UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q





þ
              Quarterly Report Pursuant to
      Section 13 or 15(d) of the Securities Exchange Act of
      1934




For
the quarterly period ended March 31, 2010




Or





o
              Transition Report Pursuant to
      Section 13 or 15(d) of the Securities Exchange Act of
      1934




For
the transition period
from            to




Commission
File Number: 001-33771




CHINACAST
EDUCATION CORPORATION


(Exact
Name of Registrant as Specified in Its Charter)


Delaware
                (State
      or Other Jurisdiction of
                Incorporation
      or Organization)
              
              20-0178991
                (I.R.S.
      Employer Identification
Number)




Suite
08, 20/F, One International Financial Centre, 1 Harbour View
Street,
 Central,
Hong Kong





(Address
of Principal Executive Offices) (Zip Code)




(852) 3960
6506


(Registrant’s
Telephone Number, Including Area Code)




Former
name, former address and former fiscal year, if changed since last
report




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes 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). 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
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.:


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




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




There
were 46,043,218 shares of the Company’s common stock, par value $0.0001 per
share, outstanding as of May 7, 2010.







TABLE OF
CONTENTS




PagePART I — FINANCIAL
      INFORMATION
                    
                    3Item 1. Financial
      Statements
                    
                    3Item 2.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations
                    
                    26Item 3.
      Quantitative and Qualitative Disclosures About Market Risk
                    
                    32Item 4. Controls
      and Procedures
                    
                    33PART II — OTHER
      INFORMATION
                    
                    34Item 1. Legal
      Proceedings
                    
                    34Item 1A. Risk
      Factors
                    
                    34Item 2.
      Unregistered Sales of Equity Securities and Use of
Proceeds
                    
                    34Item 3. Defaults
      Upon Senior Securities
                    
                    34Item 4. (Removed
      and Reserved)
                    
                    34Item 5. Other
      Information
                    
                    34Item 6.
      Exhibits
                    
                    34SIGNATURES
                    
                    35EXHIBIT
      INDEX


2




PART I — FINANCIAL
INFORMATION


Item 1. Financial
Statements


CHINACAST
EDUCATION CORPORATION


CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)


(In
thousands, except share-related data)




As ofAs of March 31,
                        
                        
                        December 31,2010
                        
                        
                        2010
                        
                        
                        2009US$
                        
                        
                        RMB
                        
                        
                        RMB(Note 1)
                        
                        
                        
                        
                        
                        
                        (Note 1)AssetsCurrent
      assets:Cash
      and cash equivalents
                        
                        
                        51,769
                        
                        
                        
                        352,027
                        
                        
                        
                        327,628Term
      deposits
                        
                        
                        80,882
                        
                        
                        
                        550,000
                        
                        
                        
                        507,000Accounts
      receivable
                        
                        
                        7,722
                        
                        
                        
                        52,509
                        
                        
                        
                        53,828Inventory
                        
                        
                        213
                        
                        
                        
                        1,449
                        
                        
                        
                        1,386Prepaid
      expenses and other current assets
                        
                        
                        2,737
                        
                        
                        
                        18,611
                        
                        
                        
                        19,212Amounts
      due from related parties
                        
                        
                        505
                        
                        
                        
                        3,438
                        
                        
                        
                        6,388Deferred
      tax assets
                        
                        
                        77
                        
                        
                        
                        521
                        
                        
                        
                        1,010Current
      portion of prepaid lease payments for land use right
                        
                        
                        477
                        
                        
                        
                        3,246
                        
                        
                        
                        3,246Total
      current assets
                        
                        
                        144,382
                        
                        
                        
                        981,801
                        
                        
                        
                        919,698Non-current
      deposits
                        
                        
                        3,454
                        
                        
                        
                        23,489
                        
                        
                        
                        14,550Property
      and equipment, net
                        
                        
                        75,616
                        
                        
                        
                        514,190
                        
                        
                        
                        516,938Prepaid
      lease payments for land use rights - non-current
                        
                        
                        21,177
                        
                        
                        
                        144,002
                        
                        
                        
                        144,818Acquired
      intangible assets, net
                        
                        
                        9,216
                        
                        
                        
                        62,668
                        
                        
                        
                        71,286Long-term
      investments
                        
                        
                        452
                        
                        
                        
                        3,071
                        
                        
                        
                        3,101Non-current
      advances to related party
                        
                        
                        14,665
                        
                        
                        
                        99,724
                        
                        
                        
                        99,727Goodwill
                        
                        
                        74,084
                        
                        
                        
                        503,769
                        
                        
                        
                        503,771Total
      assets
                        
                        
                        343,046
                        
                        
                        
                        2,332,714
                        
                        
                        
                        2,273,889


3





As ofAs of March 31,
                                      
                                      
                                      December 31,2010
                                      
                                      
                                      2010
                                      
                                      
                                      2009US$
                                      
                                      
                                      RMB
                                      
                                      
                                      RMB(Note 1)
                                      
                                      
                                      
                                      
                                      
                                      
                                      (Note 1)Liabilities and
      equityCurrent
      liabilities:Accounts
      payable
                                      
                                      
                                      3,032
                                      
                                      
                                      
                                      20,621
                                      
                                      
                                      
                                      16,061Accrued
      expenses and other current liabilities
                                      
                                      
                                      28,985
                                      
                                      
                                      
                                      197,101
                                      
                                      
                                      
                                      215,631Deferred
      revenues
                                      
                                      
                                      14,597
                                      
                                      
                                      
                                      99,256
                                      
                                      
                                      
                                      156,645Income
      taxes payable
                                      
                                      
                                      11,032
                                      
                                      
                                      
                                      75,015
                                      
                                      
                                      
                                      68,731Current
      portion of long-term bank borrowings
                                      
                                      
                                      11,176
                                      
                                      
                                      
                                      76,000
                                      
                                      
                                      
                                      104,400Current
      portion of capital lease obligation
                                      
                                      
                                      200
                                      
                                      
                                      
                                      1,358
                                      
                                      
                                      
                                      1,323Other
      borrowings
                                      
                                      
                                      10,147
                                      
                                      
                                      
                                      69,000
                                      
                                      
                                      
                                      200Total
      current liabilities
                                      
                                      
                                      79,169
                                      
                                      
                                      
                                      538,351
                                      
                                      
                                      
                                      562,991Non-current
      liabilities:Long-term
      bank borrowings
                                      
                                      
                                      21,471
                                      
                                      
                                      
                                      146,000
                                      
                                      
                                      
                                      134,000Deferred
      tax liabilities – non-current
                                      
                                      
                                      4,348
                                      
                                      
                                      
                                      29,566
                                      
                                      
                                      
                                      30,923Unrecognized
      tax benefits – non-current
                                      
                                      
                                      9,778
                                      
                                      
                                      
                                      66,491
                                      
                                      
                                      
                                      62,457Total
      non-current liabilities
                                      
                                      
                                      35,597
                                      
                                      
                                      
                                      242,057
                                      
                                      
                                      
                                      227,380Total
      liabilities
                                      
                                      
                                      114,766
                                      
                                      
                                      
                                      780,408
                                      
                                      
                                      
                                      790,371Commitments
      and contingenciesEquity:Ordinary
      shares (US$0.0001 par value; 100,000,000 shares authorized; 46,043,218 and
      45,170,698 shares issued and outstanding in 2010 and 2009,
      respectively)
                                      
                                      
                                      5
                                      
                                      
                                      
                                      34
                                      
                                      
                                      
                                      33Additional
      paid-in capital
                                      
                                      
                                      195,245
                                      
                                      
                                      
                                      1,327,668
                                      
                                      
                                      
                                      1,290,651Statutory
      reserve
                                      
                                      
                                      5,756
                                      
                                      
                                      
                                      39,139
                                      
                                      
                                      
                                      39,139Accumulated
      other comprehensive loss
                                      
                                      
                                      (857
                                      )
                                      
                                      
                                      (5,827
                                      )
                                      
                                      
                                      (6,055
                                      )Retained
      earnings
                                      
                                      
                                      24,663
                                      
                                      
                                      
                                      167,705
                                      
                                      
                                      
                                      136,583Total
      ChinaCast Education Corporation shareholders’ equity
                                      
                                      
                                      224,812
                                      
                                      
                                      
                                      1,528,719
                                      
                                      
                                      
                                      1,460,351Noncontrolling
      interest
                                      
                                      
                                      3,468
                                      
                                      
                                      
                                      23,587
                                      
                                      
                                      
                                      23,167Total
      equity
                                      
                                      
                                      228,280
                                      
                                      
                                      
                                      1,552,306
                                      
                                      
                                      
                                      1,483,518Total
      liabilities and equity
                                      
                                      
                                      343,046
                                      
                                      
                                      
                                      2,332,714
                                      
                                      
                                      
                                      2,273,889




See notes
to unaudited condensed consolidated financial statements.


