with a third-party credit enhancement should not include
the effect of the credit enhancement in the fair value measurement of the
liability.  EITF 08-5 is effective for reporting periods beginning
after December 15, 2008, with early adoption allowed. The Company adopted EITF
08-5 in the fourth quarter of fiscal 2008.  Adoption of EITF 08-5 did
not have an impact on our financial position, results of operations or cash
flows.







13





In
October 2008, the FASB issued FSP FAS 157-3, Determining Fair Value of a
Financial Asset When the Market for That Asset Is Not Active. FSP FAS 157-3
provides guidance and illustrates key considerations for determining fair value
in markets that are not active. FSP FAS 157-3 is effective upon issuance and
must be applied to all periods for which financial statements have not been
issued. Adoption of FSP FAS 157-3 did not have an impact on the Company’s
financial position, results of operations or cash flows.





In
December 2008, the FASB issued FSP SFAS 140-4 and FIN 46(R)-8, Disclosures by
Public Entities (Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities . FSP 140-4 and FIN 46 (R)-8 amends SFAS 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities and FIN 46(R) Consolidation of Variable Interest Entities
(revised December 2003) — an interpretation of ARB No. 51 to require public
entities to provide additional disclosures about transfers of financial assets
and their involvement with variable interest entities. FSP 140-4 and FIN 46(R)-8
is effective for the first interim or annual reporting period ending after
December 15, 2008. Adoption of FSP 140-4 and FIN 46(R) did not have a material
impact on the Company’s financial position, results of operations or cash
flows.





In April
2009, the FASB issued FASB Staff Position (FSP) FAS 141(R)-1, Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies , which amends the accounting in SFAS 141(R) for assets and
liabilities arising from contingencies in a business combination. The FSP is
effective January 1, 2009, and requires pre-acquisition contingencies to be
recognized at fair value, if fair value can be reasonably determined during the
measurement period. If fair value cannot be reasonably determined, the FSP
requires measurement based on the recognition and measurement criteria of SFAS
5, Accounting for Contingencies.  Adoption of FSP FAS 141(R)-1 did not
have an impact on the Company’s financial position, results of operations or
cash flows.





In April
2009, the FASB issued FSP SFAS No. 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly.” Under FSP SFAS No.
157-4, transactions or quoted prices may not accurately reflect fair value if an
entity determines that there has been a significant decrease in the volume and
level of activity for the asset or the liability in relation to the normal
market activity for the asset or liability (or similar assets or liabilities).
In addition, if there is evidence that the transaction for the asset or
liability is not orderly, the entity shall place little, if any weight on that
transaction price as an indicator of fair value. FSP SFAS No. 157-4 is effective
for periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009 subject to the early adoption of FSP SFAS
No. 115-2 and SFAS No. 124-2. We did not elect to early adopt FSP SFAS No.
157-4; however, the Company do not expect the adoption to have a material impact
on our Consolidated Financial Statements.





In April
2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments” (“FSP SFAS No. 115-2”). FSP
SFAS No. 115-2 provides new guidance on the recognition and presentation of
other-than-temporary impairments (“OTTI”) for fixed maturity securities that are
classified as available-for-sale and held-to-maturity if management does not
intend to sell the impaired security and it is more likely than not it will not
be required to sell the impaired security before the recovery of its amortized
cost basis. If management concludes a security is other-than-temporarily
impaired, FSP SFAS No. 115-2 requires that the difference between the fair value
and the amortized cost of the security be presented as an OTTI realized loss
with an offset for any noncredit-related loss component of the OTTI realized
loss to be recognized in accumulated other comprehensive income. Accordingly,
only the credit loss component will have an impact on earnings for the reporting
period. FSP SFAS No. 115-2 also requires extensive new interim and annual
disclosures for both fixed maturity securities and equity securities to provide
further disaggregated information as well as information about how the credit
loss component of the OTTI realized loss was determined along with a roll
forward of such amount for each reporting period. FSP SFAS No. 115-2 is
effective for interim and annual periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009 subject to the early
adoption of FSP SFAS 157-4. We did not elect to early adopt FSP SFAS No. 115-2;
however, the Company do not expect the adoption to have a material impact on our
Consolidated Financial Statements.





