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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 20-F**

 

**(MarkOne)**

 

| **o**      | **REGISTRATION STATEMENT PURSUANT  TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF  1934**                                 |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                            |
| **OR**     |
| ** ** | ** **                                                                                                                                            |
| **x**      | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the fiscal year ended December 31, 2008** |
| ** ** | ** **                                                                                                                                            |
| **OR**     |
| ** ** | ** **                                                                                                                                            |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                               |
| ** ** | ** **                                                                                                                                            |
| **OR**     |
| ** ** | ** **                                                                                                                                            |
| **o**      | **SHELL COMPANY REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                            |

 

Dateof event requiring this shell company report . . . . . . . . . . . . . . . . ... .

 

**For the transition period from                      to                        **

 

Commissionfile number: 001-33858

 
| **ChinaEdu Corporation**                                                                                                                                                                                                                                                              |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (Exact name of Registrant as specified in its charter)                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                  |
| **Not Applicable**                                                                                                                                                                                                                                                                    |
| (Translation of Registrant’s name into English)                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                  |
| **Cayman Islands**                                                                                                                                                                                                                                                                    |
| (Jurisdiction of incorporation or organization)                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                  |
| **ChinaEdu Corporation**

**4****th**** Floor-A, GeHua Building**

**No. 1 QinglongHutong, Dongcheng District**

**Beijing, 100007 People’s Republic of China**                                                                                                             |
| (Address of principal executive offices)                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                  |
| **Julia Huang**

**Chairman and Chief Executive Officer**

**ChinaEdu Corporation**

**4th Floor-A, GeHua Building**

**No. 1 QinglongHutong, Dongcheng District**

**Beijing, 100007 People’s Republic of China**

**Telephone: 86-10-84186655**

**Email: julia@chinaedu.net** |
| (Name, Telephone, E-mail and/or Facsimile number and Address of Company  Contact Person)                                                                                                                                                                                              |

 

Securitiesregistered or to be registered pursuant to Section 12(b) of the Act:

 

| Title of each  class                                                                              |   | Name of each  exchange on which registered |
|---------------------------------------------------------------------------------------------------|--------|--------------------------------------------|
| American Depositary Shares, each representing three Ordinary Shares,  par value US$0.01 per share |   | NASDAQ Global Market                       |
| Ordinary Shares, par value US$0.01 par value per share                                            |   | NASDAQ Global Market*                      |

 

*                Application made for listing, not fortrading, but only in connection with the registration of the AmericanDepositary Shares pursuant to requirements of the Securities and ExchangeCommission.

 

Securitiesregistered or to be registered pursuant to Section 12(g) of the Act:

 
| **None**         |
|------------------|
| (Title of Class) |

 

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Securitiesfor which there is a reporting obligation pursuant to Section 15(d) ofthe Act:

 
| **None**         |
|------------------|
| (Title of Class) |

 

Indicatethe number of outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report.
|                                                            |   |
|-----------------------------------------------------------------|--------|
| 63,076,129  Ordinary Shares, par value $0.01 per Ordinary Share |   |

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.

o Yes   x No

 

Ifthis report is an annual or transition report, indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934.

o Yes   x No

 

Note— Checking the box above will not relieve any registrant required to filereports pursuant to Section 13 or 15(d) of the Securities ExchangeAct of 1934 from their obligations under those Sections.

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

x Yes   o No

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).

o Yes   o No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.:

 

| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer x |
|---------------------------|--------|---------------------|--------|-------------------------|

 

Indicateby check mark which basis of accounting the registrant has used to prepare thefinancial statements included in this filing:

 

| U.S. GAAP x |   | International Financial Reporting Standards as issued  by the International Accounting Standards Board o |   | Other o |
|-------------|--------|----------------------------------------------------------------------------------------------------------|--------|---------|

 

If“Other” has been checked in response to the previous question, indicate bycheck mark which financial statement item the registrant has elected to follow.

o Item 17   o Item 18

 

Ifthis is an annual report, indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   x No

 

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**TABLE OFCONTENTS**

 
| **PART I**                                                                                   | **1**        |
|---------------------------------------------------------------------------------------------------|--------------|
| ** **                                                                                        | *** *** |
| ***Item  1. Identity of Directors, Senior Management and Advisers***                              | ***1***      |
| ***Item  2. Offer Statistics and Expected Timetable***                                            | ***1***      |
| ***Item 3. Key  Information***                                                                    | ***1***      |
| ***Item 4. Information on the Company***                                                          | ***24***     |
| ***Item 5. Operating and Financial Review and Prospects***                                        | ***46***     |
| ***Item 6. Directors, Senior Management and Employees***                                          | ***68***     |
| ***Item 7. Major Shareholders and Related Party  Transactions***                                  | ***75***     |
| ***Item 8. Financial Information***                                                               | ***78***     |
| ***Item 9. The Offer and Listing***                                                               | ***79***     |
| ***Item 10. Additional Information***                                                             | ***79***     |
| ***Item 11. Quantitative and Qualitative Disclosures  about Market Risk***                        | ***83***     |
| ***Item 12. Description of Securities Other than Equity  Securities***                            | ***86***     |
| *** ***                                                                                      | *** *** |
| **PART II**                                                                                  | **87**       |
| ** **                                                                                        | *** *** |
| ***Item 13. Defaults, Dividend Arrearages and  Delinquencies***                              | ***87***     |
| ***Item 14. Material Modifications to the Rights of  Security Holders and Use of Proceeds*** | ***87***     |
| ***Item 15. Controls and Procedures***                                                            | ***87***     |
| ***Item 16A. Audit Committee Financial Expert***                                             | ***89***     |
| ***Item 16B.  Code of Ethics***                                                              | ***89***     |
| ***Item 16C. Principal Accountant Fees and Services***                                       | ***89***     |
| ***Item 16D. Exemptions from the Listing Standards  for Audit Committees***                  | ***89***     |
| ***Item 16E. Purchases of Equity Securities by the  Issuer and Affiliated Purchasers***      | ***90***     |
| ** **                                                                                        | *** *** |
| **PART III**                                                                                 | **91**       |
| ** **                                                                                        | *** *** |
| ***Item 17. Financial Statements***                                                          | ***91***     |
| ***Item 18. Financial Statements***                                                          | ***91***     |
| ***Item 19.  Exhibits***                                                                     | ***91***     |

 

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**INTRODUCTION**

 

Unless otherwiseindicated and except where the context otherwise requires, references in thisannual report on Form 20-F to:

 

·                  “we,” “us,” “our company” or “our” refersto ChinaEdu Corporation, its predecessor entities and subsidiaries;

 

·                  “China” or “PRC” refers to the People’sRepublic of China, excluding Taiwan, Hong Kong and Macau;

 

·                  “shares,” “ordinary shares,” or “commonshares” refers to our common shares;

 

·                  “ADSs” refers to our American DepositaryShares, each of which represents three common shares, and “ADRs” refers to theAmerican Depositary Receipts that evidence our ADSs;

 

·                  “RMB” or “Renminbi” refers to the legalcurrency of China; and

 

·                  “$,” “dollars,” “US$” or “U.S. dollars”refers to the legal currency of the United States.

 

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**FORWARD-LOOKINGSTATEMENTS**

 

This annual reportcontains forward-looking statements that involve risks and uncertainties. Allstatements other than statements of historical facts are forward-lookingstatements. These statements involve known and unknown risks, uncertainties andother factors that may cause our actual results, performance or achievements tobe materially different from those expressed or implied by the forward-lookingstatements.

 

You can identify theseforward-looking statements by words or phrases such as “may,” “will,” “expect,”“is expected to,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,”“is/are likely to” or other similar expressions. We have based theseforward-looking statements largely on our current expectations and projectionsabout future events and financial trends that we believe may affect ourfinancial condition, results of operations, business strategy and financialneeds. These forward-looking statements include:

 

·                  our anticipated growth strategies;

 

·                  our future business development, results of operationsand financial condition;

 

·                  expected changes in our revenues and certain cost andexpense items;

 

·                  our ability to increase student enrollments and coursefees and expand program, service and product offerings;

 

·                  competition in the language training, testpreparation, primary and secondary education, educational content, software andother technology development and online education markets;

 

·                  risks associated with our offering of new educationalprograms, services and products and the expansion of our geographic reach;

 

·                  risks associated with our existing developmentprojects, including construction delays or cost overruns with respect to ourpending campus construction projects and the build out of our learning centernetwork, which may increase project costs, and the failure of the newlydeveloped schools or learning centers to perform as expected;

 

·                  the expected increase in expenditures on education inChina;

 

·                  PRC laws, regulations and policies relating to privateeducation and providers of private educational services, including recentchanges in the government regulatory environment related to our internationalcurriculum program; and

 

·                  general economic, business and othermarket conditions in the PRC and worldwide, including the ability of thegeneral global economy to recover timely from the current economic downturn.

 

You should readthoroughly this annual report and the documents that we refer to herein withthe understanding that our actual future results may be materially differentfrom and/or worse than what we expect. We qualify all of our forward-lookingstatements by these cautionary statements. Other sections of this annual reportinclude additional factors which could adversely impact our business andfinancial performance. Moreover, we operate in an evolving environment. Newrisk factors emerge from time to time and it is not possible for our managementto predict all risk factors, nor can we assess the impact of all factors on ourbusiness or the extent to which any factor, or combination of factors, maycause actual results to differ materially from those contained in anyforward-looking statements.

 

# You should not rely uponforward-looking statements as predictions of future events. The forward-lookingstatements made in this annual report relate only to events or information asof the date on which the statements are made in this annual report. Weundertake no obligation to update or revise any forward-looking statements,whether as a result of new information, future events or otherwise. 

 

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# **PART I**

#  

**Item1. Identity of Directors, Senior Management and Advisers**

 

Not applicable.

 

**Item2. Offer Statistics and Expected Timetable**

 

Not applicable.

 

**Item3. Key Information**

 

A.  Selected Financial Data

 

**SelectedCondensed Consolidated Financial Data**

 

The followingselected condensed consolidated statement of operations data for the threeyears ended December 31, 2006, 2007 and 2008 and selected condensedconsolidated balance sheet data as of December 31, 2007 and 2008 have beenderived from our audited consolidated financial statements included in thisannual report. These consolidated financial statements have been audited byDeloitte Touche Tohmatsu CPA Ltd., an independent registered public accountingfirm. The report of Deloitte Touche Tohmatsu CPA Ltd. on our auditedconsolidated financial statements for the three years ended December 31,2006, 2007 and 2008 and as of December 31, 2007 and 2008 is included in thisannual report.  The selected condensedconsolidated statement of operations data for the years ended December 31,2004 and 2005 and selected consolidated balance sheet data as of December 31,2004, 2005 and 2006 have been derived from our audited consolidated financialstatements, which are not included in this annual report. Our auditedconsolidated financial statements are prepared and presented in accordance withgenerally accepted accounting principles in the United States, or U.S. GAAP.The historical results are not necessarily indicative of results to be expectedin any future period.**** The selected condensed consolidated financialdata should be read in conjunction with, and are qualified in their entirety byreference to, our consolidated financial statements and related notes and “Item5. Operating and Financial Review and Prospects—A. Operating Results” includedelsewhere in this annual report.