4




CHINACAST EDUCATION CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)


(In
thousands, except share-related data)


For the three months ended March 31,2010
                                                    
                                                    
                                                    2010
                                                    
                                                    
                                                    2009US$
                                                    
                                                    
                                                    RMB
                                                    
                                                    
                                                    RMB(Note 1)
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    (Note 1)Revenues:Service
                                                    
                                                    
                                                    15,930
                                                    
                                                    
                                                    
                                                    108,330
                                                    
                                                    
                                                    
                                                    73,641Equipment
                                                    
                                                    
                                                    5
                                                    
                                                    
                                                    
                                                    31
                                                    
                                                    
                                                    
                                                    2,87615,935
                                                    
                                                    
                                                    
                                                    108,361
                                                    
                                                    
                                                    
                                                    76,517Cost
      of revenues:Service
                                                    
                                                    
                                                    (7,091
                                                    )
                                                    
                                                    
                                                    (48,219
                                                    )
                                                    
                                                    
                                                    (27,367
                                                    )Equipment
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (2,838
                                                    )(7,091
                                                    )
                                                    
                                                    
                                                    (48,219
                                                    )
                                                    
                                                    
                                                    (30,205
                                                    )Gross
      profit
                                                    
                                                    
                                                    8,844
                                                    
                                                    
                                                    
                                                    60,142
                                                    
                                                    
                                                    
                                                    46,312Operating
      (expenses) income:Selling
      and marketing expenses (including share-based compensation of RMB410 and
      RMB840 for the three months ended March 31 for 2010 and 2009,
      respectively)
                                                    
                                                    
                                                    (118
                                                    )
                                                    
                                                    
                                                    (805
                                                    )
                                                    
                                                    
                                                    (1,748
                                                    )General
      and administrative expenses (including share-based compensation of
      RMB2,480 and RMB5,736 for the three months ended March 31 for 2010
      and 2009, respectively)
                                                    
                                                    
                                                    (2,592
                                                    )
                                                    
                                                    
                                                    (17,627
                                                    )
                                                    
                                                    
                                                    (17,628
                                                    )Foreign
      exchange gain (loss)
                                                    
                                                    
                                                    (45
                                                    )
                                                    
                                                    
                                                    (303
                                                    )
                                                    
                                                    
                                                    169Management
      service fee
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    967Other
      operating income
                                                    
                                                    
                                                    1
                                                    
                                                    
                                                    
                                                    7
                                                    
                                                    
                                                    
                                                    505Total
      operating expenses, net
                                                    
                                                    
                                                    (2,754
                                                    )
                                                    
                                                    
                                                    (18,728
                                                    )
                                                    
                                                    
                                                    (17,735
                                                    )




5




For the three months ended March 31,2010
                                              
                                              
                                              2010
                                              
                                              
                                              2009US$
                                              
                                              
                                              RMB
                                              
                                              
                                              RMB(Note 1)
                                              
                                              
                                              
                                              
                                              
                                              
                                              (Note 1)Income
      from operations
                                              
                                              
                                              6,090
                                              
                                              
                                              
                                              41,414
                                              
                                              
                                              
                                              28,577Interest
      income
                                              
                                              
                                              435
                                              
                                              
                                              
                                              2,954
                                              
                                              
                                              
                                              2,312Interest
      expense
                                              
                                              
                                              (437
                                              )
                                              
                                              
                                              (2,971
                                              )
                                              
                                              
                                              (1,453
                                              )Income
      before provision for income taxes and earnings in equity method
      investments
                                              
                                              
                                              6,088
                                              
                                              
                                              
                                              41,397
                                              
                                              
                                              
                                              29,436Provision
      for income taxes
                                              
                                              
                                              (1,443
                                              )
                                              
                                              
                                              (9,811
                                              )
                                              
                                              
                                              (6,325
                                              )Net
      income before earnings in equity investments
                                              
                                              
                                              4,645
                                              
                                              
                                              
                                              31,586
                                              
                                              
                                              
                                              23,111Loss in
      equity investments
                                              
                                              
                                              (4
                                              )
                                              
                                              
                                              (30
                                              )
                                              
                                              
                                              (266
                                              )Income
      from continuing operation, net of tax
                                              
                                              
                                              4,641
                                              
                                              
                                              
                                              31,556
                                              
                                              
                                              
                                              22,845Discontinued
      operationsLoss
      from discontinued operations, net of taxes of RMBnil for 2009 and
      2010:
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (604
                                              )Net
      income
                                              
                                              
                                              4,641
                                              
                                              
                                              
                                              31,556
                                              
                                              
                                              
                                              22,241Less:
      Net income attributable to noncontrolling interest
                                              
                                              
                                              (64
                                              )
                                              
                                              
                                              (434
                                              )
                                              
                                              
                                              (2,559
                                              )Net
      income attributable to ChinaCast Education Corporation
                                              
                                              
                                              4,577
                                              
                                              
                                              
                                              31,122
                                              
                                              
                                              
                                              19,682Net
      income
                                              
                                              4,641
                                              
                                              
                                              31,556
                                              
                                              
                                              22,241Foreign
      currency translation adjustments
                                              
                                              
                                              31
                                              
                                              
                                              
                                              214
                                              
                                              
                                              
                                              (802
                                              )Comprehensive
      income
                                              
                                              
                                              4,672
                                              
                                              
                                              
                                              31,770
                                              
                                              
                                              
                                              21,439Comprehensive
      income attributable to noncontrolling interest
                                              
                                              
                                              (62)
                                              
                                              
                                              
                                              (420
                                              )
                                              
                                              
                                              (2,553
                                              )Comprehensive
      income attributable to ChinaCast Education Corporation
                                              
                                              4,610
                                              
                                              
                                              31,350
                                              
                                              
                                              18,886Net
      income per shareNet
      income attributable to ChinaCast Education Corporation per
      share:Basic
                                              
                                              
                                              0.10
                                              
                                              
                                              
                                              0.68
                                              
                                              
                                              
                                              0.55Diluted
                                              
                                              
                                              0.10
                                              
                                              
                                              
                                              0.67
                                              
                                              
                                              
                                              0.55Weighted
      average shares used in computation:Basic
                                              
                                              
                                              45,968,134
                                              
                                              
                                              
                                              45,968,134
                                              
                                              
                                              
                                              35,648,251Diluted
                                              
                                              
                                              46,312,165
                                              
                                              
                                              
                                              46,312,165
                                              
                                              
                                              
                                              35,648,251


See notes
to unaudited condensed consolidated financial statements.


6




CHINACAST EDUCATION CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)


(In
thousands, except share-related data)




ChinaCast Education Corporation ShareholdersAccumulatedAdditional
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      otherOrdinary
                                                                                                                      
                                                                                                                      
                                                                                                                      paid-in
                                                                                                                      
                                                                                                                      
                                                                                                                      Statutory
                                                                                                                      
                                                                                                                      
                                                                                                                      Retained
                                                                                                                      
                                                                                                                      
                                                                                                                      comprehensive
                                                                                                                      
                                                                                                                      
                                                                                                                      Noncontrolling
                                                                                                                      
                                                                                                                      
                                                                                                                      TotalAmount
                                                                                                                      
                                                                                                                      
                                                                                                                      capital
                                                                                                                      
                                                                                                                      
                                                                                                                      Reserve
                                                                                                                      
                                                                                                                      
                                                                                                                      earnings
                                                                                                                      
                                                                                                                      
                                                                                                                      loss
                                                                                                                      
                                                                                                                      
                                                                                                                      interest
                                                                                                                      
                                                                                                                      
                                                                                                                      EquityShares
                                                                                                                      
                                                                                                                      
                                                                                                                      RMB
                                                                                                                      
                                                                                                                      
                                                                                                                      RMB
                                                                                                                      
                                                                                                                      
                                                                                                                      RMB
                                                                                                                      
                                                                                                                      
                                                                                                                      RMB
                                                                                                                      
                                                                                                                      
                                                                                                                      RMB
                                                                                                                      
                                                                                                                      
                                                                                                                      RMB
                                                                                                                      
                                                                                                                      
                                                                                                                      RMBBalance
      at January 1, 2010
                                                                                                                      
                                                                                                                      
                                                                                                                      45,170,698
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      33
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1,290,651
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      39,139
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      136,583
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (6,055
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      23,167
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1,483,518Issuance
      of shares of common stock
                                                                                                                      
                                                                                                                      
                                                                                                                      692,520
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      34,127
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      34,128Share-based
      compensation
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      2,890
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      2,890Issuance
      of vested shares
                                                                                                                      
                                                                                                                      
                                                                                                                      180,000
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —Net
      income
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      31,122
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      434
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      31,556Foreign
      currency translation adjustments
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      228
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (14
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      214Balance
      at March 31, 2010
                                                                                                                      
                                                                                                                      
                                                                                                                      46,043,218
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      34
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1,327,668
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      39,139
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      167,705
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (5,827
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      23,587
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1,552,306US$
                                                                                                                      5
                                                                                                                      
                                                                                                                      
                                                                                                                      US$
                                                                                                                      195,245
                                                                                                                      
                                                                                                                      
                                                                                                                      US$
                                                                                                                      5,756
                                                                                                                      
                                                                                                                      
                                                                                                                      US$
                                                                                                                      24,663
                                                                                                                      
                                                                                                                      
                                                                                                                      US$
                                                                                                                      (857
                                                                                                                      )
                                                                                                                      
                                                                                                                      US$
                                                                                                                      3,468
                                                                                                                      
                                                                                                                      
                                                                                                                      US$
                                                                                                                      228,280




See notes
to unaudited condensed consolidated financial
statements.


7


CHINACAST EDUCATION CORPORATION


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


(In
thousands)


For the three months ended March 31,2010
                
                
                2010
                
                
                2009US$
                
                
                RMB
                
                
                RMB(Note 1)
                
                
                
                
                
                
                (Note 1)Cash
      flows from operating activities:Net
      income
                
                
                4,641
                
                
                
                31,556
                
                
                
                22,241Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                
                
                1,610
                
                
                
                10,950
                
                
                
                6,016Amortization
      of acquired intangible assets
                
                
                1,267
                
                
                
                8,618
                
                
                
                4,091Amortization
      of land use rights
                
                
                120
                
                
                
                816
                
                
                
                650Share-based
      compensation
                
                
                425
                
                
                
                2,890
                
                
                
                6,576Loss
      on disposal of property, plant and equipment
                
                
                -
                
                
                
                1
                
                
                
                -Loss
      in equity investments
                
                
                4
                
                
                
                30
                
                
                
                266Changes
      in assets and liabilities:Accounts
      receivable
                
                
                191
                
                
                
                1,297
                
                
                
                (14,328
                )Inventory
                
                
                (9
                )
                
                
                (63
                )
                
                
                17Prepaid
      expenses and other current assets
                
                
                88
                
                
                
                601
                
                
                
                2,541Non-current
      deposits
                
                
                (874
                )
                
                
                (5,939
                )
                
                
                (295
                )Amounts
      due from related parties
                
                
                434
                
                
                
                2,950
                
                
                
                800Accounts
      payable
                
                
                671
                
                
                
                4,560
                
                
                
                2,215Accrued
      expenses and other current liabilities
                
                
                (458
                )
                
                
                (3,116
                )
                
                
                (2,178
                )Deferred
      revenues
                
                
                (8,440
                )
                
                
                (57,389
                )
                
                
                (33,118
                )Amount
      due to related party
                
                
                -
                
                
                
                -
                
                
                
                (289
                )Income
      taxes payable
                
                
                924
                
                
                
                6,284
                
                
                
                3,534Deferrred
      tax assets
                
                
                72
                
                
                
                489
                
                
                
                -Deferred
      tax liabilities
                
                
                (199
                )
                
                
                (1,357
                )
                
                
                (638
                )Unrecognized
      tax benefits
                
                
                594
                
                
                