In April
2009, the FASB issued FSP SFAS No. 107-1 and Accounting Principles Board (“APB”)
No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP
SFAS No. 107-1”). FSP SFAS No. 107-1 amends SFAS No. 107, “Disclosures about
Fair Value of Financial Instruments,” to require fair value of financial
instrument disclosure in interim financial statements and amends APB No. 28,
“Interim Financial Reporting,” to require those disclosures in all interim
financial statements. The provisions of FSP SFAS No. 107-1 are effective for
interim periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. We did not elect to early adopt FSP SFAS
No. 107-1; however, the Company do not expect the adoption to have a material
impact on our Consolidated Financial Statements.







14




4.        Property
and Equipment


Accumulated
              
              
              June
      30, 2009Cost
              
              
              Depreciation
              
              
              Net
      Book ValueComputer
      equipment
              
              $
              1,010,440
              
              
              $
              404,656
              
              
              $
              605,784Vehicles
              
              
              192,585
              
              
              
              141,348
              
              
              
              51,237Office
      furniture
              
              
              11,484
              
              
              
              8,423
              
              
              
              3,061Leasehold
      improvement
              
              
              35,570
              
              
              
              -
              
              
              
              35,570Software
              
              
              28,657
              
              
              
              4,471
              
              
              
              24,186Total
              
              $
              1,278,736
              
              
              $
              558,898
              
              
              $
              719,838
   Accumulated
              
              
              June
      30, 2009Cost
              
              
              Depreciation
              
              
              Net
      Book ValueComputer
      equipment
              
              $
              957,625
              
              
              $
              332,514
              
              
              $
              635,111Vehicles
              
              
              171,852
              
              
              
              159,640
              
              
              
              12,212Office
      furniture
              
              
              8,738
              
              
              
              8,395
              
              
              
              343Leasehold
      improvement
              
              
              -
              
              
              
              -
              
              
              
              -Software
              
              
              5,520
              
              
              
              2,478
              
              
              
              3,042Total
              
              $
              1,143,735
              
              
              $
              493,027
              
              
              $
              650,708  Total
depreciation expense for the three months ended June 30, 2009 was $40,778 (2008
- $61,108) with $29,621 (2008 - $41,648) included in cost of sales, $10,942
(2008 – 19,370) in general and administrative expenses, and $215 (2008 - $Nil)
in selling expenses.





Total
depreciation expense for the six months ended June 30, 2009 was $90,803 (2008 -
$104,817) with $72,927 (2008 - $81,794) included in cost of sales, $17,486 (2008
– 23,023) in general and administrative expenses, and $390 (2008 - $Nil) in
selling expenses.





5.        Software
Development Cost


June
      30, 2009
                
                December
      31, 2008Software
      development cost
                
                $
                219,597
                
                $
                219,861Less:
      accumulated amortization
                
                
                182,997
                
                
                146,574$
                36,600
                
                $
                73,287
 Amortization
expense for the three months ended June 30, 2009 was $18,297 (2008 - $17,965)
and for six months ended June 30, 2009 was $36,587  (2008 - $35,428).
The amortization expense was included in cost of sales.





6.       
Statutory Reserves




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





15


7.       
Income Taxes





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





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





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





The
benefit of the tax holiday for the six months ended June 30, 2009 and 2008 was
$113,135 and $Nil. The benefit of the tax holiday on earnings per share for the
six months ended June 30, 2009 and 2008 was $0.02 and $Nil.





A
reconciliation of consolidated corporate income taxes at the statutory rate of
25% (2008: 12.5%) and the Company's effective income tax expense for the six
months ended June 30, 2009 and 2008 are shown as follows:




For
      the six months ended
                                                June
      30,2009
                                              
                                              
                                              2008Income
      before provision for income taxes
                                              
                                              $
                                              563,098
                                              
                                              
                                              $
                                              242,485Income
      tax at statutory rate
                                              
                                              
                                              140,775
                                              
                                              
                                              
                                              30,311Stock-based
      compensation
                                              
                                              
                                              85,494
                                              
                                              
                                              
                                              -Foreign
      profit not recognized in PRC
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Underprovision
      of the income tax from prior year
                                              
                                              
                                              10,789
                                              
                                              
                                              
                                              -Temporary
      difference and other
                                              
                                              
                                              55,955
                                              
                                              
                                              
                                              (30,311)Effect
      of 50% tax reduction
                                              
                                              
                                              (113,135)
                                              
                                              
                                              
                                              -Income
      tax provision
                                              
                                              $
                                              179,878
                                              
                                              
                                              $
                                              -Current
      income taxes
                                              
                                              $
                                              12,385
                                              
                                              
                                              $
                                              -Deferred
      income taxes
                                              
                                              
                                              167,493
                                              
                                              
                                              