 

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| ** **                                                                                | ** ** | **Years  ended December 31,**         | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006(1)** | ** ** | **2007(1)** | ** ** | **2008(1)** | ** ** | **2008(1)** | ** ** |
| ** **                                                                                | ** ** | **RMB**                                    | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **$** | ** ** |
| ** **                                                                                | ** ** | **(In  thousands, except per share data)** | ** ** |
| **Condensed Consolidated Statement  of Operations Data:**                                 |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Net revenue                                                                               |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Online degree program                                                                     |       | 100,896                                    |       | 98,527 |   | 156,845 |   | 202,185 |   | 255,388 |   | 37,433 |   |
| International curriculum programs                                                         |       | —                                     |       | 4,854 |   | 28,428 |   | 31,434 |   | 27,607 |   | 4,046 |   |
| Online tutoring programs                                                                  |       | —                                     |       | 14,390 |   | 17,384 |   | 18,013 |   | 15,436 |   | 2,263 |   |
| Private primary and secondary schools                                                     |       | —                                     |       | 8,591 |   | 10,874 |   | 13,356 |   | 19,289 |   | 2,827 |   |
| Net revenue                                                                               |       | 100,896                                    |       | 126,362 |   | 213,531 |   | 264,988 |   | 317,720 |   | 46,569 |   |
| Cost of revenue                                                                           |       | (38,014                                    | )          | (53,138 | ) | (80,308 | ) | (96,349 | ) | (117,733 | ) | (17,257 | ) |
| Gross profit                                                                              |       | 62,882                                     |       | 73,224 |   | 133,223 |   | 168,639 |   | 199,987 |   | 29,312 |   |
| Operating expenses                                                                        |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| General and administrative                                                                |       | (26,924                                    | )          | (44,089 | ) | (48,846 | ) | (76,893 | ) | (86,908 | ) | (12,738 | ) |
| Selling and marketing                                                                     |       | (751                                       | )          | (6,116 | ) | (12,893 | ) | (14,277 | ) | (29,851 | ) | (4,375 | ) |
| Research and development                                                                  |       | (12,905                                    | )          | (11,842 | ) | (14,263 | ) | (21,021 | ) | (26,185 | ) | (3,838 | ) |
| Goodwill impairment                                                                       |       | —                                     |       | — |   | — |   | (16,192 | ) | (41,036 | ) | (6,015 | ) |
| Intangible assets impairment                                                              |       | —                                     |       | — |   | — |   | — |   | (29,057 | ) | (4,259 | ) |
| Total operating expenses                                                                  |       | (40,580                                    | )          | (62,047 | ) | (76,002 | ) | (128,383 | ) | (213,037 | ) | (31,225 | ) |
| Income (loss) from operations                                                             |       | 22,302                                     |       | 11,177 |   | 57,221 |   | 40,256 |   | (13,050 | ) | (1,913 | ) |
| Other income                                                                              |       | —                                     |       | — |   | — |   | 394 |   | 562 |   | 82 |   |
| Interest income                                                                           |       | 266                                        |       | 1,078 |   | 1,172 |   | 4,118 |   | 10,652 |   | 1,561 |   |
| Interest expense                                                                          |       | —                                     |       | (1,242 | ) | (2,279 | ) | (2,130 | ) | (1,298 | ) | (190 | ) |
| Income (loss) before income tax (benefits)  provisions and minority interest              |       | 22,568                                     |       | 11,013 |   | 56,114 |   | 42,638 |   | (3,134 | ) | (460 | ) |
| Income tax (benefits) provisions                                                          |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Current                                                                                   |       | 1,248                                      |       | 4,849 |   | 9,475 |   | 16,286 |   | 11,860 |   | 1,738 |   |
| Deferred                                                                                  |       | (2,094                                     | )          | (855 | ) | (2,481 | ) | (1,283 | ) | (8,387 | ) | (1,229 | ) |
| Total income tax (benefits) provisions                                                    |       | (846                                       | )          | 3,994 |   | 6,994 |   | 15,003 |   | 3,473 |   | 509 |   |
| Income (loss) before minority interest                                                    |       | 23,414                                     |       | 7,019 |   | 49,120 |   | 27,635 |   | (6,607 | ) | (969 | ) |
| Minority interest, net of taxes                                                           |       | (11,465                                    | )          | (9,869 | ) | (23,581 | ) | (25,148 | ) | (36,412 | ) | (5,337 | ) |
| Net income (loss)                                                                         |       | 11,949                                     |       | (2,850 | ) | 25,539 |   | 2,487 |   | (43,019 | ) | (6,306 | ) |
| Deemed dividends on preferred share                                                       |       | (15,959                                    | )          | — |   | — |   | — |   | — |   | — |   |
| Net income (loss) attributable to ordinary  shareholders                                  |       | (4,010                                     | )          | (2,850 | ) | 25,539 |   | 2,487 |   | (43,019 | ) | (6,306 | ) |
| Adjusted EBITDA(2)                                                                        |       | 30,094                                     |       | 21,966 |   | 76,901 |   | 81,409 |   | 85,271 |   | 12,499 |   |
| Net income (loss) per ordinary share—basic                                           |       | (0.34                                      | )          | (0.18 | ) | 0.65 |   | 0.06 |   | (0.75 | ) | (0.11 | ) |
| Net income (loss) per preferred A share—basic                                        |       | —                                     |       | — |   | 0.65 |   | 0.06 |   | — |   | — |   |
| Net income (loss) per preferred B share—basic                                        |       | —                                     |       | — |   | 0.65 |   | 0.06 |   | — |   | — |   |
| Net income (loss) per preferred C share—basic                                        |       | —                                     |       | — |   | 0.65 |   | 0.06 |   | — |   | — |   |
| Net income (loss) per preferred D share—basic                                        |       | —                                     |       | — |   | — |   | 0.06 |   | — |   | — |   |
| Net income (loss) per ordinary share—diluted                                         |       | (0.34                                      | )          | (0.18 | ) | 0.60 |   | 0.05 |   | (0.75 | ) | (0.11 | ) |
| Net income (loss) per ADS                                                                 |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Basic—ordinary                                                                       |       | (1.02                                      | )          | (0.54 | ) | 1.95 |   | 0.18 |   | (2.25 | ) | (0.33 | ) |
| Diluted—ordinary                                                                     |       | (1.02                                      | )          | (0.54 | ) | 1.80 |   | 0.15 |   | (2.25 | ) | (0.33 | ) |
| Weighted average shares used in calculating basic  net income (loss) per ordinary share   |       | 11,673,946                                 |       | 16,243,736 |   | 39,209,606 |   | 42,147,170 |   | 57,679,504 |   | 57,679,504 |   |
| Weighted average shares used in calculating diluted  net income (loss) per ordinary share |       | 11,673,946                                 |       | 16,243,736 |   | 42,708,213 |   | 47,322,184 |   | 57,679,504 |   | 57,679,504 |   |

 

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| ** **                                                                            | ** ** | **Years  ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2008** | ** ** |
| ** **                                                                            | ** ** | **RMB**                            | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **$** | ** ** |
| ** **                                                                            | ** ** | **(In  thousands)**                | ** ** |
| Share-based compensation expense included in:                                         |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Cost of revenue                                                                       |       | 369                                |       | 369 |   | 468 |   | 346 |   | 474 |   | 70 |   |
| General and administrative                                                            |       | 2,719                              |       | 1,965 |   | 1,942 |   | 2,960 |   | 4,073 |   | 597 |   |
| Selling and marketing                                                                 |       | —                             |       | — |   | 205 |   | 222 |   | 506 |   | 74 |   |
| Research and development                                                              |       | 44                                 |       | 44 |   | 96 |   | 115 |   | 178 |   | 26 |   |
| Total                                                                                 |       | 3,132                              |       | 2,378 |   | 2,711 |   | 3,643 |   | 5,231 |   | 767 |   |
|                                                                                  |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Amortization of intangible assets acquired through business  combination included in: |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Cost of revenue                                                                       |       | —                             |       | 2,097 |   | 4,182 |   | 3,954 |   | 3,956 |   | 580 |   |
| Selling and marketing                                                                 |       | —                             |       | 1,125 |   | 3,279 |   | 3,279 |   | 3,250 |   | 476 |   |
|                                                                                  |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Total                                                                                 |       | —                             |       | 3,222 |   | 7,461 |   | 7,233 |   | 7,206 |   | 1,056 |   |

 

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(1) Theamounts of share-based compensation included in operating expenses for 2006,2007 and 2008 reflect the adoption of Statement of Financial AccountingStandard No. 123 (revised 2004), or SFAS 123(R), “Share-Based Payment,”effective on January 1, 2006. If we had applied the fair value recognitionprovisions of SFAS 123(R) to prior periods, we would have reported netloss of RMB6.7 million and RMB8.1 million for 2004 and 2005, respectively, andnet loss per share (diluted) of 0.57 and 0.50 for 2004 and 2005, respectively.

 

(2) AdjustedEBITDA represents net (loss) income attributable to ordinary shareholdersbefore deductions for minority interest, deemed dividend, interest income,income taxes, depreciation, amortization, share-based compensation, write-offfor  receivables acquired throughbusiness acquisition, goodwill and intangibles impairment charges and currencyexchange losses. We believe that adjusted EBITDA is useful to investors as ameasure of comparative operating performance, as it is less susceptible tovariances in actual performance resulting from depreciation, amortization andgoodwill and intangible assets impairment, and is more reflective of changes inpricing decisions, cost controls and other factors that affect operatingperformance. We also present adjusted EBITDA because we believe it is useful toinvestors as a way to evaluate our ability to incur and service debt, makecapital expenditures and meet working capital requirements. Adjusted EBITDA isnot intended as a measure of our operating performance, as an alternative tonet income or as an alternative to any other performance measure in conformitywith U.S. GAAP, or as an alternative to cash flow provided by operatingactivities as a measure of liquidity. The following is a reconciliation of net(loss) income attributable to ordinary shareholders to adjusted EBITDA:

 
| ** **                                             | ** ** | **Years  ended December 31,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2008** | ** ** |
| ** **                                             | ** ** | **RMB**                            | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **$** | ** ** |
| ** **                                             | ** ** | **(In  thousands)**                | ** ** |
| Net (loss) income attributable to ordinaryshareholders |       | (4,010                             | )          | (2,850 | ) | 25,539 |   | 2,487 |   | (43,019 | ) | (6,306 | ) |
| Deemed dividends on preferred shares                   |       | 15,959                             |       | — |   | — |   | — |   | — |   | — |   |
| Minority interest, net of taxes                        |       | 11,465                             |       | 9,869 |   | 23,581 |   | 25,148 |   | 36,412 |   | 5,337 |   |
| Income tax (benefits) provision                        |       | (846                               | )          | 3,994 |   | 6,994 |   | 15,003 |   | 3,473 |   | 509 |   |
| Interest income and other, net                         |       | (266                               | )          | 164 |   | 1,107 |   | (2,382 | ) | (9,916 | ) | (1,453 | ) |
| Depreciation                                           |       | 4,297                              |       | 5,023 |   | 8,157 |   | 8,206 |   | 12,212 |   | 1,790 |   |
| Amortization                                           |       | 363                                |       | 3,388 |   | 8,812 |   | 9,081 |   | 9,352 |   | 1,371 |   |
| Goodwill impairment                                    |       | —                             |       | — |   | — |   | 16,192 |   | 41,036 |   | 6,015 |   |
| Intangible assets impairment                           |       | —                             |       | — |   | — |   | — |   | 29,057 |   | 4,259 |   |
| Exchange loss                                          |       | —                             |       | — |   | — |   | — |   | 1,433 |   | 210 |   |
| Accounts receivable write-off                          |       | —                             |       | — |   | — |   | 4,031 |   | 1,042 |   | 153 |   |
| Share-based compensation                               |       | 3,132                              |       | 2,378 |   | 2,711 |   | 3,643 |   | 5,231 |   | 767 |   |
| Adjusted EBITDA                                        |       | 30,094                             |       | 21,966 |   | 76,901 |   | 81,409 |   | 86,313 |   | 12,652 |   |

 
| ** **                                      | ** ** | **Years  ended December 31,** | ** ** |
|-------------------------------------------------|------------|------------------------------------|------------|
| ** **                                      | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2008** | ** ** |
| ** **                                      | ** ** | **RMB**                            | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **$** | ** ** |
| ** **                                      | ** ** | **(In  thousands)**                | ** ** |
| **Condensed Consolidated Balance  Sheet Data:** |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | 106,936                            |       | 155,912 |   | 148,315 |   | 497,114 |   | 353,933 |   | 51,877 |   |
| Total assets                                    |       | 199,182                            |       | 428,408 |   | 497,210 |   | 980,068 |   | 918,680 |   | 134,651 |   |
| Total current liabilities                       |       | 41,051                             |       | 141,706 |   | 132,746 |   | 186,122 |   | 221,921 |   | 32,527 |   |
| Total liabilities                               |       | 43,881                             |       | 188,036 |   | 183,568 |   | 243,338 |   | 244,536 |   | 35,841 |   |
| Convertible notes                               |       | —                             |       | 29,324 |   | 30,654 |   | — |   | — |   | — |   |
| Total shareholders’ equity                 |       | 145,698                            |       | 204,235 |   | 264,319 |   | 678,734 |   | 589,829 |   | 86,452 |   |

 

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**ExchangeRate Information**

 

The following table setsforth the noon buying rates for U.S. dollars in effect in The City of New Yorkfor cable transfers of Renminbi as certified for customs purposes by theFederal Reserve Board, for the periods indicated.