                4,034
                
                
                
                1,943Net
      cash provided by operating activities
                
                
                1,061
                
                
                
                7,212
                
                
                
                44Cash
      flows from investing activities:Advance
      to related party
                
                
                -
                
                
                
                -
                
                
                
                (20,000
                )Repayment
      from advance to related party
                
                
                -
                
                
                
                3
                
                
                
                25,922Purchase
      of property and equipment
                
                
                (3,433
                )
                
                
                (23,345
                )
                
                
                (4,377
                )Term
      deposits
                
                
                (6,324
                )
                
                
                (43,000
                )
                
                
                (133,700
                )Deposits
      for investments
                
                
                (441
                )
                
                
                (3,000
                )
                
                
                -Net
      cash used in investing activities
                
                
                (10,198
                )
                
                
                (69,342
                )
                
                
                (132,155
                )




8





For the three months ended March 31,2010
                    
                    
                    2010
                    
                    
                    2009US$
                    
                    
                    RMB
                    
                    
                    RMB(Note 1)
                    
                    
                    
                    
                    
                    (Note 1)Cash
      flows from financing activities:Other
      borrowings raised
                    
                    
                    10,147
                    
                    
                    
                    69,000
                    
                    
                    
                    -Repayment
      of other borrowings
                    
                    
                    (29
                    )
                    
                    
                    (200
                    )
                    
                    
                    -Bank
      borrowings raised
                    
                    
                    6,176
                    
                    
                    
                    42,000
                    
                    
                    
                    -Bank
      borrowings repaid
                    
                    
                    (8,588
                    )
                    
                    
                    (58,400
                    )
                    
                    
                    -Proceeds
      from issuance of shares, net of issuance costs
                    
                    
                    5,019
                    
                    
                    
                    34,128
                    
                    
                    
                    -Net
      cash provided by financing activities
                    
                    
                    12,725
                    
                    
                    
                    86,528
                    
                    
                    
                    -Effect
      of foreign exchange rate changes
                    
                    
                    -
                    
                    
                    
                    1
                    
                    
                    
                    1Net
      increase(decrease) in cash and cash equivalents
                    
                    
                    3,588
                    
                    
                    
                    24,399
                    
                    
                    
                    (132,110
                    )Cash
      and cash equivalents at beginning of the period
                    
                    
                    48,181
                    
                    
                    
                    327,628
                    
                    
                    
                    220,131Cash
      and cash equivalents at end of the period
                    
                    
                    51,769
                    
                    
                    
                    352,027
                    
                    
                    
                    88,021




See notes
to unaudited condensed consolidated financial statements.


9




NOTES
TO CONDENSED


CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)


(In
thousands, except share-related data)





1.
            BASIS OF
      PREPARATION





The
accompanying unaudited condensed consolidated financial statements of ChinaCast
Education Corporation (“CEC”, formerly Great Wall Acquisition Corporation
(“Great Wall”)) have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”) regarding interim financial
reporting. Accordingly, they do not include all of the information and notes
required by accounting principles generally accepted in the United States of
America (“US GAAP”) for complete financial statements and should be read in
conjunction with the audited financial statements included in CEC’s Annual
Report on Form 10-K for the fiscal year ended December 31,
2009.





In the
opinion of the management of CEC, the accompanying unaudited condensed
consolidated financial statements are prepared on the same basis as the audited
financial statements and these unaudited condensed consolidated financial
statements reflect all adjustments, consisting only of normal recurring
adjustments that are, in the opinion of management, necessary for a fair
presentation of the results of the interim periods presented. The results of
operations for the interim periods presented are not necessarily indicative of
the operating results expected for any subsequent interim period or for CEC’s
fiscal year ending December 31, 2010.





The
accompanying unaudited condensed consolidated financial statements include the
accounts of CEC, its subsidiaries, and variable interest entities (collectively,
the “Company”). All significant intercompany balances and transactions have been
eliminated in consolidation.





Significant
Accounting Policies





The
accompanying unaudited condensed consolidated financial statements have been
using the same accounting policies used in the preparation of the audited
financial statements included in CEC’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2009,except for
the additional accounting policies adopted as stated in (1) of note
2.




Convenience
Translation





Amounts
in United States dollars (“US$”) are presented solely for the convenience of
readers and an exchange rate of RMB6.8 to US$1 was applied as of March 31, 2010.
Such translation should not be construed to be the amounts that would have been
reported under US GAAP.


10




The
Share Exchange Transaction





On
December 22, 2006, Great Wall consummated the voluntary conditional offer
(the “Offer”) made in Singapore to acquire all of the outstanding ordinary
shares of ChinaCast Communication Holdings Limited (“CCH”). Pursuant to the
terms of the Offer, CCH shareholders had the option to receive either shares of
CEC or a cash payment for each CCH share tendered. On January 18, 2007, the
closing date of the Offer, total shares acquired were 80.27%. Since Great Wall
was not an operating company and the shareholders of CCH control the combined
company after the above transaction consummated on December 22, 2006 (the
“Share Exchange Transaction”), the Share Exchange Transaction was accounted for
as a recapitalization in which CCH was the accounting acquirer.
The cash consideration paid as part of the Offer was accounted for as a capital
distribution. The remaining outstanding ordinary shares of CCH not acquired by
Great Wall were reported as minority interest.


During
the year ended December 31, 2007, CEC acquired additional shares by issuing
shares of CEC and cash amounted to RMB5,793 to certain original CCH shareholders
and, as of July 11, 2007, CEC increased its holdings to 100% of the
outstanding ordinary shares of CCH. The 19.73% of the additional shares acquired
were accounted for on the same basis as the Share Exchange
Transaction.





2.
            RECENTLY
      ISSUED ACCOUNTING
PRONOUNCEMENTS




(1)
              Newly
      Adopted Accounting Pronouncements
  In June
2009, the FASB issued an authoritative pronouncement that changes how a company
determines whether an entity should be consolidated when such entity is
insufficiently capitalized or is not controlled by the company through voting
(or similar rights). The determination of whether a company is required to
consolidate an entity is based on, among other things, the entity’s purpose and
design and the company’s ability to direct the activities of the entity that
most significantly impact the entity’s economic performance. The pronouncement
retains the scope of previously issued pronouncements but added entities
previously considered qualifying special purpose entities, since the concept of
these entities was eliminated by FASB. The pronouncement is effective as of the
beginning of an entity’s first fiscal year that begins after November 15,
2009. The adoption of this pronouncement did not have a significant impact on
its financial condition or results of operations.
  In
January 2010, the FASB issued authoritative guidance to improve disclosures
about fair value measurements. This guidance amends previous guidance on fair
value measurements to add new requirements for disclosures about transfers into
and out of Levels 1 and 2 and separate disclosures about purchases, sales,
issuances, and settlements relating to Level 3 measurement on a gross basis
rather than on a net basis as currently required. This guidance also clarifies
existing fair value disclosures about the level of disaggregation and about
inputs and valuation techniques used to measure fair value. This guidance is
effective for annual and interim periods beginning after December 15, 2009,
except for the requirement to provide the Level 3 activities of purchases,
sales, issuances, and settlements on a gross basis, which will be effective for
annual and interim periods beginning after December 15, 2010. Early
application is permitted and, in the period of initial adoption, entities are
not required to provide the amended disclosures for any previous periods
presented for comparative purposes. The adoption of this pronouncement did not
have a significant impact on its financial condition or results of
operations.
  (2)
              Recently
      Issued Accounting Pronouncements Not Yet
Adopted


In
October 2009, the FASB issued amended revenue recognition guidance for
arrangements with multiple deliverables. The new guidance eliminates the
residual method of revenue recognition and allows the use of management’s best
estimate of selling price for individual elements of an arrangement when vendor
specific objective evidence, vendor objective evidence or third-party evidence
is unavailable. Prospective application of this new guidance for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010, with earlier application permitted. Alternatively, an
entity can elect to adopt this guidance on a retrospective basis. The Company
does not expect the adoption of this pronouncement to have a significant impact
on its financial condition or results of operations.





In
October 2009, the FASB issued authoritative guidance which amends the scope
of existing software revenue recognition accounting. Tangible products
containing software components and non-software components that function
together to deliver the product’s essential functionality would be scoped out of
the accounting guidance on software and accounted for based on other appropriate
revenue recognition guidance.  Prospective application of this new guidance
for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with earlier application permitted.
Alternatively, an entity can elect to adopt this new guidance on a retrospective
basis. The Company does not expect the adoption of this pronouncement to have a
significant impact on its financial condition or results of
operations.






11


On March
5, 2010, the FASB issued authoritative guidance to clarify the type of embedded
credit derivative that is exempt from embedded derivative bifurcation
requirements. Specifically, only one form of embedded credit derivative
qualifies for the exemption – one that is related only to the subordination of
one financial instrument to another. As a result, entities that have contracts
containing an embedded credit derivative feature in a form other than such
subordination may need to separately account for the embedded credit derivative
feature. This guidance also has transition provisions, which permit entities to
make a special one-time election to apply the fair value option to any
investment in a beneficial interest in securitized financial assets, regardless
of whether such investments contain embedded derivative features. This guidance
is effective on the first day of the first fiscal quarter beginning after June
15, 2010. Early adoption is permitted at the beginning of any fiscal quarter
beginning after March 5, 2010. The Company does not expect the adoption of this
pronouncement to have a significant impact on its financial condition or results
of operations.
 
 In March
2010, the FASB issued authoritative guidance on milestone method of revenue
recognition. The scope of this consensus is limited to arrangements that include
milestones relating to research or development deliverables. The guidance
specifies guidance that must be met for a vendor to recognize consideration that
is contingent upon achievement of a substantive milestone in its entirety in the
period in which the milestone is achieved. The guidance applies to milestones in
arrangements within the scope of this consensus regardless of whether the
arrangement is determined to have single or multiple deliverables or units of
accounting. The guidance will be effective for fiscal years, and interim periods
within those years, beginning on or after June 15, 2010. Early application is
permitted. Companies can apply this guidance prospectively to milestones
achieved after adoption. However, retrospective application to all prior periods
is also permitted. The Company does not expect the adoption of this
pronouncement to have a significant impact on its financial condition or results
of operations.
 