                                              -Total
      income tax provisions
                                              
                                              $
                                              179,878
                                              
                                              
                                              $
                                              -




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


June
      30, 2009Current
                                        
                                        
                                        Non-current
                                        
                                        
                                        TotalTiming
      difference on revenue recognition
                                        
                                        $
                                        (739,169
                                        )
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        (739,169
                                        )Write
      off of accounts receivable
                                        
                                        
                                        59,478
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        59,478Plant,
      equipment and capitalized software cost
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (38,384
                                        )
                                        
                                        
                                        (38,384
                                        )Other
      temporary differences
                                        
                                        
                                        1,355
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,355(678,336
                                        )
                                        
                                        
                                        (38,384
                                        )
                                        
                                        
                                        (716,720
                                        )Effect
      of 50% tax reduction
                                        
                                        
                                        339,168
                                        
                                        
                                        
                                        19,192
                                        
                                        
                                        
                                        358,360Net
      deferred income tax liabilities
                                        
                                        $
                                        (339,168
                                        )
                                        
                                        $
                                        (19,192
                                        )
                                        
                                        $
                                        (358,360
                                        )






December
      31, 2008Current
                
                
                Non-current
                
                
                TotalTiming
      difference on revenue recognition
                
                $
                (572,125
                )
                
                $
                -
                
                
                $
                (572,125
                )Write
      off of accounts receivable
                
                
                57,717
                
                
                
                -
                
                
                
                57,717Plant,
      equipment and capitalized software cost
                
                
                -
                
                
                
                (37,063
                )
                
                
                (37,063
                )Other
      temporary differences
                
                
                169,399
                
                
                
                -
                
                
                
                169,399(345,009
                )
                
                
                (37,063
                )
                
                
                (382,072
                )Effect
      of 50% tax reduction
                
                
                172,504
                
                
                
                18,532
                
                
                
                191,036Net
      deferred income tax liabilities
                
                $
                (172,505
                )
                
                $
                (18,531
                )
                
                $
                (191,036
                )


16




8.
Shareholders'
Equity


Common
stock
  On July
21, 2008, The Company's Board of Directors approved a 169.529280-for-1 stock
split of the Company's common stock, whereby each share held by holders of
record as of July 21, 2008 was subdivided into 169.529280 shares. The effects of
this common stock split have been retroactively applied to the accompanying
consolidated financial statement and notes thereto.
  On
September 8, 2008, the Company completed an initial public offering ("IPO") on
NASDAQ. Pursuant to the IPO, the Company issued 1,200,000 shares of common stock
for gross proceeds of $8,400,000 and issued 120,000 underwriter warrants. Each
warrant entitles the holder to purchase one common share for a price of $8.40
per share for a period of four years following the closing of the IPO. The unit
price for each Underwriter warrant is $ 0.001. The Company received proceeds of
$120 from the issuance of underwriter warrants which is included in additional
paid-in capital. The costs of the offering totaled to $876,987 and are included
in additional paid-in capital.
  Warrants
  The
following table shows the number of warrants with other information as of June
30, 2009:
  Outstanding
      Warrants
              Exercisable
      WarrantsWeighted
      Average Exercise Price
              Number
              Weighted
      Average Remaining Contractual Life
              Weighted
      Average Exercise Price
              Exercise
      Number$
      8.4
              120,000
              3.2
      years
              $
      8.4
              - Stock
options





The
Company has authorized the establishment of stock option plan effective on July
20, 2008 for its directors and employees (the "Plan"). The Plan 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.




In
September 2008, the Company granted 321,000 options to its directors, management
and key employees at an exercise price of $7.00, vesting at a rate of 20% per
year for five years. The fair value of these stock options was determined to be
$4.39 per stock option. In December 2008, the Company granted 46,000 options to
its directors, financial advisor and Interim CFO at an exercise price of $2.74.
The vesting rate is 33% per year for two years and 34% for one year for the
options granted to the directors and advisor and at the rate of 20% per year for
five years for the options granted to Interim CFO. The fair value of these stock
options was determined to be $1.39 and 1.72 per stock option,
respectively.







17




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




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





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


Grant
      Date
                September
      8, 2008
                December
      13, 2008
                December
      13, 2008Option
      Granted
                321,000
                31,000
                15,000Exercise
      Price
                $7.00
                $2.74
                $2.74Expected
      Life
                5
                3
                5Volatility
                75%
                75%
                75%Risk
      free rate
                2.98%
                1.05%
                1.55%Dividend
      yield
                0%
                0%
                0%Option
      value
                $4.39
                $1.39
                $1.72




A total
of $341,974 and $Nil was included in the stock option expense for the six months
ended June 30, 2009 and 2008, respectively. As of June 30, 2009 and December 31,
2008, there was approximately $1,132,094 and $1,276,028, respectively, of
unrecognized compensation costs related to the non-vested share-based
arrangements granted under the Company's stock option plan. Those costs are
expected to be recognized over a weighted-average period of approximately 4.11
years and 4.61 years as of June 30, 2009 and December 31, 2008,
respectively.