 
| ** **                        | ** ** | **Renminbi per U.S. Dollar Noon Buying Rate** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------------------------|------------|
| **Period**                        | ** ** | **Average**                                                                 | ** ** | **High** | ** ** | **Low** | ** ** | **Period-End** | ** ** |
| 2004                              |       | 8.2768                                                                      |       | 8.2764 |   | 8.2774 |   | 8.2765 |   |
| 2005                              |       | 8.1940                                                                      |       | 8.0702 |   | 8.2765 |   | 8.0702 |   |
| 2006                              |       | 7.9723                                                                      |       | 7.8041 |   | 8.0702 |   | 7.8041 |   |
| 2007                              |       | 7.6072                                                                      |       | 7.2946 |   | 7.8127 |   | 7.2946 |   |
| 2008                              |       | 6.9477                                                                      |       | 6.7800 |   | 7.2946 |   | 6.8225 |   |
|                              |       |                                                                        |       |   |   |   |   |   |   |
| **Previous Six Months**           |       |                                                                        |       |   |   |   |   |   |   |
| December 2008                |       | 6.8539                                                                      |       | 6.8225 |   | 6.8842 |   | 6.8225 |   |
| January, 2009                     |       | 6.8360                                                                      |       | 6.8225 |   | 6.8403 |   | 6.8392 |   |
| February, 2009                    |       | 6.8363                                                                      |       | 6.8241 |   | 6.8470 |   | 6.8395 |   |
| March, 2009                       |       | 6.8360                                                                      |       | 6.8240 |   | 6.8438 |   | 6.8329 |   |
| April, 2009                       |       | 6.8304                                                                      |       | 6.8180 |   | 6.8361 |   | 6.8180 |   |
| May, 2009                         |       | 6.8235                                                                      |       | 6.8176 |   | 6.8326 |   | 6.8278 |   |
| June, 2009 (through June 25) |       | 6.8336                                                                      |       | 6.8264 |   | 6.8371 |   | 6.8344 |   |

 

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Source: Federal Reserve Board

 

On June 25**,**2009**,**thenoon buying rate was RMB6.8344 to$1.00.

 

We publish our financialstatements in Renminbi. This annual report contains translations of Renminbiamounts into U.S. dollars at specified rates solely for the convenience ofthe reader. Unless otherwise noted, all translations from Renminbi toU.S. dollars were made at the noon buying rate in The City of New York forcable transfers in Renminbi per U.S. dollar as certified for customspurposes by the Federal Reserve Bank of New York, as of December 31, 2008,which was RMB6.8225 to $1.00. We make no representation that any Renminbi orU.S. dollar amounts could have been, or could be, converted into U.S. dollarsor Renminbi, as the case may be, at any particular rate, the rates statedabove, or at all. The PRC government imposes control over its foreign currencyreserves in part through direct regulation of the conversion of RMB intoforeign exchange and through restrictions on foreign trade.

 

Since July 2005, theRenminbi is no longer pegged solely to the U.S. dollar. Instead, its valueis measured against a basket of currencies, determined by the People’s Bank ofChina, against which it can rise or fall by as much as 0.3% each day. TheRenminbi may appreciate or depreciate significantly in value against theU.S. dollar in the future. See “—D. Risk Factors—Risks Related to the People’sRepublic of China—The fluctuation of the Renminbi may materially and adverselyaffect your investment.”

 

B.             Capitalization and Indebtedness

 

Not applicable.

 

C.  Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D.  Risk Factors

 

*Investingin our securities involves a high degree of risk. You should carefully considerthe risks described below, in conjunction with other information and ourconsolidated financial statements and related notes included elsewhere in thisannual report, before making an investment decision. Our business, financialcondition or results of operations could be affected materially and adverselyby any or all of these risks. The trading price of our ADSs could decline dueto any or all of these risks, and you may lose all or part of your investment.*

 

**RisksRelated to Our Business**

 

***The education sector, in which all of our businesses areconducted, and the telecommunication sector, upon which we are heavily reliant,each are subject to extensive regulation in China, and our ability to conductbusiness is highly dependent on our compliance with these regulatoryframeworks.***

 

The Chinese governmentregulates all aspects of the education sector, including licensing of partiesto perform various services, pricing of tuition and other fees, curriculumcontent, standards for the operations of schools and learning centersassociated with online degree programs and foreign participation. The Chineselaws and regulations applicable to the education and telecommunication sectors arein some aspects vague and uncertain, and often lack detailed implementingregulations. These laws and regulations also are subject to change, and newlaws and regulations may be adopted, some of which may have retroactiveapplication or have a negative effect on our business. Moreover, there isconsiderable ongoing 

 

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scrutiny of the educationsector and its participants.  For adiscussion of the regulatory framework for the education system and thetelecommunication sectors in China, see “Item 4. Information on the Company—B.Business Overview—Regulation.”

 

We must comply with China’sextensive regulations on private and foreign participation in the education andtelecommunication sectors, and compliance with such restrictions has caused usto adopt complex structural arrangements with our Chinese subsidiaries andChinese affiliated entities. If the relevant Chinese authorities decide thatour structural arrangements do not comply with these restrictions, we would beprecluded from conducting some or all of our current business and our financialcondition, results of operations and business strategy may be materially andadversely affected.

 

Chinese regulators havebroad powers to regulate the tuition and other fees charged by schools and, asa result, can adversely impact the fees we receive from the schools to which weprovide services, as well as the returns from the private primary and secondaryschools operated by our Chinese affiliated entities. While China’s regulatoryframework provides that investors in private schools are entitled to receive a “reasonablereturn” on their investment, there is no clear guidance in law as to what thisterm means.

 

Although our corporatestructure and business are designed to comply with the limitations on foreigninvestment and participation in the education and telecommunication sectors, wecannot assure you that we will not be found to be in violation of any currentor future Chinese laws and regulations. See also the risk factors below under “RisksRelated to China’s Regulation of the Education and Telecommunication Sectorsand Our Corporate Structure.” There are substantial uncertainties regarding theinterpretation and application of Chinese laws and regulations. If we or any ofour Chinese subsidiaries or Chinese affiliated entities are found to be or tohave been in violation of Chinese laws or regulations limiting foreign ownershipor participation in the education or telecommunication sectors, the relevantregulatory authorities have broad discretion in dealing with such violation,including but not limited to:

 

·                  levying fines and confiscating illegalincome;

 

·                  restricting or prohibiting our use of theproceeds from our initial public offering to finance our business andoperations in China;

 

·                  requiring us to restructure the ownershipstructure or operations of our Chinese subsidiaries or Chinese affiliatedentities;

 

·                  requiring us to discontinue all or aportion of our business; and/or

 

·                  revoking our business licenses.

 

Any of these or similaractions could cause significant disruption to our business operations or renderus unable to conduct all or a substantial portion of our business operations,and may materially and adversely affect our business, financial condition andresults of operations.

 

***We derive a majority of our revenue by providing services toonline degree programs, and any adverse development in this business willmaterially and adversely affect our overall results of operations.***

 

For fiscal years ended December 31,2006, 2007 and 2008, approximately 73.5%, 76.3%, and 80.4%, respectively,  of our net revenue was generated fromservices provided to online degree programs of Chinese universities. Thecontinued growth of this business line depends on our ability to attract newuniversity customers and the ability of these universities to increase studentenrollment for their online degree programs. We face many challenges in ouronline degree program services business, including:

 

·                  our structure for this line of business,in which services are provided to our university customers’ online degreeprograms by one of our Chinese subsidiaries and affiliated entities, may befound by Chinese regulatory authorities to violate restrictions on entitiesother than universities being responsible for online degree programs;

 

·                  the demand for online degree programsdepends on the social acceptance and perceived attractiveness of degreesoffered by these programs, which may decline due to actual or perceived qualityproblems at online degree programs and the increased availability ofalternatives such as traditional degree programs, on-the-job training andoverseas programs;

 

·                  the universities with online degreeprograms have primary responsibility for these programs and their prioritiesand objectives may conflict with our own objectives of growing our revenue andprofits from servicing these programs; and

 

·                  each of the universities with onlinedegree programs has been approved by China’s Ministry of Education, or the MOE,to operate these programs as part of the MOE’s pilot program for onlineeducation and there is no assurance that the MOE will not restrict, suspend orrevoke this program in the future or that any of the currently approved universities,including our university partners, will continue to qualify for this program.

 

A significant factoraffecting the results of our online degree program business is the fees thatour university partners are required to pay to independent learning centers.The share of tuition revenue that we receive is after the payment of fees tolearning centers. As a result, an increase in the portion of tuition fees paidto the learning centers will result in a decrease in the 

 

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portion of tuition feesthat we receive as revenue. In 2007, our university partners paid fees toindependent learning centers in amounts ranging from 23% to 56% of the grosstuition revenues received by their online degree programs. In 2008, these samefees ranged in amounts from 23% to 54% of the gross tuition revenues receivedby their online degree programs. For fiscal years ended December 31, 2006,2007 and 2008, the portion of gross tuition fees that our university partnerspaid in aggregate to independent learning centers was approximately 39%, 40%and 39%, respectively. There can be no assurance that the amounts payable toindependent learning centers, as a portion of gross tuition fees, will notincrease.

 

To the extent any of thefactors discussed above or other adverse developments occur in the onlinedegree program sector, our revenue and results of operations from our onlinedegree program services business could be adversely affected.

 

***Most of our revenue comes from a limited number ofcustomers, the loss of which could significantly impact our revenue and resultsof operations.***

 

For fiscal years ended December 31,2006, 2007, and 2008, 67.3%, 68.2% and 67.3%, respectively, of our net revenuewas derived from our services to our five largest online degree programcustomers. Our three largest customers, Renmin University of China, ChinaAgricultural University and Dongbei University of Finance and Economics,accounted for 22.1%, 15.2 % and 13.3%, respectively, of our net revenue in2008.  These same customers accounted for21.1%, 17.3% and 14.0%, respectively, of our net revenue in 2007.  We will likely continue to rely on arelatively small number of customers for a significant portion of our revenuefor the foreseeable future. If for any reason our revenue from any of oursignificant customers or other online degree programs were to decline or if wewere to lose any of our significant customers, our revenue and results ofoperations would be materially and adversely affected.

 

***We may not succeed in attracting additional universityonline degree programs as customers and our growth prospects could suffer.***

 

Although our strategy isto increase the number of online degree programs using our services, we may notbe able to attract additional university customers. Developing and enteringinto a relationship with a university requires considerable effort on our part,and we may spend considerable time and still may not be successful indeveloping a new customer. Our ability to expand our services to additionalonline degree programs is dependent on our ability to identify potentialuniversity partners who can provide course offerings that will be attractive tothe target market and to develop a mutually acceptable arrangement with theuniversity for the development of a program. Some of the universities offeringonline degree programs that do not utilize our services have developed theirown technology platforms, and others have entered into service agreements withother service providers. Some of the universities we would like to partner withmay not have goals and objectives that are compatible with ours, may be subjectto long-term contracts with other service providers, or may have cumbersomedecision-making procedures that may delay or prohibit our entering into aservice relationship with them. In addition, some of these universities arealso being pursued by our competitors. As a result, we cannot predict whetherwe will be successful in attracting additional universities to which we canprovide services. If we are unsuccessful in establishing new servicerelationships, our strategic growth objectives may not be achieved, therebyadversely impacting our prospects and results of operations.

 

***The tuition charged by online degree programs, the secondaryand vocational schools that we provide curriculum programs to and our privateprimary and secondary schools are all subject to price controls administered bythe Chinese government, and our revenue is highly dependent on the level ofthese tuition charges.***

 

In the year ended December 31,2008, 80.4% of our net revenue was generated by providing services to onlinedegree programs. Our revenue in this segment comes primarily from service feesthat are paid by universities and calculated as a percentage of the tuitionrevenue of the online degree programs that we provide services to, and thetuition charges for these programs are subject to price controls administeredby various price control offices under China’s National Development and ReformCommission, or NDRC. Similarly, our revenue from the curriculum programs thatwe offer to secondary and vocational schools is also directly dependent on thetuition revenue of those schools, and those tuition charges are subject toadministrative price controls. The tuition charges of our private primary andsecondary schools are also subject to price controls. In light of thesubstantial increase in tuitions and other education-related fees in China inrecent years, China’s price control authorities may impose stricter pricecontrol on tuition charges in the future. If the tuition charges upon which ourrevenue depends, particularly the tuition charges for online degree programs,were to be decreased or if they were not to increase in line with increases inour costs because of the actions of China’s administrative price controls, ourrevenue and profitability would be adversely affected.