 In March
2010, the FASB issued authoritative guidance on effect of denominating the
exercise price of a share-based payment award in the currency of the market in
which the underlying equity securities trades and that currency is different
from (1) entity's functional currency, (2) functional currency of the foreign
operation for which the employee provides services, and (3) payroll currency of
the employee. The guidance clarifies that an employee share-based payment award
with an exercise price denominated in the currency of a market in which a
substantial portion of the entity's equity securities trades should be
considered an equity award assuming all other criteria for equity classification
are met. The guidance will be effective for interim and annual periods beginning
on or after December 15, 2010, and will be applied prospectively. Affected
entities will be required to record a cumulative catch-up adjustment for all
awards outstanding as of the beginning of the annual period in which the
guidance is adopted. The Company is in the process of evaluating the effect of
adoption of this pronouncement.


3.
              DISCONTINUED
      OPERATIONS








Starting
from 2007, the Company provided Modern English training services through Jiangsu
English Training Technology Limited (“JSET”).  During 2009, the
Company gradually closed all the training centers.  On December 29,
2009, the Company completed the transaction under a sale and purchase agreement
with a third party to dispose of its brand name usage right associated with the
English training services with a consideration of RMB6,000.  A gain
amounting to RMB1,552 was reported for the fiscal year ended December 31,
2009.  The Company ceased all English training services in JSET
thereafter.


Summarized
operating results from the discontinued operations included in the Company's
condensed consolidated statements of operations were as follows for the three
months periods ended March 31, 2009 and 2010:
 Three months ended March
31,2009
                          
                          
                          2010RMB
                          
                          
                          RMBRevenues
                          
                          
                          421
                          
                          
                          
                          -Loss
      before provision of income taxes from discontinued
    operations
                          
                          
                          (604
                          )
                          
                          
                          -Provision
      for income taxes
                          
                          
                          -
                          
                          
                          
                          -Noncontrolling
      interest in discontinued operations
                          
                          
                          9
                          
                          
                          
                          -Loss
      from discontinued operations attributable to ChinaCast Education
      Corporation, net of tax
                          
                          
                          (595
                          )
                          
                          
                          -Net
      loss on discontinued operations attributable to ChinaCast Education
      Corporation per share - basic
                          
                          
                          (0.01
                          )
                          
                          
                          -Net
      loss on discontinued operations attributable to ChinaCast Education
      Corporation per share - diluted
                          
                          
                          (0.01
                          )
                          
                          
                          -
 
 All notes
to the accompanying condensed consolidated financial statements have been
retrospectively adjusted to reflect the effect of the discontinued operations,
where applicable.


12





4.
            ACQUISITION




On
October 5, 2009, CCH, the Company's subsidiary in Bermuda, consummated the
acquisition of the entire interest in East Achieve Limited (“East Achieve”) from
the former sole owner of East Achieve.  East Achieve holds the entire
interest in Shanghai Xijui Information Technology Co., Ltd.
(“Xijiu”).  Xijiu holds the entire interest in China Lianhe
Biotechnology Co., Ltd. (“Lianhe”) which in turns holds the entire interest in
Lijiang College of Guangxi Normal University (“Lijiang
College”).  Lijiang College is a private college affiliated with
Guangxi Normal University.  The total consideration for the
acquisition is up to RMB365,000, of which RMB295,000 was paid during
2009.  The remaining amount of the consideration is to be calculated
as below.


For the
academic year of 2009 (i.e. from September 1, 2009 to August 31, 2010), if the
net profit as determined under the relevant sale and purchase agreement of the
Lijiang College is less than RMB55,000, CCH is entitled to deduct an amount
equal to 6.6 times of the difference between the net profit and RMB55,000 from
the remaining payment.





The
remaining consideration was recorded as a liability at fair value of RMB30,482
and the change of its fair value was recorded in earnings at each reporting
date.  As a result, the expected total consideration was RMB325,482 as
of the date of acquisition. There was no change in the fair value of the
remaining consideration up to March 31, 2010.





The
acquisition was recorded using the purchase method of accounting and,
accordingly, the acquired assets and liabilities were recorded at their fair
market value at the date of acquisition.  The purchase price
allocation was as follows:





AmortizationRMB
                    
                    periodCash
                    
                    
                    73,113Other
      current assets
                    
                    
                    2,408Non-current
      deposits
                    
                    
                    6,374Property
      and equipment
                    
                    
                    261,543
                    
                    3-20
      yearsPrepaid
      lease payments for land use rights
                    
                    
                    28,920
                    
                    Over
      the remaining lease term of 48 yearsIntangible
      assets:Customer
      relationship
                    
                    
                    51,000
                    
                    47
      monthsAffiliation
      Agreement
                    
                    
                    14,000
                    
                    59
      monthsGoodwill
                    
                    
                    192,440Other
      current liabilities
                    
                    
                    (105,424
                    )Deferred
      revenues
                    
                    
                    (89,114
                    )Deferred
      tax liabilities
                    
                    
                    (12,616
                    )Long-term
      bank borrowings
                    
                    
                    (90,000
                    )Unrecognized
      tax benefits
                    
                    
                    (7,162
                    )Total
                    
                    
                    325,482


13





The
Company performed the purchase price allocation for the
acquisition.  The valuation analyses utilized and considered generally
accepted valuation methodologies such as income, market and cost
approach.
 
 An affiliation
agreement ("Affiliation Agreement") was signed between Lianhe and Guangxi Normal
University in relation to the operations of Lijiang
College.  Under the Affiliation Agreement, Guangxi Normal University
authorizes Lijiang College to use its school name and offers certain management
and operational supports for an agreed amount of fees.
 
 The
Company believes that the acquisition furthers its strategy of expanding into
the post-secondary bricks and mortar education market.  The
combination of these factors is the rationale for the excess of purchase price
over the value of the assets acquired and liabilities assumed.
  14


5.
            NON-CURRENT
      DEPOSITS





Non-current
deposits consisted of the following:





As of March
                        31, 2010
                      
                      
                      As of
                        December 31,
                        2009RMB
                      
                      
                      RMBRental deposits
                      
                      
                      358
                      
                      
                      
                      358Utilities deposits
                      
                      
                      208
                      
                      
                      
                      208Guarantee deposit for
      borrowings
                      
                      
                      4,000
                      
                      
                      
                      3,000Guarantee deposits for
      construction projects
                      
                      
                      2,492
                      
                      
                      
                      2,492Deposit for investment project
                      
                      
                      6,000
                      
                      
                      
                      3,000Deposit
      for acquiring of land use rights
                      
                      
                      10,431
                      
                      
                      
                      5,492Total
                      
                      
                      23,489
                      
                      
                      
                      14,550





Rental
deposits represented office rental deposits for the Company’s daily
operations.





Guarantee
deposit represented deposits placed with Chongqing Education Guarantee Co., Ltd.
,a long-term investment of the Company, which in turn provided guarantee in
favor of the relevant bank for the Company’s bank borrowings of RMB30,000 and
RMB20,000, respectively.




Deposit
for investment project represented deposit for a potential investment project.
The Company deposited an additional RMB3,000 in 2010 for the same
project.




These
deposits are classified into non-current deposits since they will not be
refunded within one year.




15




6.
              ACQUIRED INTANGIBLE ASSETS,
      NET




Acquired
intangible assets, net consisted of the following:





As of March
                              31,
                            
                            
                            As of
                              December 31,2010
                            
                            
                            2009RMB
                            
                            
                            RMBCustomer
      relationshipsCost
                            
                            
                            91,329
                            
                            
                            
                            91,329Less: Accumulated
      amortization
                            
                            
                            (41,237
                            )
                            
                            
                            (33,331
                            )50,092
                            
                            
                            
                            57,998Affiliation agreementCost
                            
                            
                            14,000
                            
                            
                            
                            14,000Less: Accumulated
      amortization
                            
                            
                            (1,424
                            )
                            
                            
                            (712
                            )12,576
                            
                            
                            
                            13,288Acquired intangible assets,
      net
                            
                            
                            62,668
                            
                            
                            
                            71,286





On
April 11, 2008, the Company acquired a customer relationship through the
acquisition of Hai Lai Education Technology Limited. The customer relationship
is being amortized using accelerated amortization method over 41 months
based on the estimated progression of the students through the respective
courses, giving consideration to the revenue and cash flow
associated.





On
October 5, 2009, the Company acquired another customer relationship through the
acquisition of East Achieve (see Note 4).  The customer relationship
is being amortized using accelerated amortization method over 47 months based on
the estimated progression of the students through the respective courses, giving
consideration to the revenue and cash flow associated.





For the
three months ended March 31, 2010, the Company recorded amortization
expense in respect of the customer relationships amounting to RMB7,906. The
Company will record further amortization expenses in respect of the customer
relationships of RMB20,206, RMB17,576, RMB8,793 and RMB3,517 in 2010, 2011, 2012
and 2013, respectively.





On
October 5, 2009, the Company acquired an affiliation agreement through the
acquisition of East Achieve (see Note 4).  The affiliation agreement
is being amortized on a straight-line basis over 59 months.





For the
three months ended March 31, 2010, the Company recorded amortization
expense in respect of the affiliation agreement amounting to
RMB712.  The Company will record amortization expenses in respect of
the affiliation agreement of RMB2,135, RMB2,847, RMB2,847, RMB2,847 and RMB1,900
in 2010, 2011, 2012, 2013 and 2014, respectively.




7.
              NON-CURRENT
      ADVANCES TO RELATED PARTY
  The
noncurrent advances to a related party represent money spent on assets and
expenses to build up the satellite business of ChinaCast Co., Ltd. (“CCL”) over the years.
Amounts advanced to the related party were RMB99,700 and RMB99,700 as at March
31, 2010 and December 31, 2009, respectively.
  CCL has
undertaken that when regulation allows, the ownership of ChinaCast
Li Xiang Co., Ltd. (“CCLX”) and all the
relevant assets attributable to the satellite business operations in the books
of CCL and Beijing Branch of CCL (“CCLBJ”) will be
transferred to the Company, the consideration of which will be settled against
the above advances to CCL in the books of the Company at the sole discretion of
the Company. Accordingly, we consider the advances are of the nature of a deemed
investment.
  In
addition, the Company has obtained an undertaking from CCL that, at the time of
such transfer, CCL will make a payment to the Company for any shortfall if the
valuation of the deemed investment is lower than the outstanding amount of the
advances, and therefore believes that the advances are recoverable.
  For the
three months ended March 31, 2009, the Company received a management service fee
of RMB967. The management service fee arose from various agreements with CCL
that entitled the Company to the economic benefits of its Beijing Branch —
CCLBJ. The management service fee was terminated with effect from January 1,
2010.