Outstanding Stock
      Options
            Exercisable
      OptionsWeighted
      Average Exercise Price
            Number
            Weighted
      Average Remaining Contractual Life
            Weighted
      Average Exercise Price
            Exercise
      Number$
      7.00
            321,000
            4.25
      years
            $
      7.00
            -$
      2.74
            46,000
            3.11
      years
            $
      2.74
            -$
      6.47
            367,000
            4.11
      years
            $
      6.47
            - No
movement for outstanding stock options for the six months ended June 30,
2009.





9.       
Commitments


The
Company was obligated under operating leases requiring minimum rentals as of
June 30, 2009 as follows:
  (Unaudited)Payable
      within:-
      Remainder of 2009
                
                
                
                $
                22,800-
      2010
                
                
                
                
                21,696-
      2011
                
                
                
                
                5,424Total
      minimum lease payments
                
                
                
                $
                49,920


18


10.     
Financial Instruments




Concentrations of credit
risk




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





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





Currency
risk




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




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




11.      Economic
Dependence




For three
months ended June 30, 2009, two customers individually comprised 23% and 18% of
revenue, compared with 12% and 16% respectively in 2008. The subsidiaries of the
Company’s three major customers accounted for 50% of revenue (2008 –
48%).





For six
months ended June 30, 2009, two customers individually comprised 36% and
23% of revenue, compared with 12% and 27% respectively in 2008. The subsidiaries
of the Company's three major customers accounted for 34% of revenue (2008 –
40%).




There
were three customers that individually comprise 74%, 14% and 12% of account
receivable as of June 30, 2009. Three customers individually made up 31%, 24%
and 15% of account receivable as of December 31, 2008.





12.     
Segmented Information




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




13.     
Subsequent event
  The
Company has evaluated subsequent events for the period from June 30, 2009, the
date of these financial statements through August 14, 2009, which represents the
date these financial statements are available to be issued. Pursuant to the
requirements of SFAS No. 165, there were no events or transactions occurring
during this subsequent event report period which require recognition or
disclosure in the financial statements.







19





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




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




Overview




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




Overview
of Business Operations in the Second Quarter and First Six Months of
2009




We
generate revenue through software systems development, integration and provision
of related support services. Our revenue during the fiscal quarter and half year
ended June 30, 2009 reflect the seasonality 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 the smaller in proportion of that for the whole
year in most cases, so does in this year, due to our clients’ budgeting and
planning schedule. Nevertheless, we continued to experience steady demand for
our services from and also to generate revenue through the provision of our
services to our oil industrial client base during the three and six months ended
June 30, 2009.





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




Operating
Results




The
condensed and consolidated financial statements presented in hereinbefore 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
and six months ended June 30, 2009 reflect the operating results of the Company,
in comparison with the financial data for the same period in 2008.





Summary of Gross
Margin





For The Three Months Ended June
      30
                                        
                                        
                                        For The Six Months Ended June
      302009
                                        
                                        
                                        2008
                                        
                                        
                                        Change
                                        
                                        
                                        %
                                        
                                        
                                        2009
                                        
                                        
                                        2008
                                        
                                        
                                        Change
                                        
                                        
                                        %(Unaudited)
                                        
                                        
                                        (Unaudited)
                                        
                                        
                                        US
      $
                                        
                                        
                                        
                                        
                                        
                                        (Unaudited)
                                        
                                        
                                        (Unaudited)
                                        
                                        
                                        US
      $Sales
                                        
                                        $
                                        1,517,820
                                        
                                        
                                        $
                                        819,258
                                        
                                        
                                        $
                                        698,562
                                        
                                        
                                        
                                        85
                                        %
                                        
                                        $
                                        2,939,906
                                        
                                        
                                        $
                                        1,377,264
                                        
                                        
                                        $
                                        1,562,642
                                        
                                        
                                        
                                        113
                                        %Cost
      of Sales
                                        
                                        $
                                        946,876
                                        
                                        
                                        $
                                        536,659
                                        
                                        
                                        $
                                        410,217
                                        
                                        
                                        