 

***Our international curriculum programs, which include ourPloytechnic and English language programs, are heavily regulated, and ourability to conduct business in this area is highly dependent on regulatorypolicies and our compliance with these policies.***

 

Our internationalpost-secondary Polytechnic curriculum program, or BCIT program, has recentlybeen restricted in its ability to contract new schools. In April 2007, theMOE issued the *Circular on FurtherRegulating Chinese-Foreign Cooperative Education Programs*. Thecircular directs the local education authorities generally to suspend theapproval of any new Chinese-foreign cooperative polytechnic education programsuntil the end of 2008, and there is no new policy currently being promulgatedto revoke the suspension.  To ensure thequality of the Chinese-foreign cooperative education programs, the circularemphasizes the regulatory supervision of these programs and advises localeducation authorities to closely supervise 

 

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and monitor the existingprograms, especially in recruiting materials, advertisements, and issuance ofdegrees and diplomas, and directs them to report and remedy any non-complianceby existing programs of the applicable regulations. As a result of thiscircular, our BCIT program has not been able to contract new schools for theprogram and we do not expect it will in the near future. Although the circularonly discusses the suspension of approvals through the end of 2008, we cannotassure you that our BCIT program will be able to contract new schools in 2009or at any time after that.

 

In addition, in recentyears our English language curriculum program, or FEC program, has facedchallenges obtaining certain regulatory approvals. In August 2004, the MOEpromulgated the *Announcement regardingRe-Approval of Chinese-foreign Cooperative Educational Institutions andPrograms*, or the Re-Approval Announcement, which requires Chinese-foreigncooperative educational institutions and programs that were established before July 1,2004 (the effective date of the Re-Approval Announcement) to be re-approved bythe MOE. Only four of our 19 contracted schools obtained re-approval from theMOE, and if MOE re-approval is not obtained, the remaining contracted schoolsmay terminate their FEC programs. As a result, in December 2008 wemutually terminated our agreement with Western Institute of Technology atTaranki (“WITT”), a post-secondary education institution based in New Zealandthat offers English language programs for overseas students, to serve as theexclusive service provider for all of WITT’s English language programs withinChina until September 2020. The schools that have been receiving supportfrom us under the FEC program, however, can continue to recruit students underthe FEC name even after termination of our agreement with WITT if they desire,since all education related support is provided by us.  However, we cannot assure you that any, or all,of the FEC contracted schools will continue to work with us in the future, andour partner schools may face challenges obtaining re-approvals for replacingWITT with other overseas education institutions with whom we may partner.

 

Failure to obtainre-approval for a majority of our contracted schools has adversely affected ourresults of operations and the prospects for our English language programs, andother regulatory actions could have similar adverse effects on our Polytechnicprograms. As a result of these developments, we incurred an impairment chargeof RMB68.2 million ($10.0 million) related to the international curriculumprogram segment during the year ended December 31, 2008, of which RMB39.1million was related to goodwill impairment and RMB29.1 million was related tointangible assets impairment.

 

***Our business is subject to seasonal fluctuations, which maycause our operating results to fluctuate from quarter to quarter. This mayresult in volatility and adversely affect the price of our ADSs.***

 

We have experienced, andexpect to continue to experience, seasonal fluctuations in our revenue andresults of operations, primarily due to seasonal changes in the number ofstudents who are enrolled in, or served by, our businesses. Historically, ourlargest revenue student enrollments occur in the fall, and we generallyrecognize revenue over the six-month period following these enrollments. As aresult, our revenue in the fourth quarter and first quarter of each year,representing the fall semester, have been higher than the other two quarters,which represent the spring semester. Our expenses and costs, however, do notnecessarily correspond with changes in our revenue or the number of studentswho are enrolled in, or served by, our businesses. We expect quarterlyfluctuations in our revenue and results of operations to continue. Thesefluctuations could result in volatility and adversely affect the price of ourADSs. As our revenue grows, these seasonal fluctuations may become more pronounced.

 

***During prior reporting periods, we identified materialweaknesses and  significant deficienciesin our internal control over financial reporting. Although we have sinceremedied these material weaknesses and significant deficiencies, if we fail to maintain an effective system ofinternal control over financial reporting, we may not be able to accuratelyreport our financial results or prevent fraud.***

 

We are subject to thereporting obligations under the U.S. federal securities laws. The SEC, as requiredby Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-OxleyAct, adopted rules that now require every public reporting company toinclude in its annual report management’s report on internal control overfinancial reporting, which contains management’s assessment of theeffectiveness of such company’s internal control over financial reporting. Inaddition, certain registrants are required to include an attestation reportfrom an independent registered public accounting firm on the effectiveness ofsuch registrant’s internal control over financial reporting.

 

Our management assessedthe effectiveness of our internal control over financial reporting as of December 31,2008 using the criteria set forth in the “Internal Control — Integrated Framework”report published by the Committee of Sponsoring Organizations of the TreadwayCommission (known as COSO) and has concluded that our internal control overfinancial reporting was effective as of December 31, 2008. Pursuant totemporary rules implemented by the SEC, this annual report on Form 20-Ffor the year ended December 31, 2008 does not include an attestationreport of Deloitte Touche Tohmatsu CPA Ltd., our independent registered publicaccounting firm, regarding our internal control over financial reporting.

 

We previously disclosedin our annual report on Form 20-F for the year ended December 31,2007 that we had identified two material weakness and two significantdeficiencies. “Material weakness” is a significant deficiency, or combinationof significant deficiencies, that results in more than a remote likelihood thata material misstatement of the annual or interim financial statements will notbe prevented or detected.  A “significantdeficiency” is a control deficiency, or combination of control deficiencies,that adversely affects our ability to initiate, authorize, record, process, orreport external financial data reliably in accordance with U.S. GAAP such thatthere is more than a remote likelihood that a misstatement of our annual or interimfinancial statements that is more than inconsequential will not be prevented ordetected.

 

During our 2008 fiscalyear, we implemented measures to resolve and remediate these materialweaknesses and significant deficiencies and to improve our internal anddisclosure controls, and we do not believe that the material weaknesses that wepreviously identified had a pervasive impact on our internal control overfinancial reporting. See “Item 15. Controls 

 

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and Procedures —Management’s Report on Internal Control over Financial Reporting.”Nevertheless, we cannot assure you that these measures will continue to be effectiveand that any significant deficiencies and material weakness in our internalcontrol over financial reporting will not be identified in the future.   Moreover, if we fail to maintain theadequacy of our internal control, we may not be able to conclude that we haveeffective internal control over financial reporting. Even if we do concludethat our internal control over financial reporting is effective, ourindependent registered public accounting firm may still issue a report that isqualified if it is not satisfied with our internal control or the level atwhich our controls are documented, designed, operated or reviewed, or if itinterprets the relevant requirements differently from us. Furthermore,effective internal control over financial reporting is necessary for us toproduce reliable financial reports and is important to help us to manage thecompany effectively and prevent fraud. As a result, our failure to achieve andmaintain effective internal control over financial reporting could result in aloss of investor confidence in the reliability of our financial statements,which in turn could harm our business and negatively impact the trading priceof our ADSs.

 

***Our limited operating history may not serve as an adequatebasis to judge our future prospects and results of operations.***

 

We began operations in1999 and only initiated three of our four lines of business in 2005 and 2006through acquisitions. Our limited operating history may not provide ameaningful basis on which to evaluate our business. For the year ended December 31,2008, we incurred a net loss of RMB43.0 million ($6.3 million), primarily dueto goodwill and intangible assets impairment losses related to ourinternational curriculum program. We cannot assure you that we will not recognizefuture impairment charges or incur future losses. We also expect that ouroperating expenses will increase as we expand. Given our limited operatinghistory and the limited period of time that our management team has workedtogether, our operating history may not provide you with a sufficient basisupon which to evaluate the ability of our management team to address theserisks. If we are not successful in addressing any or all of these risks, ourbusiness may be materially and adversely affected.

 

***We are dependent on third parties, particularly the learningcenters serving online degree programs, over which we have no control, toperform functions that are critical to the success of our business.***

 

The success of ourbusiness in providing services to online degree programs depends in part on theactions of learning centers and universities over which we have limited or nocontrol. The learning centers, principally operated by third parties, perform anumber of essential functions for universities that operate the online degreeprograms (such as marketing, enrollment, administration, tuition collection andtesting), but we have no ability to ensure that they adequately perform thesefunctions or comply with the regulations and standards applicable to them. Ifthe learning centers upon which our online degree programs are dependentexperience regulatory compliance issues, our results of operations and ourability to attract and retain university customers will be adversely affected.In addition, because a university must obtain regulatory approval, which isgenerally a time consuming process, to either change learning centers orestablish its own learning centers, the learning centers maintain a strongnegotiating position and are able to demand substantial compensation for theirservices.

 

***Because we face significant competition in several of ourlines of business, we could lose market share and may need to respond bylowering our prices, which could materially and adversely affect our results ofoperations.***

 

In addition to our recentcollaborative alliance agreement with Guangxi Radio and TV University(discussed elsewhere), we currently serve 18 out of the 67****universities that have been approved tooffer online degree programs in China as well as the China Central Radio and TVUniversity, which functions primarily as a distance learning facility. Ourrevenue from these 18 universities depends on the total cash tuition receiptsfor these programs. The online degree programs of these 18 universities must competewith the online degree programs of the other 49 universities approved to offeronline degree programs, as well as other education and training programs thatare seeking to enroll students. While we are trying to enter into agreementswith additional universities with respect to their online degree programs, weface competition from other service providers and may not succeed in ourefforts.

 

Our online tutoring andtest preparation business competes for students with traditional in-persontutoring services and after school programs, as well as with companiesproviding online services similar to ours. Our English language programscompete for students with other private schools with English language programs,sister schools, online programs, after school programs and self-study programs.Our Polytechnic programs compete for students with other Chinese-foreigncooperative education programs, sister school programs, distance learningprograms, self-study programs and other vocational and technical training programs.Our private primary and secondary schools compete for recruiting students withother schools in their respective areas as well as boarding schools thatrecruit students on a nationwide basis.

 

There are also many newentrants seeking to participate in the education sector in China, includingfor-profit and not-for-profit educational institutions from overseas that areattracted by the education market in China. Although restrictive regulation ofthe education sector in China may have limited our competition in the past, anyderegulation of this industry, or easing of restrictions on foreignparticipants, could increase the competition we face in one or more lines ofbusiness.

 

***Certain of our businesses face relatively low barriers toentry, which could result in even greater competitive pressure and potentialloss of market share in the future.***

 

Our online tutoringbusiness and international curriculum program business are characterized byrelatively low start-up and fixed costs, modest capital requirements, shortstart-up lead times and a limited need for significant proprietary technology.As a result, potential market entrants, both in China and from abroad, facerelatively low entry barriers to these markets. The online tutoring businessrequires relatively small amounts of capital and technological capabilities toenter. Similarly, other international programs similar to our internationalcurriculum programs could be initiated by one or more competitors in 

 

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cooperation withinternational partners. In addition, as the existing penetration rates of theselines of business are relatively low in our markets, competitors could acquiresignificant numbers of customers and establish significant market share withina relatively short period. For example, we incurred an impairment charge duringthe year ended December 31, 2008 of RMB68.2 million ($10.0 million) relatedto our international curriculum program, and we expect the future operatingresults of our FEC program and our recent partnership with Howe Sound SecondarySchool to provide English language instruction, which we refer to as our SCCprogram, to be adversely affected as a result of increasing competition,government regulation, lower student enrollments and lower per student amountspayable to us under our contractual arrangements with participating schools.Increased competition could result in loss of market share and revenue andlower profit margins, which would in turn have a material adverse effect on ourbusiness, financial condition and results of operations.

 

***We have not received permanent approval to operate ourlearning centers and our strategy to develop a nationwide network of learningcenters will involve substantial costs and may not succeed.***

 

In February 2007, wereceived provisional approval from the MOE to operate 10 learning centers inthe provinces of Beijing, Shanghai, and Jiangsu and Zhejiang for a trial periodof up to 18 months.  Although thisprovisional approval has since expired, the MOE has not ordered us to terminateoperations at these 10 learning centers, although no assurance can be giventhat the MOE will not.

 

We have also obtainedprovincial licenses from the Beijing, Shanghai, and Jiangsu provinces, as wellinformal approval from the Zhejiang province, to operate a total of 17 learningcenters, including the 10 that received provisional approval from the MOE in February 2007.We have also entered into agreements to establish three cooperative learningcenters in the provinces of Jilin, Hainan, and Guangdong.  Although these learning centers are notbranded under the ChinaEdu name, we derive revenue from them by contributing significantlyto their operations.