16





8.
            BORROWINGS




In
January 2010, a bank borrowing amounting to RMB58,400 was repaid by the Company
as at its maturity date.


In
March 2010, a bank borrowing amounting to RMB12,000 was raised. The bank
borrowing carried interests at the benchmark interest rate announced by the
People’s Bank of China plus 10% per annum and was secured by guarantees given by
Chongqing Education Guarantee Co., Ltd. (“CQEG”) and in favor of the relevant
bank. In connection with the guarantee given by CQEG, a deposit of RMB1,000 were
pledged to CQEG. RMB10,000 of the borrowing will be repayable in September 2011,
the remaining RMB2,000 will be repayable in September 2012.


In
March 2010, another bank borrowing amounting to RMB30,000 was raised. The
bank borrowing carried interests at 5.31% per annum and will be repayable in
March 2011.





During
the three months ended March 31, 2010, an aggregate amount of other
borrowings amounting to RMB69,000 was raised. RMB63,000 of the other borrowings
carried interest at 7.2% per annum and will be repayable in 2010, of which
RMB30,000 was secured by pledge of certain buildings in FTBC. The rest part of
other borrowings was interest free and will be repayable in 2010.





9.
            STOCK
      COMPENSATION PLAN





Under the
2007 Omnibus Securities and Incentive Plan (“2007 Plan”) adopted in
May 2007, CEC may grant any awards to eligible participants, including
employees, directors or consultants, to purchase up to 2,500,000 ordinary
shares.





On
July 11, 2007, CEC granted, under the 2007 Plan, 12,500 restricted shares
to its employees at no consideration. The per share fair value of ordinary
shares as of the grant date was US$5.65 (RMB42.75).





On
January 11, 2008, CEC agree to grant, under the 2007 Plan, restricted
shares to its three directors at no consideration. Each of the three directors
was entitled to 100,000 restricted shares of the Company’s common stock. The
fair value of these restricted shares was determined based on the closing price
on January 11, 2008 of US$6.25 (RMB45.38). For each of the three directors
of CEC, 10,000, 30,000 and 60,000 restricted shares were/will be vested on
February 9, 2008, February 9, 2009 and February 9, 2010,
respectively. On June 25, 2009, 120,000 restricted shares were
issued.


17





On
January 11, 2008, CEC agreed to grant, under the 2007 Plan, restricted shares to
its three directors at no consideration. Each of the three directors was agreed
to be granted 100,000 restricted shares of the Company's common stock. All of
the shares of restricted stock to be granted to the directors were issued at
fair market value based on the closing price on January 11, 2008 of US$6.25
(RMB45.38). For each of the three directors of CEC, 10,000, 30,000 and 60,000 of
the restricted shares were vested on February 9, 2008, February 9, 2009 and
February 9, 2010, respectively. In December 2009, Mr. Richard Xue decided
not to stand for re-election to the board of directors of CEC. CEC's board
of directors has decided to accelerate the date of the vesting of his final
branch of 60,000 restricted shares from February 9, 2010 to the date of his
resignation. On January 11, 2008, CEC granted, under the 2007 Plan, 1,200,000
share options on the Company's common stock to selected employees at no
consideration. The exercise price of the share options granted is US$6.30 and
the expiry date is January 11, 2018. A total of 401,000, 401,000 and 398,000
share options were vested on March 31, 2008, March 31, 2009 and March 31, 2010,
respectively. Upon exercise of these share options, a total of 1,200,000 common
stock will be issued. As of March 31, 2010, no such restricted shares or share
options have been forfeited.





A summary
of the share option activity under 2007 Plan was as follows:





WeightedAverageExerciseNumber
                    
                    
                    Priceof
      options
                    
                    
                    US$Options
      outstanding at December 31, 2009
                    
                    
                    1,200,000
                    
                    
                    
                    6.30Granted
                    
                    
                    —
                    
                    
                    
                    —Exercised
                    
                    
                    —
                    
                    
                    
                    —Cancelled
                    
                    
                    —
                    
                    
                    
                    —




18





WeightedAverageExerciseNumber
                          
                          
                          Priceof
      options
                          
                          
                          US$Options
      outstanding at March 31, 2010
                          
                          
                          1,200,000
                          
                          
                          
                          6.30Options
      exercisable at March 31, 2010
                          
                          
                          1,200,000
                          
                          
                          
                          6.30





A
summary of the status of the Company's nonvested options as of March 31, 2010
and changes during the three months ended March 31, 2010, is presented as
below:





Weighted
                  average
                
                
                Weightedgrant date
                
                
                averageNonvested options
                
                Shares
                
                
                fair value
                
                
                exercise priceUS$
                
                
                US$Nonvested
      at January 1, 2010
                
                
                398,000
                
                
                
                2.67
                
                
                
                6.30Granted
                
                
                -
                
                
                
                -
                
                
                
                -Vested
                
                
                (398,000
                )
                
                
                2.67
                
                
                
                6.30Forfeited
                
                
                -
                
                
                
                -
                
                
                
                -Nonvested
      at March 31, 2010
                
                
                -
                
                
                
                -
                
                
                
                -




The per
share fair value of options as of January 11, 2008, the grant date was US$2.67
(RMB19.33).





The
aggregate intrinsic value of share options outstanding and exercisable as of
March 31, 2010 was US$1,584.


The
weighted average remaining contractual life is 7.75 years as of
March 31, 2010.


Total
share-based compensation expenses amounting to RMB2,890 and RMB6,576 were
recognized for the three months ended March 31, 2010 and 2009,
respectively.


There was
no unrecognized compensation expense related to the stock based compensation
arrangements for the restricted shares and share options as of March 31,
2010.





As of
March 31, 2010, no other awards have been granted under the 2007
Plan.


19


10.
              INCOME
    TAXES
  On
March 16, 2007, the National People’s Congress enacted a new enterprise
income tax law, which took effect on January 1, 2008. The new law applies a
uniform 25% enterprise income tax rate to both foreign invested enterprises and
domestic enterprises. The new law provides a five-year transition period from
its effective date for the entitled enterprises which were established before
the promulgation date of the new tax law and which were entitled to a
preferential tax treatment such as a reduced tax rate or a tax holiday.
According to transitional rules published after the new income tax law, one of
the Company’s major operating subsidiaries, ChinaCast Technology (Shanghai)
Limited (“CCT Shanghai”), which was subject to the preferential tax rate of 15%,
is now eligible to the phased-in rates: 18% in 2008, 20% in 2009, 22% in 2010,
24% in 2011, 25% in 2012 and thereafter.
  Foreign
Trade and Business College of Chongqing Normal University (“FTBC”)and Hai Yuen
Company Limited (“Hai Yuen”) were incorporated in Chongqing of the PRC and are
subject to the preferential tax rate of 15% until 2010 in accordance with the
western development preferential policy.
  Lijiang
College was incorporated in Guilin of the PRC and is subject to the preferential
tax rate of 15% until 2010 in accordance with the western development
preferential policy.
 
 The
Company considers itself to be permanently reinvested with respect to its
investment in its foreign subsidiaries. Accordingly, no deferred income tax
liability related to the unremitted earnings of its foreign subsidiaries has
been included in the Company’s provision for income taxes. Upon distribution of
subsidiaries earnings in the form of dividends or otherwise, the Company would
be subject to a withholding tax calculated based on 10% of the gross amount of
distribution.
 
 During
the three months ended March 31, 2010, the unrecognized tax benefits increased
from RMB62,457 to RMB66,491.
  20
 
 11.
              NET INCOME PER
      SHARE
 
 For the three months ended March 31,2010
                                        
                                        
                                        2009Numerator
      used in basic and diluted net income per share: Income from continuing
      operations attributable to ChinaCast Education Corporation
                                        
                                        RMB
                                        31,122
                                        
                                        
                                        RMB
                                        20,277Loss
      on discontinued operations attributable to ChinaCast Education
      Corporation
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (595
                                        )Net
      income attributable to ChinaCast Education Corporation
                                        
                                        RMB
                                        31,122
                                        
                                        
                                        RMB
                                        19,682Shares
      (denominator):Weighted
      average ordinary shares outstanding used in computing basic net income per
      share
                                        
                                        
                                        45,968,134
                                        
                                        
                                        
                                        35,648,251Plus:Incremental
      ordinary shares from assumed conversions of stock options, vesting of
      restricted stock and exercises of Underwriter Warrants
                                        
                                        
                                        344,031
                                        
                                        
                                        
                                        —Weighted
      average ordinary shares outstanding used in computing diluted net income
      per share
                                        
                                        
                                        46,312,165
                                        
                                        
                                        
                                        35,648,251Net
      income per share – basic:Income
      from continuing operations attributable to ChinaCast Education
      Corporation
                                        
                                        RMB
                                        0.68
                                        
                                        
                                        RMB
                                        0.57Loss
      on discontinued operations attributable to ChinaCast Education
      Corporation
                                        
                                        
                                        -
                                        
                                        
                                        RMB
                                        (0.02
                                        )Net
      income attributable to ChinaCast Education Corporation
                                        
                                        RMB
                                        0.68
                                        
                                        
                                        RMB
                                        0.55Net
      income per share – diluted:Income
      from continuing operations attributable to ChinaCast Education
      Corporation
                                        
                                        RMB
                                        0.67
                                        
                                        
                                        RMB
                                        0.57Loss
      on discontinued operations attributable to ChinaCast Education
      Corporation
                                        
                                        
                                        -
                                        
                                        
                                        RMB
                                        (0.02
                                        )Net
      income attributable to ChinaCast Education Corporation per share
      —diluted:
                                        
                                        RMB
                                        0.67
                                        
                                        
                                        RMB
                                        0.55


21
  12.
              SEGMENT
      INFORMATION
 
 For the three months ended March
                                31,2010
                              
                              
                              2009RMB
                              
                              
                              RMBRevenues
      from external customers:ELG
                              
                              
                              46,399
                              
                              
                              
                              46,774TUG
                              
                              
                              61,962
                              
                              
                              
                              29,743108,361
                              
                              
                              
                              76,517Additional
      analysis of revenues from ELG by product or service:Service
                              
                              
                              46,368
                              
                              
                              
                              43,898Equipment
                              
                              
                              31
                              
                              
                              
                              2,87646,399
                              
                              
                              
                              46,774Additional
      analysis of revenues from ELG by business lines:Post
      secondary education distance learning
                              
                              
                              28,054
                              
                              
                              
                              25,829K-12
      and content delivery
                              
                              
                              16,006
                              
                              
                              
                              16,219Vocational
      training, enterprise/government training and networking
      services
                              
                              
                              2,339
                              
                              
                              
                              4,72646,399
                              
                              
                              
                              46,774Income
      from operations:ELG
                              
                              
                              25,440
                              
                              
                              
                              18,240TUG
                              
                              
                              15,974
                              
                              
                              
                              10,33741,414
                              
                              
                              
                              28,577
 
 As
      of March
                                
                                
                                As
      of December31,
      2010
                                
                                
                                31,
      2009RMB
                                
                                
                                RMBSegment
      assets:ELG
                                
                                
                                830,115
                                
                                
                                
                                805,116TUG
                                
                                
                                1,502,599
                                
                                
                                
                                1,468,7732,332,714
                                
                                
                                
                                2,273,889
 
 The
Company’s revenues and net income are substantially derived from the PRC. Most
of the assets and capital expenditure of the Company are
employed in the PRC.
  22
 
 There
were no customers accounting for 10% or more of total net revenues for the three
months period ended March 31, 2010.
 