                                        76
                                        %
                                        
                                        $
                                        1,714,918
                                        
                                        
                                        $
                                        1,030,417
                                        
                                        
                                        $
                                        684,501
                                        
                                        
                                        
                                        66
                                        %notes
      3, 4 and 5)Gross
      Profit
                                        
                                        $
                                        570,944
                                        
                                        
                                        $
                                        282,599
                                        
                                        
                                        $
                                        288,345
                                        
                                        
                                        
                                        102
                                        %
                                        
                                        $
                                        1,224,988
                                        
                                        
                                        $
                                        346,847
                                        
                                        
                                        $
                                        878,141
                                        
                                        
                                        
                                        253
                                        %GM
      Ratio
                                        
                                        
                                        38
                                        %
                                        
                                        
                                        34
                                        %
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        42
                                        %
                                        
                                        
                                        25
                                        %




20
  Revenue





During
the second quarter of 2009, large software system integration and development
projects comprised a higher proportion of total revenue. The total value of our
revenue was $1,517,820, reflecting a 85% increase from $819,258 in second
quarter of 2008. The large increase in revenue in this period reflected the
projects and business from the Company’s long term clients is in a steady
growing pace. During the first six months of 2009, revenue in total value was
$2,939,906, reflecting a 113% increase from $1,377,264 in the first six months
of 2008. The significant increase in our sales was due to a large sales contract
in the first quarter of 2009 for the equipment in association with the
system implementation signed with our major client and new business contract
signed by our new Hong Kong branch, in addition to the natural growth with our
running projects as well as natural extension of the large system projects
completed in the past. Although high seasonality of our revenue pattern remains,
the revenue increase in the first half year of 2009 indicates the pattern is
improving.




Cost of
sales




Our cost
of revenue increased by $410,217, or 76%, to $946,876, for the three months
ended June 30, 2009, from $536,659 for the same period in 2008. Our cost of
revenue for the six months ended June 30, 2009 was $1,714,918, reflecting a 66%
increase from $1,030,417 for the same period in 2008. The slower pace of
increase in cost as compared to the increase in revenue indicates that our cost
has been under control during our rapid business expansion, particularly in the
area of  employee compensation which comprises a major part of our
operating cost.




Gross
Profit


For the
three months ended June 30, 2009, our gross profit was $570,944, compared to
$282,599 for the same period in 2008, reflecting a 102% increase. For the three
months ended June 30, 2009 our gross profit as a percentage of revenue increased
to 38%, from 34% for the same period in 2008. This 4% increase in gross profit
margin was mainly due to tight cost control during the course of faster revenue
growth in second quarter of 2009. For the six months ended June 30, 2009, our
gross profit was $1,224,988, compared to $346,847 for the same period in 2008,
reflecting a 253% increase. For the six months ended June 30, 2009, our gross
profit as a percentage of revenue increased to 42%, from 25% for the same period
in 2008. This 17% increase in gross profit margin was mainly due to fast revenue
growth in the first two quarters of 2009.





Summary of Operating
Expenses




In
USD


For
      The Six Months Ended at June 30
                                    
                                    
                                    For
      The Six Months Ended at June 30Expenses
                                    
                                    2009
                                    
                                    
                                    2008
                                    
                                    
                                    Change
      $
                                    
                                    
                                    %
                                    
                                    
                                    2009
                                    
                                    
                                    2008
                                    
                                    
                                    Change
      $
                                    
                                    
                                    %(Unaudited)
                                    
                                    
                                    (Unaudited)
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (Unaudited)
                                    
                                    
                                    (Unaudited)General
      and administrative expenses
                                    
                                    
                                    89,205
                                    
                                    
                                    
                                    66,893
                                    
                                    
                                    
                                    22,312
                                    
                                    
                                    
                                    33
                                    %
                                    
                                    
                                    249,242
                                    
                                    
                                    
                                    80,262
                                    
                                    
                                    
                                    168,980
                                    
                                    
                                    
                                    211
                                    %Selling
      expenses
                                    
                                    
                                    59,697
                                    
                                    
                                    
                                    3,467
                                    
                                    
                                    
                                    56,230
                                    
                                    
                                    
                                    1622
                                    %
                                    
                                    
                                    121,794
                                    
                                    
                                    
                                    6,5322
                                    
                                    
                                    
                                    115,262
                                    
                                    
                                    
                                    1765
                                    %Professional
      fees
                                    
                                    
                                    86,826
                                    
                                    
                                    
                                    28,565
                                    
                                    
                                    
                                    58,261
                                    
                                    
                                    