 

In addition to the 20learning centers discussed above, we have also entered into agreements with 32third party learning centers pursuant to which we provide assistance applyingfor approval from provincial level education authorities as well as securingadditional university online degree programs. In return, we receive a percentage of the tuition earned by these thirdparty learning centers.

 

Our strategy to operatelearning centers involves various risks and may not succeed. These risksinclude those related to operating a new business in which we do not havesignificant experience. To be successful in operating learning centers we willhave to obtain new contracts on acceptable terms with the university onlinedegree programs, all of which already have existing relationships with learningcenters. We will also have to incur substantial capital expenditures andoperating expenses and devote substantial time and other resources to establishand staff these new learning centers. In addition to the risks of entering anew line of business, we also face regulatory risks relating to our plan toexpand the scope of our approval to a national scope with an unlimited numberof learning centers and to convert our provisional licenses to permanentapprovals. Moreover, even in the event we are able to successfully obtain MOEapproval to operate learning centers in additional provinces, we will stillneed to obtain approval from the relevant provincial level educationauthorities before we are able to establish any new learning center, and thereare risks relating to our ability to obtain such provincial levelapprovals.  Any one of these risks couldcause our expansion into the learning center business to be delayed or  unsuccessful and our business, financialcondition and results of operations could be adversely affected.

 

***Our ability to attract and retain customers is heavilydependent on our reputation, which in turn relies on our maintaining a highlevel of service quality.***

 

We need to continue toprovide high quality services to our existing customers to maintain and enhanceour reputation, and we also need to attract and retain customers for ourvarious lines of business. All of our business lines are highly dependent onexisting and potential students perceiving our programs as high quality andworth the investment of time and money that they require of students. If any ofthe programs we operate or support experience service quality problems, ourreputation could be harmed and our results of operations and prospects could bematerially and adversely affected.

 

***We rely heavily on our senior management team and keypersonnel, and the loss of any of their services could severely disrupt ourbusiness.***

 

Our future success ishighly dependent on the ongoing efforts of our senior management and other keypersonnel. We rely heavily on their management skills, expertise in theeducation sector, strategy and marketing skills, as well as the relationshipsthey have with many of the educational institutions with which we do business,and with local and national regulatory authorities. We do not maintain keyperson life insurance on any of our senior executives or other key personnel.The loss of the services of one or more of our senior executives or other keypersonnel may have a material adverse effect on our business, financialcondition and results of operations. Competition for senior executives andother key personnel in China, such as personnel engaged in software and systemdevelopment, is intense, and the pool of suitable candidates is very limited.As a result, we may not be able to retain the services of our senior executivesor other key personnel, or attract and retain senior executives or other keypersonnel in the future.

 

In addition, if anymember of our senior management or any of our other key personnel joins acompetitor or forms a competing company, we may lose customers, businesspartners, key professionals and staff members to them. Each of our seniorexecutives and key personnel has entered into an employment agreement with usthat contains confidentiality and non-competition provisions. In the event of adispute between any of our senior executives or other key personnel and us,however, we cannot assure you as to the extent, if any, that these provisionsmay be enforceable in China due to uncertainties involving the Chinese legalsystem.

 

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***We may not be able to successfully execute futureacquisitions or efficiently manage the businesses we have acquired to date  or may acquire in the future.***

 

Since 2005, we haveentered several new lines of business through the acquisition of existingbusinesses or contractual rights. We may continue to expand, in part, byacquiring complementary businesses. The success of our past acquisitions andany future acquisitions will depend upon several factors, including:

 

·                  our ability to identify and acquirebusinesses on a cost-effective basis;

 

·                  our ability to integrate acquiredpersonnel, operations, products and technologies into our organizationeffectively;

 

·                  our ability to retain and motivate keypersonnel and to retain the customers of the acquired businesses;

 

·                  unanticipated problems or legalliabilities of the acquired businesses; and

 

·                  tax or accounting issues relating to theacquired businesses.

 

Any acquisition mayrequire a significant commitment of management time, capital investment andother resources. For example, our entry into the private primary and secondaryschool business, which includes our Anqing Foreign Language School (the “AnqingSchool”), Pingdingshan Wellent Bilingual School (the “Pingdingshan School”) andJingzhou School (Southern Campus), has required us to invest significantamounts for the acquisition of the rights to operate these schools and forexpanding facilities and upgrading the services offered by these schools.

 

In the case of the AnqingSchool, we had outstanding capital commitments of approximately RMB38.2 millionas of December 31, 2008 associated with acquisition of the AnqingSchool.  In addition, during the fiscalyear ended 2008, we completed Phase I construction of a new campus at theAnqing School and commenced Phase II construction, which we expect to becompleted by the fall of 2009.  Weanticipate that the additional capital expenditures associated with theconstruction at the Anqing School will be approximately RMB83.0 million.

 

In the case of thePingdingshan School, we acquired all of the rights and interests in the schoolin 2005.  As of December 31, 2008,we have no outstanding capital commitments associated its acquisition, althoughwe are currently in the process of constructing a new building and makingrelated facility improvements.  Weanticipate that the remaining capital expenditures associated with suchconstruction and facility improvements will be approximately RMB4.4 million.

 

In the case of theJingzhou School (Southern Campus), we initially planned to completeconstruction of a new campus by the fall 2006 recruiting season, although wehave encountered delays obtaining land-use rights for the new campus site aswell as delays due to inclement weather experienced in early 2008.  Because of these ongoing delays and theuncertainty as to when they will be resolved, we had outstanding capitalcommitments of approximately RMB64.8 million as of December 31, 2008associated with acquisition of the Jingzhou School (Southern Campus).  In addition, we anticipate that our remainingcapital expenditures associated with construction of the new campus will beapproximately RMB4.0 million.  Delayscompleting construction of the new campus at Jingzhou School (Southern Campus)have adversely affected revenue from this investment, and we cannot assure youthat we will be able to begin construction in time for the fall 2009 recruitingseason, or at all.

 

If we are unable toeffectively execute our acquisition strategy or integrate any acquiredbusiness, our business, financial condition and results of operations may bematerially and adversely affected. In addition, if we use our equity securitiesas consideration for acquisitions, the value of your ordinary shares or ADSs maybe diluted.

 

***If we are unable to attract and locate qualified personnelfor our various programs, in particular qualified educators, our business maybe materially and adversely affected.***

 

Each of our lines ofbusiness is highly dependent on the ability to attract qualified educators toprovide services in connection with our programs and the programs we support.The success of our programs and the programs we support, and thedifferentiating factor between our programs and those of the traditional educationsector in China, rely significantly on the quality of the educators we are ableto attract to such programs. For example:

 

·                  the online degree programs that we serverely to a significant degree on professors to prepare the online courseware;

 

·                  our international post-secondary programs rely oncapable instructors within participating colleges to take part in the trainingby the overseas post-secondary institutions;

 

·                  our online tutoring program needs to attract tutorswho are perceived to be successful in preparing students for examinations;

 

·                  our private primary and secondary schools need toattract qualified and experienced teachers and administrators; and

 

·                  we need to find well-qualified native English speakersto teach in the English language programs and the international post-secondaryprograms that we support and the private primary and secondary schools operatedby our Chinese affiliated entities.

 

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There are considerablechallenges in locating and attracting the personnel we need. There isconsiderable competition in China to attract strong educators. To the extent wehave focused our market for English language programs, internationalpost-secondary education programs and our private primary and secondary schoolsin second tier cities, we also face challenges in attracting teachers fromoverseas who are willing to relocate to areas in which there are few, if any,expatriates and the living conditions are markedly different from their homecountries. If we are unable to attract and locate well-qualified educators forthe various programs, our results of operations could be adversely affected.

 

***If we are not able to respond successfully to technologicalor industry developments, our business may be materially and adversely affected.***

 

The market for providingservices to educational institutions for their online degree programs and themarket for online tutoring services are relatively new. These markets arecharacterized by rapid technological developments, the introduction of newbusiness models, launches of new products and services and changes in customerneeds and behavior. For example, the delivery of online degree programs inChina is still relatively new and the evolution of these programs fromrelatively rudimentary systems for delivery of course content to more robustinteractive models is taking place on an ongoing basis. As high speed Internetconnections become available for more potential users, the expectations ofstudents for online degree programs are likely to require continued devotion ofour research and development efforts to maintain our position as a perceivedmarket leader in providing technology services to online degree programs. Ouronline tutoring programs will likewise face expectations from students for amore stimulating and interactive environment commensurate with their otheronline experiences. Innovation by our competitors in China and overseas maymake our existing services to online degree programs and our online tutoringprograms obsolete or less competitive. To respond to these types ofdevelopments, we may be required to undertake substantial efforts and incursignificant costs. If we do not successfully respond to these types ofdevelopments in a timely and cost-effective manner, our business may bematerially and adversely affected.

 

All of the servers usedto support our business operations are currently hosted in the same location inBeijing. We do not have a backup location, so we cannot assure you that we willbe able to operate if our server location suffers from the effects of fire,floods, typhoons, earthquakes, power loss, telecommunications failures,break-ins, war, terrorist acts or similar events. Any of these events couldgive rise to server interruptions, breakdowns, system failures, technologyplatform failures and Internet failures, which could cause the loss orcorruption of data or malfunctions of software or hardware. These types ofevents could adversely affect our ability to provide our services to onlinedegree programs and our online tutoring program and adversely affect ouroperations. See “Item 5. Operating and Financial Review and Prospects—C.Research and Development, Patents and Licenses, Etc.—Technology.”

 

***If we are unable to achieve or maintain economies of scalewith respect to our various lines of business, our results of operations fromthese businesses may be materially and adversely affected.***

 

Each of our lines ofbusiness involves a degree of upfront investment in the development of programsor the acquisition of contract rights to provide services to programs, and ourrevenue and profitability depend on the number of students in these programs.The online degree programs to which we provide support and services, and fromwhich we derive most of our revenue and profits, require considerableinvestments of time and resources to develop. In many cases, these online degree programs also require that we makesubstantial investments in collaborative alliances, which are the majorityowned entities that we form with certain of our university partners to provideservices to their online degree programs, as well as provide advance paymentsto the universities to attract university partners. The profitability of theseprograms for us depends on the ability of the programs to attract students.Similarly, our revenue from our online tutoring programs, internationalprograms, and private primary and secondary schools depends on our attractingenough students on an ongoing basis. If the programs or schools are unable torecruit enough students to offset the development and operating costs, ourresults of operations will be adversely affected.

 

***The demand for our online tutoring services may be impactedby parental concern of children spending too much time on online gaming andother non-educational online activities.***

 

Parents and governmentofficials in China have expressed concern that school age children are spendingtoo much time on the Internet playing online games and engaging in othernon-productive online activities. As a result, parents may not be supportive ofbuying computers and other computer resources or Internet access for theirchildren, and this could adversely affect online education programs such as ouronline tutoring programs. This attitude could adversely affect our ability toexpand enrollment in our online tutoring programs and thereby adversely affectour results of operations.

 

***If we are unable to prevent others from using ourintellectual property or if we are subject to intellectual propertyinfringement claims by others, our business may be materially and adverselyaffected.***

 

Our intellectual propertyhas been and will continue to be subject to various forms of infringement,theft and misappropriation. We are also susceptible to others copying ourbusiness model and methods. Our courseware and course materials havesignificant value and could be copied. We devote substantial resources to thedevelopment of platform support and courseware for online degree programs, thecourse materials and systems support for our online tutoring program, andimplementation of the Polytechnic programs and the English language programs wesupport. The legal protection of intellectual property in China is significantlymore limited than in the United States and many other countries and may affordus little or no effective protection.

 

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In addition, we alsocould face potential claims that we have infringed the intellectual propertyrights of third parties. For example, with regard to the intellectual propertyrights to courseware used in online programs from which we derive servicerevenue, the professors who assisted in developing the courseware could claimthat they have rights to such courseware. If such claims are brought against usor the universities conducting the online degree programs, or if we arerequired to bring litigation to protect our intellectual property, we couldface expensive litigation that could divert management resources and materiallyand adversely affect our results of operations.