 Two
customers as of March 31, 2010 and three customers as of December 31, 2009 each
accounted for 10% or more of the Company’s accounts receivable balances,
representing an aggregate of 31.5% and 35.8% of the Company’s accounts
receivable balance at March 31, 2010 and December 31, 2009,
respectively.
 
 13.
              WARRANTS AND UNIT PURCHASE
      OPTIONS
  In
connection with the share offering which was consummated in October 2008, the
Company sold to the underwriter in December 2008, for nominal consideration, an
aggregate of 255,000 Underwriter Warrants with a price of US$3.15 per share. The
Underwriter Warrants will be exercisable for five years from the closing date of
the share offering and are classified as Equity in the accompanying consolidated
financial statements. As of
March 31, 2010, there were 255,000 Underwriter Warrants
outstanding.
  23
  14.
              CONTINGENCIES
 
 a)
              On March 21, 2006, after
      obtaining the approval of its shareholders, the Company amended its
      certificate of incorporation, the effect of which was, among other things,
      to eliminate the provision of the certificate of incorporation that
      purported to prohibit the amendment of the “business combination”
      provisions contained therein and to extend the date before which the
      Company must complete a business combination, to avoid being required to
      liquidate, from March 23, 2006 to December 31, 2006. Because extending the
      period during which the Company could consummate a business combination
      was not contemplated by the initial public offering (“IPO”) prospectus,
      shareholders may have securities law claims against the Company for
      rescission (under which a successful claimant would have the right to
      receive the total amount paid for his or her shares, plus interest and
      less any income earned on the shares, in exchange for surrender of the
      shares) or damages (compensation for loss on an investment caused by
      alleged material misrepresentations or omissions in the sale of the
      security). Such claims might entitle shareholders asserting them to up to
      US$6.00 per share of common stock, based on the initial offering price of
      the public units comprised of stock and warrants, less any amount received
      from sale of the original warrants purchased with them and plus interest
      from the date of the IPO. A successful claimant for damages under federal
      or state law could be awarded an amount to compensate for the decrease in
      value of his or her shares caused by the alleged violation (including,
      possibly, punitive damages), together with interest, while retaining the
      shares. The Company believes the shareholder claims for rescission or
      damages are remote. As such, the Company has not recorded a liability for
      such possible rescission. However, the Company cannot definitively predict
      whether shareholders will bring such claims, how many might bring them or
      the extent to which they might be
  successful.
  24
 
 b)
              The Company may be subject to
      claims for rescission or other securities law claims resulting from the
      failure to disclose that the charter provision purporting to prohibit
      certain amendments was possibly inconsistent with Delaware’s General
      Corporation Law. The Company may also be subject to such claims as a
      result of inaccuracies in other disclosures, as follows: It may be argued
      that the IPO prospectus misstated the vote required by its charter to
      approve a business combination by providing that “[w]e willproceed with a business
      combination only if the public shareholders who own at least a majority of
      the shares of common stock sold in [that] offering vote in favor [of it]
      ...,” and that the Exchange Act reports have been inaccurate in describing
      ChinaCast as a leading provider of e-learning content (as opposed to being
      primarily a content carrier). On November 13, 2006, the Company filed a
      Current Report on Form 8-K with the SEC regarding this last item. The
      Company is unable to predict the likelihood that claims might be made with
      regard to the foregoing or estimate any amounts for which it might be
      liable if any such claim was made. As such, the Company has not recorded a
      liability for such possible
rescission.
 
 15.
              SUBSEQUENT
      EVENT
 
 On May 3,
2010 , the Company announced the signing of an agreement for an approximate
RMB200,000 direct investment in the Company by Mr. Wu Shi Xin, the owner of
Wintown Enterprises Limited, a holding company which, after completion of a
reorganization, will own 100% of Hubei Industrial University Business College
(“HIUBC”), a private,
accredited university located in Wuhan, China.
 
 The
purchase of the Company’s shares by Mr. Wu
is an initial step in the execution of the Company's acquisition of HIUBC,
pursuant to a Memorandum of Understanding ("MOU") previously announced on March
30, 2010, for an expected total consideration of approximate RMB450,000. On
receipt of the investment of approximate RMB200,000 in cash, the
Company will issue to Mr. Wu's nominated companies a total of 3,735,734 million
shares of restricted stock at $7.85 per share. The signing of a definitive
purchase agreement and payment by the Company of approximate
RMB450,000 in cash to complete the acquisition is expected to occur within
the next 60 days, subject to the customary closing conditions.
 25
  Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
  Forward
Looking Statements
  Portions
of the discussion and analysis below contain certain statements that are not
descriptions of historical facts, but are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities and Exchange Act of 1934. These forward-looking statements may
include statements about our plans and objectives for future expansion,
including into post-secondary brick and mortar education market; expectations
for E-learning and training services the PRC; anticipated margins for our
solutions; general and cyclical economic and business conditions, and, in
particular, those in the PRC’s education market; our ability to enter into and
renew key corporate and strategic relationships with our customers and
suppliers; changes in the favorable tax incentives enjoyed by our PRC operating
companies; and other statements containing forward looking terminology such as
“may”, “expects”, “believes”, “anticipates”, “intends”, “projects”, “looking
forward” or similar terms, variations of such terms or the negative of such
terms. Such information is based upon various assumptions made by, and
expectations of, our management that were reasonable when made but may prove to
be incorrect. All of such assumptions are inherently subject to uncertainties
and contingencies beyond our control and upon assumptions with respect to future
business decisions which are subject to change. Accordingly, there can be no
assurance that actual results will meet expectations and actual results may vary
(perhaps materially) from certain of the results anticipated herein. For a
further description of these and other risks and uncertainties, see our most
recent Annual Report filed with the Securities and Exchange Commission (SEC) on
Form 10-K, and our subsequent SEC filings. The following discussion of our
financial condition and results of operations should also be read in conjunction
with our unaudited condensed consolidated financial statements and the notes to
those financial statements appearing elsewhere in this Form 10-Q.
  Overview
  We were
formed on August 20, 2003 to serve as a vehicle to effect a merger, capital
stock exchange, asset acquisition or other similar business combination with a
company having its primary operations in the PRC.
  On
December 22, 2006, we consummated the acquisition of ChinaCast Communication
Holdings Limited (“CCH”). As of December 22, 2006, shareholders of CCH that had
previously executed Letters of Undertaking with us with respect to the sale of
their shares of CCH and that collectively held 239,648,953 shares of CCH or
51.22% of CCH’s outstanding shares accepted the voluntary conditional offer (the
“Offer”) made in Singapore by DBS Bank, for and on our behalf, to acquire all of
the outstanding ordinary shares of CCH. On January 18, 2007, at the end of the
Offer period, acceptance of the Offer totaled 80.27% which is the basis we
accounted for the acquisition. As a result of this acceptance of the Offer by
CCH shareholders, CCH became our subsidiary and such acquisition qualified as a
“business combination” under our amended and restated certificate of
incorporation. During 2007, CEC acquired additional shares by issuing shares of
CEC to certain original ChinaCast shareholders and increased its holdings to
100% of the outstanding ordinary shares of ChinaCast. The 19.73% of the
additional shares acquired were accounted for on the same basis as the
acquisition of the 80.27% shares.
  We are
subject to risks common to companies operating in China, including risks
inherent in our distribution and commercialization efforts, uncertainty of
foreign regulatory approvals and laws, the need for future capital and retention
of key employees. We cannot provide assurance that we will generate revenues or
achieve and sustain profitability in the future.
  Critical
Accounting Policies
  For
summary of the critical accounting policies and the significant judgments and
estimates made on the part of the management, see item 7 of Form 10-K for the
year ended December 31, 2009 filed by the Company on March 29,
2010.
  26
 
 Results
of Operations
  For the
purpose of the discussion and analysis of the results of ChinaCast Education
Corporation (“CEC”), its subsidiaries, and variable interest entities in this
section, the consolidated group is referred to as the “Company”. CCL was not
accounted for as a consolidated variable interest entity, because the Company
was not considered to be the primary beneficiary of CCL. The US dollar figures
presented below were based on the historical exchange rate of 1USD = 6.8RMB at
March 31, 2010 for the three months ended March 31, 2010.
  Since our
acquisition of Hai Lai, we have been organized as two business segments, the
E-learning and training service Group (the “ELG”), encompassing all the
Company’s businesses before the acquisition, and the Traditional University
Group (the “TUG”), offering bachelor and diploma programs to students in
China.
  The
revenue of the Company for the three months ended March 31, 2010 amounted to
RMB108.4 million (US$15.9 million) representing an increase of 41.6% over the
revenue of the corresponding period in 2009. The increase in revenue for the
three months ended March 31, 2010 was mainly due to the acquisition of East
Achieve in the fourth quarter of 2009.
  Revenue
of the ELG amounted to RMB46.4 million (US$6.8 million) for the three months
ended March 31, 2010, as compared to revenue of RMB46.8 million of the ELG for
the three months ended March 31, 2009. Service income, mainly of a recurring
nature amounted to RMB46.4 million (US$6.8 million) for the three months ended
March 31, 2010, compared to RMB46.8 million for the same period in 2009.
Equipment sales, mainly project based, amounted to RMB0.03 million (US$0.005
million) for the three months ended March 31, 2010, against RMB2.9 million for
the same period last year. The following table provides a summary of the ELG’s
revenue by business lines:
  Three Months endedMarch 31, 2010
                        