                                    204
                                    %
                                    
                                    
                                    170,387
                                    
                                    
                                    
                                    61,537
                                    
                                    
                                    
                                    108,850
                                    
                                    
                                    
                                    177
                                    %Stock
      based compensation
                                    
                                    
                                    170,053
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    170,053
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    341,974
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    341,974Gain
      on disposition of property and equipment
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (732
                                    )
                                    
                                    
                                    (1,374
                                    )
                                    
                                    
                                    642
                                    
                                    
                                    
                                    -47
                                    %405,781
                                    
                                    
                                    
                                    98,925
                                    
                                    
                                    
                                    306,856
                                    
                                    
                                    
                                    310
                                    %
                                    
                                    
                                    882,665
                                    
                                    
                                    
                                    146,957
                                    
                                    
                                    
                                    735,708
                                    
                                    
                                    
                                    501
                                    %




Operating
Expenses




Operating
expenses consist primarily of general and administrative expenses, selling
expenses, professional fees and stock option expense and other expenses incurred
in connection with general operations. Administrative expenses consist primarily
of compensation and benefits to our general management, finance and
administrative staff. Professional fee covers expenses for legal counsel and
other advisor fees, audit fees and service charges associated with corporate
publicity and investor relations. For the three months ended June 30, 2009, our
operating expenses increased to $405,781 from $98,925 for the three month period
ended at June 30, 2008, or a 310% increase. For the three months ended June 30,
2009, our general and administrative expenses increased to $89,205, from $66,893
for the three months ended June 30, 2008, or a 33% increase. The mild increase
in administrative expenses was mainly attributable to the increases in our
administrative business trips and activities. The increase in selling expenses
(by 1622%, from the period to period) was [primarily?] due to the overhead
allocation to the newly established sales and marketing department. It also
included a large increase in the expenses for professional fee for the
services relating to our NASDAQ listing and publicity in the U.S., which
accounted for 21% of the total operating expenses. In addition, the non-cash
expense of stock options issued to our employees is the largest proportion in
this category and accounted for 42% of our total operating expenses, which
contributed significantly to the total increase of our expenses during this
period as compared to 2008 as we did not incur any such expenses during the same
period in 2008.





For the
six months ended June 30, 2009, our administrative expenses increased to $ 249,242, from $80,262 for the six months ended
June 30, 2008, or a 211% increase, from a period to a period due to the bonus
payment to the employees for their performance in 2008. Our selling expense
increased significantly for the six months ended June 30, 2009 as compared to
the same period in 2008 for the same reason stated above. Additionally, the
professional fee increased in this period as compared to 2008 for the same
reason stated above. Our stock option cost allocated was a new expense item as
compared to the same period in 2008.





Summary of Other Income and
Expenses




For
      Three Months Ended at June 30
                                
                                
                                For
      Six Months Ended at June 302009
                                
                                
                                2008
                                
                                
                                Change
      $
                                
                                
                                %
                                
                                
                                2009
                                
                                
                                2008
                                
                                
                                Change
      $
                                
                                
                                %(Unaudited)
                                
                                
                                (Unaudited)
                                
                                
                                
                                
                                
                                
                                
                                
                                (Unaudited)
                                
                                
                                (Unaudited)Income
      from operations
                                
                                
                                165,163
                                
                                
                                
                                183,674
                                
                                
                                
                                (18,511
                                )
                                
                                
                                -10
                                %
                                
                                
                                342,323
                                
                                
                                
                                199,890
                                
                                
                                
                                142,433
                                
                                
                                
                                71
                                %-Other
      income
                                
                                
                                (3,772
                                )
                                
                                
                                -
                                
                                
                                
                                (3,772
                                )
                                
                                
                                
                                
                                
                                
                                (3,772
                                )
                                
                                
                                537
                                
                                
                                
                                (3,909
                                )
                                
                                
                                -728
                                %Government
      grant
                                
                                
                                14,656
                                
                                
                                
                                
                                
                                
                                
                                14,656
                                
                                
                                
                                
                                
                                
                                
                                160,981
                                
                                
                                
                                -
                                
                                
                                
                                160,981Finance
      cost
                                
                                
                                367
                                
                                
                                
                                (205
                                )
                                
                                
                                572
                                
                                
                                
                                -279
                                %
                                
                                
                                (22
                                )
                                
                                
                                (419
                                )
                                
                                
                                397
                                
                                
                                
                                -95
                                %Interest
      income
                                
                                
                                24,062
                                
                                
                                
                                28,352
                                
                                
                                