 

***Our university customers may be liable for refunds tostudents, which could adversely affect our revenue.***

 

Most university onlinedegree programs require students to pre-pay for a set number of courses at theoutset of their enrollment; however, these students may not enroll in all ofthese courses in the same period for which they have prepaid tuition. Wereceive service fees from each university for technology and support servicesthat we render to our university customers during a given semester to supporttheir online degree programs. Our contracts are typically structured so thatour service fees are based upon the cash tuition receipts of the universityduring a given semester. To the extent students request that the universitiesrefund any unused prepaid tuition, our revenue could be adversely affectedbecause the universities are entitled to deduct these refunds from the cashreceipts upon which our fees are based. In 2008, the average refund rate, whichis refund expressed as a percentage of cash receipts, of the university onlinedegree programs that we service was 1%. Increases in this rate could increaseour revenue volatility and adversely affect the profitability of our services.

 

***We rely heavily on our information systems, and if we failto further develop our technology, or if our systems contain “bugs” or otherundetected errors, our operations may be seriously disrupted.***

 

To achieve our strategicobjectives and to remain competitive, we must continue to develop and enhanceour technology and our use of information that is available within our onlinesystems. This may require us to acquire additional equipment and software andto develop new applications within our online systems. Our success in thedevelopment of new service offerings, such as community features and improvedstudent management systems, depends in large part upon our ability to store,retrieve, process and manage substantial amounts of information. Our onlinesystems and the technology platform upon which online degree programs operate,and our other databases, products and systems could contain undetected errorsor “bugs” that could adversely affect their performance. In addition, oursystems supporting online degree programs and online tutoring programsoccasionally experience peak demands during which they are unable to providethe responsiveness expected by students enrolled in these programs. If weencounter errors or other service quality or reliability issues, or if we areunable to design, develop, implement and utilize information systems and thedata derived from these systems, our ability to realize our strategicobjectives and our profitability could be adversely affected, and this maycause us to lose market share, harm our reputation and brand names, and materiallyand adversely affect our business.

 

***The successful operation of our business depends upon theperformance and reliability of the Internet infrastructure andtelecommunications networks in China.***

 

Our services to onlinedegree programs and our online tutoring program depend on the performance andreliability of China’s Internet infrastructure. In China, almost all access tothe Internet is maintained through state-owned telecommunication operatorsunder the administrative control and regulatory supervision of China’s Ministryof Information Industry, or the MII. In addition, the national networks inChina are connected to the Internet through international gateways controlledby the Chinese government. These international gateways are the only channelsthrough which a user in China can connect to the Internet. We cannot assure youthat a more sophisticated Internet infrastructure will be developed in China.We may not have access to alternative networks in the event of disruptions,failures or other problems with China’s Internet infrastructure. In addition,China’s Internet infrastructure may not support the demands associated withcontinued growth in Internet usage.

 

We rely on ChinaTelecommunications Corporation, or China Telecom, and China NetworkCommunications Corporation, or China Netcom, to provide us with datacommunications capacity primarily through local telecommunications lines andtheir Internet data centers that host our servers. We do not have access toalternative services in the event of disruptions, failures or other problemswith the fixed telecommunications networks of China Telecom and China Netcom,or if China Telecom or China Netcom otherwise fail to provide such services.Any unscheduled service interruption could damage our reputation and result ina decrease in our revenue. Furthermore, we have no control over the costs ofthe services provided by China Telecom and China Netcom. If the prices that wepay for telecommunications and Internet services increase significantly, our profitabilitycould be adversely affected. In addition, if Internet access fees or othercharges to Internet users increase, the users of our online tutoring servicesmay find our services less affordable, which may in turn reduce our revenue.

 

***Computer viruses and “hacking” may cause delays orinterruptions on our systems and may reduce use of our services and damage ourreputation and brand names.***

 

Our online degree programplatforms contain substantial information about students, their attendance andperformance, and the administration of the entire student life cycle fromenrollment to graduation. As such, these online systems and records may becomeattractive targets for either dissatisfied students, or hackers in general, whoseek to access and modify records maintained on these systems, or to disruptthe online degree programs. “Hacking” involves efforts to gain unauthorizedaccess to information or systems or to cause intentional malfunctions, loss orcorruption of data, hardware or other computer equipment. Computer viruses andhacking may cause delays or other service interruptions on our systems. Inaddition, the inadvertent transmission of computer viruses could expose us to amaterial risk of loss or litigation. Hacking and computer 

 

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viruses could result insignificant damage to our systems and databases, disruptions to our businessactivities, including to our e-mail and other communications systems, breachesof security and the inadvertent disclosure of confidential or sensitiveinformation, interruptions in access to our website and the websites for onlinedegree programs and our online tutoring programs, and other material adverseeffects on our operations. We may incur significant costs to protect oursystems and equipment against the threat of, and to repair any damage causedby, computer viruses and hacking. Moreover, if a computer virus or hackingaffects our systems and is highly publicized, our reputation could bematerially damaged and usage of our services may decrease.

 

***We incur increased costs as a result of being a publiccompany.***

 

As a public company, weincur significant legal, accounting and other expenses that we did not incur asa private company prior to our initial public offering in December 2007.Moreover, the Sarbanes-Oxley Act, as well as new rules subsequently implementedby the SEC and NASDAQ have imposed additional requirements on corporategovernance practices of public companies, including Section 404 relating tointernal control over financial reporting. These rules and regulations increaseour legal and financial compliance costs and make certain corporate activitiesmore time-consuming and costly. It may also be difficult for us to attract andretain qualified persons to serve on our board of directors due to increasedrisks of liability to our directors under the new rules and regulations.

 

Although our results ofoperations, cash flows and financial condition reflected in our consolidatedfinancial statements include all expenses allocable to our business, because ofthe additional administrative and financial obligations associated withoperating as a publicly traded company, they may not be indicative of theresults of operations that we would have achieved had we operated as a publicentity for all periods presented or of future results that we may achieve as apublicly traded company with our current holding company structure. Suchvariations may be material to our business.

 

**RisksRelated to China’s Regulation of the Education and Telecommunication Sectorsand Our Corporate Structure**

 

***If the Chinese authorities determine that our organizationalstructure for operating our business does not comply with Chinese regulations,we could be subject to sanctions, including being required to discontinue allor a portion of our business.***

 

We and our Chinesesubsidiaries are considered foreign persons or foreign invested enterprisesunder Chinese laws, and, as a result, we are required to comply with Chineselaws and regulations applicable to foreign investment, including thoserestricting foreign participation in the education and telecommunicationsindustries. For example, foreign entities that are not educationalinstitutions, such as our company, cannot operate schools or education programsin China, and all foreign persons, including foreign educational institutions,are precluded from operating primary and middle schools in China, such as ourprivate primary and secondary schools. Similarly, there are limitations on theability of foreign parties such as our company and our Chinese subsidiarieswith regard to owning Internet content provider, or ICP, licenses, which arenecessary for the operation of our corporate website and the website for ouronline tutoring business. Because of these restrictions, we have developed acorporate structure in which we do not have an ownership interest in theentities involved in activities in which foreign entities’ and foreign investedenterprises’ participation is prohibited, and we function as a service providerto Chinese universities with respect to their online degree programs. For adiscussion of the limitations on foreign ownership and participation governingour businesses, see “Item 4. Information on the Company—B. BusinessOverview—Regulation—Limitations on Foreign Ownership of Our Businesses.” For adescription of our corporate structure, see “Item 4. Information on theCompany—C. Organizational Structure.”

 

The Chinese laws andregulations applicable to online university degree programs require that theuniversity offering such a program be responsible for the recruitment,operations, curriculum and management of the online program. Because of theserestrictions, we provide services to Chinese universities’ online degreeprograms either through a contractual relationship between the university andus, or through a collaborative alliance established by the university and usspecifically to provide services to that university’s online degree program.For some of our university partners, our services also include the licensing ofcertain of our domain names for their use to operate their online degreeprograms. If the relevant Chinese regulatory authorities were to find that theservices we provide to our university partners, or that our service contractrelationships, our collaborative alliance service provider structures or bothof these structures, violate the regulations requiring that these online degreeprograms be controlled by the universities, our business model might requireextensive revision or be unworkable and we could be subject to sanctions and berequired to discontinue all or a portion of this business. These developments wouldadversely affect our business, financial condition and results of operations.

 

***If the ICP license for the operation of our business websiteis suspended or revoked by the MII due to non-compliance with its requirements,we may have to shut the website down, which could have an effect on ourbusiness and market perception.***

 

In July 2006, the MIIissued the Notice on Strengthening Management of Foreign Investment inOperating Value-Added Telecom Services. The notice prohibits Chinese ICPsengaged in providing value-added telecom services from leasing, transferring orselling their ICP licenses or providing facilities or other resources toforeign investors operating in violation of restrictions on foreign investment.The notice requires that Chinese ICPs must directly own the trademarks anddomain names for websites operated by them, as well as servers and otherinfrastructure used to support these websites. The notice also requires ChineseICPs to evaluate their compliance with the notice by November 1, 2006 andcorrect any non-compliance. A Chinese ICP’s failure to complete the proceduresby November 1, 2006 could be the basis for revocation of its ICP license. Dueto a lack of interpretative materials from the MII, the impact of this circularon us is unclear.  Xiandai Technologyholds 

 

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the ICP license for ourbusiness website, www.chinaedu.net. We have not transferred the domain name andtrademark for www.chinaedu.net to Xiandai Technology, and we may be required tomake such transfer in the future.  If weare unable to do so, the ICP license held by Xiandai Technology could besuspended or revoked by MII. If Xiandai Technology’s ICP license is suspendedor revoked, we would have to shut down our business website, which may have anadverse effect on our business and market perception.

 

***Some of our university partners for online degree programshave not received all of the required approvals for their websites.***

 

Currently, websitesestablished by universities for their online degree programs approved by theMOE are generally considered by the MII to be not-for-profit operations, andtherefore the MII only requires the universities to make an ICP filing, ratherthan the more burdensome process of obtaining an ICP license, for the operationof the websites related to their online degree programs. The MII could,however, require the universities to obtain ICP licenses in the future. Some ofour university partners for online degree programs have not made the requiredfiling with the MII. In addition, our university partners may be required inthe future to make other filings or obtain other approvals to maintain their onlinedegree programs. If our university partners fail to make these filings, orobtain these licenses or other approvals, their online degree programs may besanctioned or suspended, which would have a material adverse effect on ourresults of operations.

 

***Our online tutoring business was acquired through atransaction that did not comply with applicable Chinese regulations; we maytherefore face regulatory challenges, including fines and other sanctions, withrespect to this business.***

 

Notwithstanding certainrestructuring activities and the acquisition of 100% of the equity interest inGotop Electronic, the entity that provides our online tutoring services and theICP services related to such online tutoring services through one of ourChinese affiliated entities, Hongcheng Education, our initial 80% equityinterest in Gotop Electronic was originally acquired in 2005 through a separatesubsidiary, Hongcheng Liye. That acquisition required approvals from the MII,the MOE and the Ministry of Commerce, and these approvals were notobtained.  Although we acquired theremaining 20% equity interest in Gotop Electronic in 2008, any challenge by theChinese government to our initial acquisition or the imposition of sanctionsagainst us for our activities before the restructuring could adversely affectour results of operations. In 2008, our online tutoring business accounted for4.9% of our net revenue.

 

***Certain of our Chinese subsidiaries, Chinese affiliatedentities and customers may face regulatory challenges, including fines andother sanctions, as result of their failure to comply with certain licensingand regulatory approval requirements.***

 

When Gotop Electronic,our Chinese affiliated entity that holds the ICP license for our onlinetutoring business, was approved by relevant Chinese authorities to engage inthe ICP business, its registered capital did not meet the minimum requirementspecified under Chinese law for ICP license holders. We have since increasedthe registered capital of Gotop Electronic to satisfy this requirement. See “Item4. Information on the Company—B. Business Overview—Regulation—Regulations onInternet Information Services.” In addition, two of our Chinese subsidiaries,Gotop Hongcheng and Xuezhi Shidai, were previously engaged in the sale ofproducts and services for our online tutoring program which exceeded the scopeof their business licenses. We have subsequently transferred the salesactivities to third party distributors and our sales centers which have therequired business licenses. There is no assurance that we will not besanctioned for our non-compliance before these corrective measures were taken.These sanctions can range from monetary fines and penalties to suspension ofour licenses or services that we provide to our customers.