                        
                        March 31, 2009(millions)
                        
                        
                        (millions)US$
                        
                        
                        RMB
                        
                        
                        RMBPost
      secondary education distance learning
                        
                        
                        4.1
                        
                        
                        
                        28.1
                        
                        
                        
                        25.8K-12
      and content delivery
                        
                        
                        2.4
                        
                        
                        
                        16.0
                        
                        
                        
                        16.2Vocational
      training, enterprise / government training and networking
                        
                        
                        0.3
                        
                        
                        
                        2.3
                        
                        
                        
                        4.8Total
      ELG revenue
                        
                        
                        6.8
                        
                        
                        
                        46.4
                        
                        
                        
                        46.8
  Net
revenue from post secondary education distance learning services increased from
RMB25.8 million in the three months ended March 31, 2009 to
RMB28.1 million (US$4.1 million) in three months ended March 31,
2010. The total number of post-secondary students enrolled in courses using the
Company’s distance learning platforms increased to 141,000 at March 31,
2010 from 135,000 at March 31, 2009. The increase was due to the continuous
growth of students enrolled in distance learning degree courses with the
universities.
  27
 
 The
revenue from the K-12 and content delivery business decreased slightly by
approximately 1.3% from RMB16.2 million for the three months ended March 31,
2009 to RMB16.0 million (US$2.4 million) for the three months ended March 31,
2010. The number of subscribing schools for K-12 distance learning services has
stabilized at 6,500.
  Net
revenue from vocational and career training services, enterprise government
training and networking services decreased from RMB4.7 million during the three
months ended March 31, 2009 to RMB2.3 million (US$0.3 million) during the three
months ended March 31, 2010. The decrease was mainly due to fluctuations in
equipment sales, the nature of which is not recurring. Equipment sales included
in the revenue of this business line amounted to RMB0.03 million (US$0.005
million) for the three months ended March 31, 2010, against RMB2.9 million
during the same period last year.
  The
revenue of TUG increased from RMB29.7 million in the three months ended March
31, 2009 to RMB62.0 million (US$9.1 million) in the three months ended March 31,
2010. The increase was mainly due to the acquisition of East Achieve in the
fourth quarter of 2009. TUG’s total student enrolment increased from
approximately 11,000 as at March 31, 2009 to approximately 20,400 as at March
31, 2010. Average revenue per student for the first quarter of 2010 amounted to
RMB3,000 per student as compared to RMB2,700 per student for the first quarter
of 2009.
  Cost of
sales of the Company increased by 59.6% from RMB30.2 million during the first
quarter of 2009 to RMB48.2 million (US$7.1 million) during the first quarter of
2010. The increase was mainly due to the acquisition of East Achieve, which
increased the cost of sales of the TUG.
  ELG’s
cost of sales decreased from RMB11.6 million during the first quarter of 2009 to
RMB6.7 million (US$1.0 million) during the first quarter of 2010. The decrease
was mainly due to reduction in equipment sales and the termination of the
payment of satellite platform usage fee to CCLBJ. ELG’s cost of materials was
RMB2.8 million (US$0.4 million) during the first quarter of 2009 as compared to
RMBnil for the same period in 2010. The cost of service for the ELG amounted to
RMB6.7 million (US$1.0 million) for the three months ended March 31, 2010, as
compared to RMB8.7 million for the same period in 2009. Satellite platform fee
to CCLBJ amounted to RMB1.7 million for the first quarter of 2009 and the
payment of the satellite platform fee to CCLBJ was terminated with effect from
January 1, 2010.
  TUG’s
cost of sales amounted to RMB41.6 million (US$6.1 million) for the three months
ended March 31, 2010 as compared to RMB18.6 million for the same period in 2009.
The increase was due to the acquisition of East Achieve in the fourth quarter of
2009, after which there were two universities operated under TUG.
  ELG’s
gross profit margin increased by 10.3 percentage points, from 75.3% in the first
quarter of 2009 to 85.7% in the first quarter of 2010. The increase was due to
the increase in economy of scale as well as the reduction in equipment sales,
which has a low margin and the termination of the satellite platform usage fee
to CCLBJ. TUG’s gross profit margin was 32.9% for the first quarter of 2010 as
compared to 37.3% for the same period of 2009. The decrease was mainly due to
the lower margin of the newly acquired LJC, which had a higher revenue split to
the parent university as compared to FTBC.
  For the
three months ended March 31, 2009, the Company received a management service fee
of RMB1.0 million (US$0.15 million). The management service fee arose from
various agreements with CCL that entitled the Company to the economic benefits
of its Beijing Branch — CCLBJ. The management service fee was terminated with
effect from January 1, 2010.
  Selling
and marketing expenses decreased from RMB1.7 million in the first quarter of
2009 to RMB0.8 million (US$0.1 million) in the first quarter of 2010. The
decrease was due to the drop in share option expense from RMB0.8 million for the
three months ended March 31, 2009 to RMB0.4 million (US$0.06 million) for the
three months ended March 31, 2010 and the scale down of the marketing activities
associated with ELG.
  28
 
 General
and administrative expenses remained the same at RMB17.6 million (US$2.5
million) in the three months ended March 31, 2010 as compared to the same
period last year. The reduction of share option expense from RMB5.7 million for
the first quarter of 2009 to RMB2.5 million (US$0.4 million) for the first
quarter of 2010was offset by the increase in general and administrative expenses
of the East Achieve Group after its acquisition.
  The
Company has foreign exchange loss of RMB0.3 million (US$0.04 million) for the
first quarter of 2010 compared to a gain of RMB0.2 million during the first
quarter of 2009. The change was a result of the change in the RMB/US exchange
rate.
  Interest
income increased from RMB2.3 million in the first quarter of 2009 to RMB3.0
million (US$0.4 million) in the first quarter of 2010. The increase was due to
the increase in the amount of the Company’s term deposits.
  Interest
expense increased from RMB1.5 million in the first quarter of 2009 to RMB3.0
million (US$0.4 million) in the first quarter of 2010. Interest expense was
mainly associated with the loan of the TUG to finance the construction of the
campus. The increase was due to the increase in bank loan.
  Overall,
profit before income tax and loss in equity investments increased from RMB29.4
million in the three months ended March 31, 2009 to RMB41.4 million (US$6.1
million) in the three months ended March 31, 2010, an increase of 40.6%. The
increase was mainly due the increase in revenue.
  The
Company recorded a loss in equity investments amounted to RMB0.03 million
(US$0.04 million) in the first quarter of 2010 compared to a loss of RMB0.3
million in the first quarter of 2009.
  Income
taxes increased by 55.1% from RMB6.3 million in the first quarter of 2009 to
RMB9.8 million (US$1.4 million) in the first quarter of 2010. The increase was
due to the increase in business and a higher tax rate for the ELG.
  Noncontrolling
interest amounted to RMB0.4 million (US$0.06 million) for the three months ended
March 31, 2010 as compared to RMB2.6 million for the three months ended March
31, 2009. On September 18, 2009, the Company acquired the 20% minority stake in
Hai Lai, which resulted in a reduction of the noncontrolling
interest.
  Net
income attributable to the Company increased by 58.1% to RMB31.1 million (US$4.6
million) in the three months ended March 31, 2010 from RMB19.7 million in the
three months ended March 31, 2009.
  On March
16, 2007, the National People’s Congress of China enacted a new tax law, under
which foreign-invested enterprises and domestic companies will be subject to
enterprise income tax at a uniform rate of 25% . The new tax law became
effective on January 1, 2008. There is a transition period, during which
enterprises may continue to enjoy existing preferential tax treatment or in
which their tax rates may be gradually adjusted to 25%. Following the
effectiveness of the new tax law, one of the Company’s major operating
subsidiaries, CCT Shanghai, which was subject to the preferential tax rate of
15%, is now eligible to the phased-in rates, which is 18% in 2008, 20% in 2009,
22% in 2210, 24% in 2011, 25% in 2012 and thereafter.
  29
  Liquidity and Capital
Resources
  The
following is a summary of the key items from the consolidated balance
sheets.
 As ofAs of
                        
                        
                        December 31,March 31, 2010
                        
                        
                        2009(millions)
                        
                        
                        (millions)RMB
                        
                        
                        US$
                        
                        
                        RMBCash
      and cash equivalents
                        
                        
                        352.0
                        
                        
                        
                        51.8
                        
                        
                        
                        327.6Term
      deposits
                        
                        
                        550.0
                        
                        
                        
                        80.9
                        
                        
                        
                        507.0Subtotal
                        
                        
                        902.0
                        
                        
                        
                        132.7
                        
                        
                        
                        834.6Accounts
      receivable
                        
                        
                        52.5
                        
                        
                        
                        7.7
                        
                        
                        
                        53.8Inventory
                        
                        
                        1.4
                        
                        
                        
                        0.2
                        
                        
                        
                        1.4Prepaid
      expenses and other current assets
                        
                        
                        18.6
                        
                        
                        
                        2.7
                        
                        
                        
                        19.2Total
      current assets
                        
                        
                        981.8
                        
                        
                        
                        144.4
                        
                        
                        
                        919.7Non-current
      advances to a related party
                        
                        
                        99.7
                        
                        
                        
                        14.7
                        
                        
                        
                        99.7Total
      assets
                        
                        
                        2,332.7
                        
                        
                        
                        343.0
                        
                        
                        