                                (4,290
                                )
                                
                                
                                -15
                                %
                                
                                
                                63,588
                                
                                
                                
                                42,477
                                
                                
                                
                                21,111
                                
                                
                                
                                50
                                %Income
      before provision from income taxes
                                
                                
                                200,476
                                
                                
                                
                                211,821
                                
                                
                                
                                
                                
                                
                                
                                -5
                                %
                                
                                
                                563,098
                                
                                
                                
                                242,485
                                
                                
                                
                                320,613
                                
                                
                                
                                132
                                %-
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                -Provision
      for current income taxes
                                
                                
                                7,188
                                
                                
                                
                                -
                                
                                
                                
                                7,188
                                
                                
                                
                                
                                
                                
                                
                                12,385
                                
                                
                                
                                -
                                
                                
                                
                                12,385Provision
      for deferred income taxes
                                
                                
                                103,194
                                
                                
                                
                                
                                
                                
                                
                                103,194
                                
                                
                                
                                
                                
                                
                                
                                167,493
                                
                                
                                
                                -
                                
                                
                                
                                167,493-Net
      income
                                
                                
                                90,094
                                
                                
                                
                                211,821
                                
                                
                                
                                (121,727
                                )
                                
                                
                                -57
                                %
                                
                                
                                383,220
                                
                                
                                
                                242,485
                                
                                
                                
                                140,735
                                
                                
                                
                                58
                                %-Other
      comprehensive (loss) income
                                
                                
                                11,343
                                
                                
                                
                                109,511
                                
                                
                                
                                (98,168
                                )
                                
                                
                                -90
                                %
                                
                                
                                (17,717
                                )
                                
                                
                                294,028
                                
                                
                                
                                (311,745
                                )
                                
                                
                                -106
                                %-Comprehensive
      income
                                
                                
                                101,437
                                
                                
                                
                                321,332
                                
                                
                                
                                (219,895
                                )
                                
                                
                                -68
                                %
                                
                                
                                365,503
                                
                                
                                
                                536,513
                                
                                
                                
                                (171,010
                                )
                                
                                
                                -32
                                %





21




Income
from Operations




Income
from operations was $165,163, for the three months ended June 30, 2009, a 10%
decrease from $183,674 for the same period in 2008 because of a large increase
in stock option cost amortized and professional fees paid in the second quarter
of 2009. For the six months ended June 30, 2009, income from operations was
$342,323, or a 71% rise
from $199,890 for the same period in 2008 because of high revenue growth in
first six months of 2009.





Income Before Provision of
Income Tax





As a
result of the factors described above, income before tax provision was $200,476
for the three months ended June 30, 2009, decreased slightly, by $11,345, or 5%
from $211,821 for the same period in 2008.  For the six months ended
June 30, 2009, income before tax provision was $563,098, increased
significantly, by $320,613, or 132% from $242,485 for the same period in 2008,
mainly due to one time government grant to award our IPO success and the
increase in income from operations.




Income Tax
Expense




Pansoft
Jinan is a Foreign Investment Enterprise or FIE engaged in the advanced
technology industry which entitles it to a two-year exemption from income tax
before 2008 and then started to pay income tax at the rate of 12.5%, 50% cut
from the regular income tax rate, due to its FIE tax deduction status granted by
PRC tax authorities.  Current income tax expense for the three months
ended June 30, 2009 was $7,188. The deferred income tax  provision for
the for the three months ended June 30, 2009 was $103,194 as a result of
temporary differences.. No tax provision was required in the same period in
2008. For the six months ended June 30, 2009, current income tax expense was
$12,385 and deferred income tax  for the future income expense was
$103,194....




Net Income and Comprehensive
Income




As a
result of the factors described above, net income was $90,094 for the three
months ended June 30, 2009, a decrease of $121,727, or 57%, from $211,821 for
the same period in 2008. Comprehensive income for the three months ended June
30, 2009 was $101,437, a decrease of 68% from $321,332 for the same period in
2008.  The decrease was due to a much smaller exchange gain of $11,343
that was included in other comprehensive income in this reporting period because
of the relatively flat exchange rate between that US dollar and Chinese RMB,..
In contrast, there was a gain of $109,511 in the same period in 2008. For the
six months ended June 30, 2009, net income of $383,220 increased by $140,735, or
58% from $242,485 for the same period in 2008. In the same period, comprehensive
income was $365,503, decreased by 32% from $536,513 for the same period in 2008
due to the unfavorable exchange rate move.