 

Our online tutoringbusiness may be deemed to be engaged in “Internet publishing,” “Internetculture activities” and “broadcasting audio-video programs through theInternet,” which, under Chinese regulations, would require Gotop Electronic toobtain three additional licenses, the online publication license, the Internetculture business operation license and the license for broadcasting audio-videoprograms through the Internet. At present, there is no official orpublicly-available definition of “Internet publishing” or “Internet cultureactivities.” Based on verbal confirmations from the relevant regulatoryauthorities, our online tutoring business currently does not fall into thescope of “Internet publishing,” “Internet culture activities” or “broadcastingaudio-video programs through the Internet.” However, there is no assurance thatGotop Electronic would not be required to obtain these licenses in the futureas a result of changes in interpretation of the relevant rules or changes inposition of the relevant authorities. See “Item 4. Information on theCompany—B. Business Overview—Regulation—Regulations on Online Publications,” “—Regulationson Internet Culture Activities” and “—Regulations on Broadcasting Audio-VideoPrograms through the Internet or Other Information Network.” If Gotop isrequired to obtain these licenses in the future and is unable to do so, we mayface regulatory challenges, including fines, suspensions of service and othersanctions, in respect of our online tutoring business.

 

***Our contractual arrangements with our Chinese affiliatedentities and their shareholders may not be as effective in providingoperational control and economic benefits as direct ownership.***

 

We rely on one of ourChinese affiliated entities, Hongcheng Education, to operate our privateprimary and secondary schools and to provide services to some of our universitycustomers. We rely on another of our Chinese affiliated entities, XiandaiTechnology, to hold and maintain certain ICP licenses for operating our websites.Hongcheng Education and Xiandai Technology are each owned by Chinese citizenswith whom we have entered into contractual arrangements to provide us withcontrol over and substantially all the economic benefits from these entities.These entities are our variable interest entities, but we have no directownership interest in either of them. Our contractual arrangements with theseChinese affiliated entities and the shareholders of these Chinese affiliatedentities include technical consulting and services agreements, loan agreements,

 

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shareholder voting rightsentrustment agreements, call option agreements, equity pledge agreements andpowers of attorney. For a description of these contractual arrangements, see “Item4. Information on the Company—C. Organizational Structure—Our CorporateStructure and Contractual Arrangements.” There are considerable uncertaintiesregarding the interpretation and application of Chinese laws and regulationsgoverning these contractual arrangements. Accordingly, we cannot guarantee thatthese arrangements will not be challenged by Chinese regulatory authorities orfound to violate existing Chinese laws or regulations or new laws andregulations that may be adopted in the future. In addition, under the StateAdministration of Foreign Exchange, or SAFE, regulations, all foreigndenominated loans are required to be registered with SAFE. Our U.S. dollarloans to the shareholders of Hongcheng Education to fund the registered capitalrequirements of Hongcheng Education were not registered with the SAFE at thetime they were made. As a result, we could be subject to sanctions for these loansand these loans may not be enforceable under Chinese laws.

 

Our contractualarrangements with our Chinese affiliated entities may not be as effective inproviding us with control over them as direct ownership of these entities wouldbe. In addition, our Chinese affiliated entities or their shareholders maybreach the contractual arrangements we have with them. For example, our Chineseaffiliated entities may distribute dividends to their shareholders who maydecide not to remit these dividends to us in accordance with our contractualarrangements. Moreover, our Chinese affiliated entities or their shareholdersmay refuse to renew these contractual arrangements. In addition, in the eventof the death or disability of any of the shareholders of our Chinese affiliatedentities, there is uncertainty under Chinese law whether the shareholder votingrights entrustment agreements that we have entered into with them would beenforceable against their legal heirs or assigns. Furthermore, although ourloans to shareholders of our Chinese affiliated entities specify that they mayonly be repaid with the shares of those companies held by the shareholders, itis unclear whether this provision is enforceable under Chinese law. If disputesunder these contractual arrangements were to arise, we would have to rely onlegal remedies under Chinese law. These remedies may not always be effective,particularly in light of uncertainties in the Chinese legal system, and may besignificantly more limited than the legal remedies available in the legalsystems of the United States and many other countries. See “—Risks Related tothe People’s Republic of China—China’s legal system has inherent uncertaintiesthat could materially and adversely affect us.” If we are unable to enforce ourrights, we may be unable to operate certain of our businesses through XiandaiTechnology or Hongcheng Education, or we may be unable to receive all of theeconomic benefits to which we are entitled from these entities.

 

***Our equity pledge agreements with the shareholders of ourChinese affiliated entities may not be enforceable until they are registeredwith the relevant administration for industry and commerce pursuant to theChinese Property Rights Law.***

 

Under the equity pledgeagreements, the shareholders of the Chinese affiliated entities pledged theirequity interests in these entities to Hongcheng Technology, our Chinesesubsidiary. These pledges were created by recording the pledge on theshareholder registry of the relevant Chinese affiliated entity in accordancewith the then effective Chinese laws. However, according to the ChineseProperty Rights Law, which became effective as of October 1, 2007, thesepledges may not be enforceable until they are registered with the relevantadministration for industry and commerce. Hongcheng Technology applied for suchregistration, but the application was denied as no registration procedures wereyet available. Hongcheng Technology will continue to endeavor to register thesepledges when the administration for industry and commerce implementsregistration procedures in accordance with the Chinese Property Rights Law inthe future. But we cannot assure you that Hongcheng Technology will be able toregister the pledges, and if Hongcheng Technology is unable to do so, theeffectiveness of the pledges may be affected.

 

***The shareholders of our Chinese affiliated entities may havepotential conflicts of interest with us, which may materially and adverselyaffect our business and financial condition.***

 

The shareholders of HongchengEducation are Mr. Changqing Xie, one of our officers, and Mr. Xueshan Yang, ourformer director. The shareholders of Xiandai Technology are Mr. Gongquan Wangand Mr. Xueshan Yang, both our former directors. In the case of Mr. ChangqingXie, conflicts of interests between his duties to our company and to HongchengEducation may arise. In addition, in the case of Mr. Gongquan Wang and Mr. XueshanYang, both former directors of our company, they do not owe any fiduciary dutyto our company, they have not entered into any non-competition or employmentagreements with our company and they do not have any relationship with us orour business except through these contractual arrangements and they are not ourshareholders. These individuals may breach or cause our Chinese affiliatedentities and their subsidiaries to breach or refuse to renew the existingcontractual arrangements that allow us to effectively control our Chineseaffiliated entities and their subsidiaries, and receive economic benefits fromthem. Currently, we do not have existing arrangements to address potentialconflicts of interest between these individuals and our company. We cannotassure you that any or all of these individuals will act in the best interestsof our company or that conflicts of interests will be resolved in our favor. Ifwe cannot resolve any conflicts of interest or disputes between us and theowners of our Chinese affiliated entities, we would have to rely on legalproceedings, which could result in disruption of our business and substantialuncertainty as to the outcome of any such legal proceedings.

 

***Our Chinese affiliated entities and their subsidiaries maybe subject to significant limitations on their ability to operate privateschools or make payments to related parties or otherwise be materially andadversely affected by changes in Chinese laws and regulations.***

 

Under the Chinese lawsand regulations applicable to private schools, a private school is one thatdoes not require reasonable return unless it elects to be treated as a schoolthat requires reasonable returns. At the end of each fiscal year, every privateschool is required to allocate a certain amount to its development fund for theconstruction or maintenance of the school or procurement or upgrade of educationalequipment. For a private school that requires reasonable returns, this amount 

 

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must be at least 25% ofthe school’s annual net income, and for other private schools this amount mustbe at least 25% of the school’s annual increase in its net assets, if any.Private schools that require reasonable returns must publicly disclose theirelection of that status and provide additional information required under theregulations such as the school’s tuition and other fees and admissionstandards. A private school is required to consider factors such as the school’stuition, ratio of the funds used for education-related activities to the coursefees collected, admission standards and educational quality when determiningthe percentage of the school’s net income to be distributed to investors asreasonable returns. However, none of the current Chinese laws and regulationsprovides a formula or guidelines for determining “reasonable returns.” When theformula or the guidelines for determining “reasonable returns” are issued bythe relevant authorities, they may not permit returns to us that will becommercially reasonable and may limit our expected return on investment in ourschools.

 

Private schools that havenot elected to require reasonable returns are entitled to the same preferentialtax treatment as public schools, while preferential tax treatment policiesapplicable to private schools requiring reasonable returns are to be separatelyformulated by the relevant authorities. To date, however, no separateregulations or policies have been promulgated in this regard. As a result, ourprivate primary and secondary schools are subject to the specific requirementsof their respective local tax authorities, which vary from location tolocation. Our Anqing School was established as a school that requiresreasonable returns. We anticipate adopting articles of association for thePingdingshan School in 2009 in order to designate it as a school that requiresreasonable returns.****After thecompletion of the construction of the new campus for our Jingzhou School(Southern Campus), we also plan to adopt articles of association to designateit as a school that requires reasonable returns.

 

Current laws andregulations governing private education may be amended or replaced by new lawsand regulations that (i) impose significant limitations on the ability of ourschools to operate their business, charge course fees or make payments torelated parties for services received, (ii) specify the formula for calculating“reasonable returns” or (iii) change the preferential tax treatment policiesapplicable to private schools. We cannot predict the timing and effects ofamendments or new laws and regulations. Changes in Chinese laws and regulationsgoverning private education or otherwise affecting our Chinese affiliatedentities’ and their subsidiaries’ operations could materially and adverselyaffect our business prospects and results of operations.

 

***Contractual arrangements among our Chinese subsidiaries andChinese affiliated entities and their subsidiaries may be subject to scrutinyby the Chinese tax authorities and we or our Chinese affiliated entities andtheir subsidiaries could be required to pay additional taxes, which couldsubstantially reduce our consolidated net income and the value of yourinvestment.***

 

Arrangements andtransactions among related parties may be subject to audit or challenge by theChinese tax authorities. We could face material and adverse tax consequences ifthe Chinese tax authorities determine that the contractual arrangements amongour Chinese subsidiaries and our Chinese affiliated entities and theirsubsidiaries do not represent arm’s-length terms. If this were to occur, thetax authorities could adjust our Chinese affiliated entities’ or any of theirsubsidiaries’ income in the form of a transfer pricing adjustment. A transferpricing adjustment could, among other things, result in a reduction, forChinese tax purposes, of expense deductions recorded by our Chinese affiliatedentities or any of their subsidiaries, which could in turn increase their taxliabilities. The Chinese tax authorities could also impose late payment feesand other penalties on our Chinese affiliated entities for under-paid taxes. Inaddition, any challenge by the Chinese tax authorities may limit the ability ofour Chinese affiliated entities to maintain any preferential tax treatments andother financial incentives they currently enjoy. Our consolidated net incomemay be materially and adversely affected if our Chinese affiliated entities’tax liabilities increase or if they are found to be subject to late paymentfees or other penalties.

 

***Regulatory agencies could commence investigations of theprivate primary and secondary schools directly owned and operated by asubsidiary of one of our Chinese affiliated entities, and if the results of theinvestigations were to be unfavorable to us, we could be subject to fines,penalties, injunctions or other censure that could have an adverse impact onour results of operations.***

 

Chinese laws andregulations currently prohibit foreign ownership of primary and middle schoolsin China. Through Hongcheng Education and contractual arrangements with ourChinese affiliated entities, we own and/or operate private primary andsecondary schools. As the provision of private primary and middle schoolservices is heavily regulated in China, our private primary and secondaryschools and any new primary schools that our Chinese affiliated entities andtheir subsidiaries may acquire or establish may be subject from time to time toinvestigations, claims of non-compliance or lawsuits by governmental agencies,which may allege statutory violations or regulatory infractions. If the resultsof these investigations were to be unfavorable to us, we could be subject tofines, penalties, injunctions or other censure that could have an adverseimpact on our results of operations. Even if we were to adequately address anyissues raised by a government investigation, we might have to devotesignificant financial and management resources to resolve these issues, whichcould harm our business.