                        2,273.1
  Cash and
cash equivalents balances increased from RMB327.6 million as at December 31,
2009, to RMB352.0 million (US$51.8 million) as at March 31, 2010. The increase
was mainly due to the collection of account receivable.
  There was
net cash from operating activities of RMB7.2 million (US$1.1 million) for the
three months ended March 31, 2010 as compared to net cash from operating
activities of RMB0.04 million for the three months ended March 31, 2009. Account
receivables reduced by RMB1.3 million in the first quarter of 2010 whereas
account receivables increased by RMB14.3 million in the first quarter of 2009.
Revenue is recognized ratably throughout the periods services are provided, but
payments may be received ahead of or behind the revenue being recognized.
Payments received before recognition of revenue are recorded as deferred revenue
while payments not received at the time goods and service have been provided are
recorded as accounts receivable. For revenue related to project sales, the
timing of payments depended upon the terms of the contracts.
  Net cash
used in investment activities in the three months ended March 31, 2010 was
RMB69.3 million (US$10.2 million), mainly reflecting the transfer from term
deposit of RMB43.0 million (US$6.3 million). For the three months ended March
31, 2009, transfer from term deposit amounted to RMB133.7 million, which
resulted in a cash outflow of RMB132.2 million for the period.
  Net cash
provided by financing activities in the first quarter of 2009 was RMB86.5
million (US$12.7 million). New loans were obtained to finance the expansion of
the capacity of TUG.
  The
Company believes that its cash and cash equivalents balances, together with its
access to financing sources, will continue to be sufficient to meet the working
capital needs associated with its current operations on an ongoing basis,
although that cannot be assured. Also, it is possible that the Company’s cash
flow requirements could increase as a result of a number of factors, including
unfavorable timing of cash flow events, the decision to increase investment in
marketing and development activities or the use of cash for acquisitions to
accelerate its growth.
  Total
assets at March 31, 2010 amounted to RMB2,332.7 million (US$343.0 million), an
increase of 2.6%, when compared to the total assets amounting to RMB2,273.9
million at December 31, 2009. Total current assets increased by 6.8% to RMB981.8
million at March 31, 2010.
  Accounts
receivable decreased slightly from RMB53.8 million as at December 31, 2009 to
RMB52.5 million (US$7.7 million) at March 31, 2010. Most of the business
partners are long term customers and settle their accounts promptly. All
accounts receivable are reviewed regularly and provisions have been made for any
balances that are disputed or doubtful.
  Inventory,
mainly made up of satellite transmission and receiving equipment, amounted to
RMB1.4 million (US$0.2 million) at March 31, 2010.
  30
 
 Prepaid
expenses and other current assets decreased from RMB19.2 million as at December
31, 2009 to RMB18.6 million (US$2.7 million). The decrease was mainly due to the
changes in the deposits paid by the TUG.
  The
noncurrent advances to a related party represent money spent on assets and
expenses to build up the satellite business of CCL over the years. CCL has
undertaken that when regulation allows, the ownership of CCLX and all the
relevant assets attributable to the satellite business operations in the books
of CCL and CCLBJ will be transferred to the Company, the consideration of which
will be settled against the above advances to CCL in the books of the Company at
the sole discretion of the Company. Accordingly, we consider the advances are of
the nature of a deemed investment.
  In
addition, we have obtained an undertaking from CCL that, at the time of such
transfer, CCL will make a payment to the Company for any shortfall if the
valuation of the deemed investment is lower than the outstanding amount of the
advances, and therefore believe that the advances are recoverable. Amounts
advanced to the related party were RMB99.7 million (US$14.7 million) as at March
31, 2010. As at December 31, 2009, the amount advanced was RMB99.7
million.
  As at
March 31, 2010, the Company had total bank loans of RMB222.0 million (US$32.6
million). RMB76.0 million of the bank loans are expiring within one year were
secured by pledge of certain land use rights and buildings, the entitlement to
accommodation income of the student apartments and guarantees given by certain
individuals. The rest RMB146.0 million of bank loan is expiring over one year
which was secured by the guarantees provided by Chongqing Education Guarantee
Co., Ltd. (“CQEG”) and Hai Lai. In consideration of the guarantees provided by
CQEG, the entitlement to tuition fee of FTBC and a deposit of RMB3 million paid
to CQEG were used as securities.
  Off-Balance
Sheet Arrangements
  The
Company has not entered any financial guarantees or other commitments to
guarantee the payment obligations of any third parties.
  31
  Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
  Foreign
Exchange Risk
  Our
reporting currency is the Renminbi (“RMB”). Transactions in other currencies are
recorded in RMB at the rates of exchange prevailing when the transactions occur.
Monetary assets and liabilities denominated in other currencies are remeasured
into RMB at rates of exchange in effect at the balance sheet dates. Exchange
gains and losses are recorded in our statements of operations as a component of
current period earnings.
  The
PRC State Administration for Foreign Exchange, under the authority of the
People’s Bank of China, controls the conversion of Renminbi into foreign
currencies. The principal regulation governing foreign currency exchange in
China is the Foreign Currency Administration Rules (1996), as amended, or the
“Rules.” Under the Rules, once various procedural requirements are met, RMB is
convertible for current account transactions, including trade and
service-related foreign exchange transactions and dividend payments, but not for
capital account transactions, including direct investment, loans or investments
in securities outside China, without prior approval of the State Administration
of Foreign Exchange of the People’s Republic of China, or its local
counterparts.
  Since
July 2005, the RMB has no longer been pegged to the U.S. dollar. Although
currently the Renminbi exchange rate versus the U.S. dollar is restricted to a
rise or fall of no more than 0.3% per day and the People’s Bank of China
regularly intervenes in the foreign exchange market to prevent significant
short-term fluctuations in the exchange rate, the Renminbi may appreciate or
depreciate significantly in value against the U.S. dollar in the medium to long
term. Moreover, it is possible that in the future, the PRC authorities may lift
restrictions on fluctuations in the Renminbi exchange rate and lessen
intervention in the foreign exchange market. As of the close of business on
March 31, 2010, the exchange rate between the RMB and the U.S. dollar was
RMB6.8 to US$1.
  We
conduct substantially all of our operations through our PRC operating companies,
and their financial performance and position are measured in terms of RMB. The
majority of our net sales and purchases are denominated in RMB.
  Any
devaluation of the RMB against the U.S. dollar would consequently have an
adverse effect on our financial performance and asset values when measured in
terms of U.S. dollars. In addition, from time to time we may have U.S. dollar
denominated fixed deposits, and therefore a decoupling of the RMB may affect our
financial performance in the future.
  We
recognized a foreign exchange loss of approximately RMB0.3 million
(US$0.04 million) for the three months ended March 31, 2010, respectively.
We do not currently engage in hedging activities, as such, we may in the future
experience economic loss as a result of any foreign currency exchange rate
fluctuations.
  Interest
Rate Risk
  We
have a long history of investing excess cash under a conservative corporate
policy that only allows investments in bank fixed deposits, with preservation of
capital and liquidity as the primary objectives. For the three months ended
March 31, 2010, we recorded an interest income of RMB3.0 million
(US$0.4 million). Any significant changes in interest rate might have an
adverse effect on this interest income.
  We
have short-term and long-term debt amounting to RMB222.0 million
(US$32.6 million) as at March 31, 2010. Interest paid in the three
months ended March 31, 2010 was RMB3.0 million (US$0.4 million). Any
significant changes in interest rate might have an adverse effect on interest
expense. There have been no material changes associated with the impact of
inflation and concentration of credit risk from that previously disclosed in our
2009 Annual Report on Form 10-K.
  Inflation
  There
have been no material changes associated with the impact of inflation from that
previously disclosed in our 2009 Annual Report on Form 10-K.
  32
 
 Item 4.
Controls and Procedures.
  We
maintain “disclosure controls and procedures,” as such term is defined under
Exchange Act Rule 13a-15(e) and 15d-15(e), that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized, and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosures. In designing and evaluating the disclosure controls and procedures,
our management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives and in reaching a reasonable level of assurance our
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. We have carried
out an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures as of March 31, 2010. Based upon their evaluation and subject to
the foregoing, the Chief Executive Officer and Chief Financial Officer concluded
that as of March 31, 2010 our disclosure controls and procedures were
effective.
 
 There
were no changes in our internal control over financial reporting that occurred
during the first fiscal quarter of 2010 covered by this Quarterly Report on Form
10-Q that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
  33
  PART II — OTHER
INFORMATION
  Item 1. Legal
Proceedings.
  We
are not currently a party to any pending material legal proceeding.
  Item 1A. Risk
Factors.
  There
are no material changes from risk factors previously disclosed in the Annual
Report on Form 10-K for the year ended December 31, 2009, filed with the
SEC on March 29, 2010.
  Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds.
  On
January 5, 2010, we issued 692,520 restricted shares of our common stock to.
Thriving Blue Limited, a British Virgin Islands company that is 100% owned by
Ron Chan Tze Ngon, the Company’s Chief Executive Officer (“Thriving Blue”)
pursuant to a Subscription Agreement dated December 21, 2009 between the Company
and Thriving Blue for a purchase price of US$7.22 per share or an aggregate
purchase price of US$4,999,994.40. The shares are beneficial held on behalf of
Ron Chan Tze Ngon, Michael Santos, and Antonio Sena. The sale of the shares to
Thriving Blue was exempt from the registration requirements of the Act pursuant
to Regulation S under the Act due to the fact that the offering of the shares
was not made in the United States and that Thriving Blue is a non-U.S.
Person.
  Item 3. Defaults Upon Senior
Securities.
  Item 4. (Removed and
Reserved).
  None.
  Item 5. Other
Information.
  None.
  Item 6.
Exhibits.
 
 31.1
              Certification of Chief Executive
      Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
      Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.
 
 31.2
              Certification of Chief Financial
      Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
      Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.
 
 32.1
              Certification of Chief Executive
      Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of
  2002.
 
 32.2
              Certification of Chief Financial
      Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of
  2002.
  34
  SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
  CHINACAST
      EDUCATION CORPORATION(Registrant)Date:
      May 10, 2010
                    
                    By:
                    /s/ Ron Chan
      Tze NgonName:
                    Ron
      Chan Tze NgonTitle:
                    Chairman
      of the Board,Chief
      Executive Officer (Principal Executive Officer)By:
                    /s/ Antonio
      SenaName:
                    Antonio
      SenaTitle:
                    Chief
      Financial Officer andSecretary
      (Principal Accounting and Financial
Officer)
  35
  EXHIBIT INDEX
 
 Exhibit
                  No.
                
                Description31.1
                
                Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302
      of the Sarbanes-Oxley Act of 2002.31.2
                
                Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302
      of the Sarbanes-Oxley Act of 2002.32.1
                
                Certification
      of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
                
                Certification
      of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of
  2002.
 
 36