Liquidity
and Capital Resources





Cash Flows and Working
Capital




As of
June 30, 2009, we had cash and cash equivalents of $11,330,991.




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




Comparison of Six Months
Ended June 30, 2009 and 2008





Net cash
used by operating activities totaled $680,069 for the six months ended June 30,
2009, an increase of $569,237 compared to cash used in operations of $110,832
for the six months ended June 30, 2008.  This increase resulted
primarily from the following changes in operating assets and
liabilities:


·
              $222,457
      decrease in accounts receivable
 ·
              $876,055
      increase in unbilled revenues
 
 ·
              $95,454
      increase in prepayments, deposits and other
  receivables
 ·
              $77,685
      increase in inventories
 
 ·
              $727,852
      decrease in accounts payable and accrued
  liabilities
 ·
              $45,750  increase
      in deferred revenue







22





Account
receivable is the revenue recognized based on percentage completion of the
projects and has been billed to the client. The increase in accounts receivable
was due to the fact that while we experienced rapid revenue growth and more
contracts have been invoiced to the clients though the contract payments from
major customers have not picked up to the same level during the first six months
in 2009.





Unbilled
revenue represents accumulated unbilled amount of revenue recognized, based on
the Company's revenue recognition policy. The decrease in unbilled revenue was
due to the fact that large proportion of the revenue recognized has been
invoiced to our clients and indicated an improvement of our payment
collection.





The
decrease in prepayments, deposits and other receivables resulted from less
deposit or prepayment to kick off projects from our clients due to the
alternative contracting procedure.





The
decrease in inventories was resulted from the fact that the certain
hardware equipment purchased was sold to clients and  has been
expensed to our cost of sales.





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




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





Net cash
used in investing activities was $159,960 for the six months ended June 30,
2009, compared to net cash used in investing activities of $513,630 for the six
months ended June 30, 2008.  The cash used in investing activities for
the six months ended June 30, 2009 mainly occurred to acquire computer equipment
for software development projects.




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




The
Company’s working capital increased from $14,267,469as
of December 31, 2008 to $14,943,164 as of June 30, 2009.




Total
current assets at June 30, 2009 amounted to $15,687,217, a decrease of $32,167
compared to $15,719,384 at December 31, 2008. The slight decrease was mainly due
to decrease in the cash and equivalent account.




Current
liabilities amounted to $744,053 on June 30, 2009 decreased by $707,862, 49%
compared to $1,451,915 at December 31, 2008. This decrease is mainly attributed
to a decrease of in accounts payable and accrued liabilities in this period.
Accounts payable and accrued liabilities mainly consisted of payables for
management bonus, salary accruals and audit fees.  The Company paid
out most of fiscal 2008 outstanding account payable balance and employee bonus
accrual during first half year of 2009. In addition, the Company accrued
$340,765 for both current and deferred income taxes,.




The
current ratio decreased slightly from 21.64 at June 30, 2008 to 21.08 at June
30, 2009.  The Company’s management believes the current ratio indicates
strong operating liquidity and expansion investment funds available for Company
use.




Seasonality
of Our Sales





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




Inflation




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




Off-Balance
Sheet Arrangements




We did
not have any off-balance arrangements.




Markets
and Outlook




Looking
forward, the management believes that demand for its services will continue to
grow as the Company expands its  capacity.... As a result of the
Company's brand name and reputation in the ERP industry for delivering high
quality software services at competitive prices in China, the management
believes that it will continue to deliver solid revenue and earnings growth for
the remainder  of 2009.




23




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.




Market
risk




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




Item  4T.
Controls and Procedures




Disclosure
Controls and Procedures




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




Changes
in internal control over financial reporting




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






24






PART
II.                      OTHER
INFORMATION





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




We
received net proceeds of $8,392,920 from our IPO in September 2008.  As of
March 31, 2009, such proceeds were maintained in our cash account and invested
in low-risk certificate of bank deposits issued by banks in China. Given
the current world-wide financial crisis and economic recession, we have
taken a strong precautionary position in our capital spending and investment
decisions and therefore have not used our proceeds from the IPO.  When the
timing and the specific opportunity become feasible and available in the future,
we intend to use such proceeds to invest in new projects or acquire new
businesses, or otherwise use it for general corporate
purposes





Item
6.                      Exhibits




The
following exhibits are filed herewith:





Number
                    
                    Exhibit31.1
                    
                    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.






25





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 LIMITEDAugust
      14, 2009
            By:
            /s/
      Allen ZhangAllen
      ZhangInterim
      Chief Financial Officer(Principal
      Financial and Accounting Officer)




26