 

***We may in the future rely on dividends and otherdistributions on equity paid by our Chinese subsidiaries to fund any cash andfinancing requirements we have, and any limitation on the ability of ourChinese subsidiaries and Chinese affiliated entities to make payments to uscould have a material adverse effect on our ability to conduct our business.***

 

We are a holding company,and we may rely in the future on dividends from our Chinese subsidiaries andservice, license and other fees paid to our Chinese subsidiaries by our Chineseaffiliated entities and their subsidiaries for our cash requirements, includingservicing any debt we may incur. Current Chinese regulations permit our Chinesesubsidiaries to pay dividends to us only out of their accumulated profits, ifany, determined in accordance with Chinese accounting standards and 

 

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regulations. In addition,each of our Chinese subsidiaries and Chinese affiliated entities (other thanour schools, which are subject to different regulations) in China is requiredto set aside at least 10% of its after-tax profits each year, if any, to fund astatutory reserve until such reserve reaches 50% of its registered capital.These reserves are not distributable as cash dividends. Currently, all of ourChinese subsidiaries have to comply with this reserve requirement since none oftheir statutory reserves have reached 50% of their registered capital.Furthermore, if our Chinese subsidiaries and Chinese affiliated entities incurdebt on their own behalf in the future, the terms of that debt may restricttheir ability to pay dividends or make other payments to us. Moreover, at theend of each fiscal year, every private school in China is required to allocatea certain amount to its development fund for the construction or maintenance ofthe school or procurement or upgrade of educational equipment. For privateschools that require reasonable returns, this amount must be at least 25% ofthe annual net income of the school, if any. As a result, our return oninvestment in our private schools will be limited by this reserve requirement.See “—Our Chinese affiliated entities and their subsidiaries may be subject tosignificant limitations on their ability to operate private schools or makepayments to related parties or otherwise be materially and adversely affectedby changes in Chinese laws and regulations.” Any limitation on the ability ofour Chinese subsidiaries and Chinese affiliated entities to distributedividends or other payments to us in the future could materially and adverselylimit our ability to grow, make investments or acquisitions that could bebeneficial to our businesses, pay dividends, or otherwise fund and conduct ourbusiness.

 

***We may be treated as a “resident enterprise” for PRC taxpurposes under th****e **Enterprise IncomeTax Law,****which may subject us toPRC income tax for our income originated both within and outside the PRC.***

 

Under the EnterpriseIncome Tax Law (the “EIT Law”) that went into effect on January 1, 2008,enterprises established under the laws of non-PRC jurisdictions but whose “defacto management” body is located in the PRC, may be treated as “residententerprises” for PRC tax purposes. The EIT Law’s implementing rules define “defacto management” as having substantial and overall management and control overthe production and operations, personnel, accounting, and properties of theenterprise. Based on our analysis of the current facts, we believe that we andour overseas subsidiaries should not be treated as “resident enterprises” forPRC tax purposes. It remains unclear, however, as to how tax authorities willdetermine tax residency based on the facts of each case. For the year ended December31, 2008, our calculation of income taxes generally reflects our status as anon-China tax resident company. If the PRC governmental authorities hold thatwe and our overseas subsidiaries should be treated as a resident enterprise forPRC tax purposes after January 1, 2008, the effective date of the EIT Law, ourworldwide income will be subject to PRC income tax at the 25% uniform tax rate,which could have an impact on our effective tax rate and an adverse effect onour net income and results of operations, although dividends distributed fromour PRC subsidiaries to us could be exempt from Chinese dividend withholdingtax, since such income is exempted under the new EIT Law to a PRC residentrecipient.

 

***If we are treated as a “resident enterprise” under the EITLaw, dividends payable by us to our foreign investors and gain on the sale ofour ADSs or ordinary shares may become subject to taxes under PRC tax laws.***

 

Under the EIT Law andimplementation regulations issued by the State Council, PRC income tax at therate of 10% is applicable to dividends payable to investors that are “non-residententerprises,” which do not have an establishment or place of business in thePRC, or which have such establishment or place of business but the relevantincome is not effectively connected with the establishment or place ofbusiness, to the extent such dividends have their sources within the PRC.Similarly, any gain realized on the transfer of ADSs or shares by suchinvestors is also subject to 10% PRC income tax if such gain is regarded asincome derived from sources within the PRC. If we are considered a PRC “residententerprise,” it is unclear whether dividends we pay with respect to ourordinary shares or ADSs, or the gain you may realize from the transfer of ourordinary shares or ADSs, would be treated as income derived from sources withinthe PRC and be subject to PRC tax. If we are required under the EIT Law towithhold PRC income tax on dividends payable to our non-PRC investors that are “non-residententerprises,” or if you are required to pay PRC income tax on the transfer ofour ordinary shares or ADSs, the value of your investment in our ordinaryshares or ADSs may be materially and adversely affected.

 

***If we are treated as a “non-resident enterprise” under theEIT Law, dividends that  we receive fromour operating subsidiaries located in the PRC may be subject to PRC withholdingtax.***

 

Under the EIT Law and itsimplementation rules, dividends declared on earnings generated after January 1,2008 and payable by a foreign invested entity (“FIE”) in China to its foreigninvestors who are non-resident enterprises are subject to a 10% withholdingtax, unless any such foreign investor’s jurisdiction of incorporation has a taxtreaty with China that provides for a different withholding arrangement. TheCayman Islands, where we are incorporated, does not have a tax treaty withChina.  In the future, our income may bederived from dividends we receive from our operating subsidiaries located inthe PRC. Thus, dividends paid to us by our subsidiaries in China may be subjectto the 10% income tax if we are considered a “non-resident enterprise” underthe EIT Law. If we are required to pay a 10% withholding tax for dividends wemay receive from our subsidiaries in the future, it would materially andadversely affect our financial condition and results of operations.

 

***Chinese regulation of loans and direct investment byoffshore holding companies to Chinese entities may delay or prevent us fromusing the proceeds of our initial public offering to make loans or additionalcapital contributions to our Chinese subsidiaries and Chinese affiliatedentities, which could materially and adversely affect our liquidity and ourability to fund and expand our business.***

 

Since we are an offshoreholding company for our Chinese subsidiaries and Chinese affiliated entities,we may make loans to our Chinese subsidiaries and Chinese affiliated entities,or we may make additional capital contributions to our Chinese subsidiaries.Any loans we make to our Chinese subsidiaries or our Chinese affiliatedentities are subject to Chinese regulations and approvals. For example:

 

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·                  loans by us to any of our Chinesesubsidiaries, each of which is a FIE, to finance their activities cannot exceedthe difference between the total investment amount and the registered capitalof the Chinese subsidiary, each as set forth in its articles of association,and must be registered with the SAFE; and

 

·                  loans by us to our Chinese affiliatedentities or their subsidiaries must be approved by the relevant governmentauthorities including, the SAFE and the NDRC, and must also be registered withthe SAFE.

 

We may also decide tofinance our Chinese subsidiaries by means of capital contributions. Thesecapital contributions would have to be approved by the Ministry of Commerce orits local counterpart. We cannot assure you that we will be able to obtainthese government registrations or approvals on a timely basis, if at all, withrespect to future loans or capital contributions by us to our Chinesesubsidiaries or our Chinese affiliated entities or any of their respectivesubsidiaries. If we fail to receive these registrations or approvals, ourability to finance our Chinese operations may be negatively affected, whichcould materially and adversely affect our liquidity and our ability to fund andexpand our business.

 

***If any of our Chinese affiliated entities or theirsubsidiaries become the subject of a bankruptcy or liquidation proceeding, wemay lose the ability to use and enjoy those assets, which could reduce the sizeof our operations and materially and adversely affect our business, ability togenerate revenue and the market price of our ADSs.***

 

To comply with Chineselaws and regulations relating to foreign ownership in the education andtelecommunications sectors, we currently conduct our operations in Chinathrough contractual arrangements with our Chinese affiliated entities and theirrespective shareholders and subsidiaries. As part of these arrangements, ourChinese affiliated entities and their subsidiaries hold some of the assets thatare important to the operation of our business. If any of these entities goesbankrupt and all or part of their assets become subject to liens or rights ofthird-party creditors, we may be unable to continue some or all of our businessactivities, which could materially and adversely affect our business, financialcondition and results of operations. If any of our Chinese affiliated entitiesor their subsidiaries undergoes a voluntary or involuntary liquidationproceeding, its shareholders or unrelated third-party creditors may claimrights to some or all of these assets, which would hinder our ability tooperate our business, which could materially and adversely affect our business,our ability to generate revenue and the market price of our ADSs.

 

**RisksRelated to the People’s Republic of China**

 

***Our business may be adversely affected by the economic,political and social conditions in China.***

 

Substantially all of ourassets are located in China and all of our revenue is derived from ouroperations in China. Accordingly, our business, financial condition, results ofoperations and prospects are subject, to a significant extent, to economic,political and social developments in China. The Chinese economy differs fromthe economies of most developed countries in many respects, including theamount of government involvement, level of development, growth rate, control offoreign exchange and allocation of resources. While the Chinese economy hasexperienced significant growth over the past two decades, growth has beenuneven, both geographically and among various sectors of the economy.

 

The Chinese economy hasbeen transitioning from a planned economy to a more market-oriented economy.Although the Chinese government has implemented measures since the late 1970semphasizing the utilization of market forces for economic reform, the reductionof state ownership of productive assets and the establishment of improvedcorporate governance in business enterprises, a substantial portion ofproductive assets in China is still owned by the Chinese government. The Chinesegovernment also exercises significant control over China’s economic growththrough the allocation of resources, controlling payment of foreigncurrency-denominated obligations, setting monetary policy and providingpreferential treatment to particular industries or companies. Since late 2003,the Chinese government implemented a number of measures, such as raising bankreserves against deposit rates to place additional limitations on the abilityof commercial banks to make loans and raise interest rates, in order to slowdown specific segments of China’s economy that it believed to be overheating.Since the demand for our services is affected by a number of factors, includingthe spending power of Chinese students and their families on education, which inturn is affected by the condition of the Chinese economy, the foregoingactions, as well as future actions and policies of the Chinese government,could materially affect the demand for our services, our prospects and resultsof operations.

 

***If preferential tax treatments currently available to us arereduced or repealed, our business and results of operations could suffer.***

 

On January 1, 2008, theEIT Law became effective pursuant to which FIEs, such as our Chinesesubsidiaries, and domestic companies are both subject to a uniform statutorytax rate of 25%. Preferential tax treatments will continue to be granted toentities that are classified as “high and new technology enterprises stronglysupported by the State”****or toentities that conduct business in encouraged sectors, whether FIEs or domesticcompanies. Pursuant to Circular 172, which was issued on April 14, 2008, inorder for applicant enterprises to be classified as “high and new technologyenterprises strongly supported by the State” certain requirements must be met,such as ownership of the core intellectual property, products or serviceswithin “State-Encouraged High Technology Areas.”  Pursuant to the EIT Law and regulationsthereunder, enterprises that were established before March 6, 2007, and wereenjoying preferential tax rates according to previous tax laws, administrativeregulations, and other circulars with equivalent effect, will have theirpreferential tax rates gradually transitioned to the new uniform tax rate overa five-year period starting from January 1, 2008. Enterprises that were alsoenjoying preferential tax exemptions and/or reductions for a specified term,however, will continue to enjoy those exemptions 

 

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and/or reductions attheir current applicable rates until the expiration of the applicable term andin accordance with the implementation of transitional preferential tax policiesfor enterprise income tax.

 

On April 14, 2008,Measures on the Classification of High and New Technology Enterprises, adiscussion and interpretation of the detailed standards applicable to theclassification of “high and new technology enterprises” status, waspromulgated.  Currently seven of oursubsidiaries and affiliated entities have been approved and classified as “highnew technology enterprises.”  Eachapproval is valid for three years, meaning that each classified entity willenjoy the preferential income tax rate of 15% through 2010.  However, as the procedures for obtainingclassification as “high and new technology enterprises” are very complicatedand time consuming, and the standards for classification as a “high and newtechnology enterprise” are not easy to achieve, we cannot assure you that anymore of our other subsidiaries or affiliated entities that previously enjoyedpreferential tax rates will be approved as “high and new technology enterprises”entitled to preferential tax treatment. We also cannot assure you that ourentities currently classified as “high and new technology enterprises” willcontinue to be classified as such after the expiration of the initial threeyear period.

 

***China’s legal system has inherent uncertainties that couldmaterially and adversely affect us.***

 

We are a holding company,and we conduct our business primarily through our subsidiaries and Chineseaffiliated entities incorporated in China. We and our subsidiaries aregenerally subject to laws and regulations applicable to foreign investment inChina. We depend on our Chinese affiliated entities to honor their agreementswith us. Most of our contractual arrangements with our Chinese affiliatedentities are governed by Chinese law and disputes arising out of these agreementsare expected to be decided by arbitration in China.

 

China’s legal system isbased upon written statutes. Prior court decisions may be cited for referencebut are not binding on subsequent cases and have limited value as precedents.Since 1979, the Chinese legislative bodies have promulgated laws andregulations dealing with economic and other matters such as foreign investment,corporate organization and governance, commerce, taxation, trade and education.However, China has not developed a fully integrated legal system and the arrayof new laws and regulations may not be sufficient to cover all aspects ofeconomic and other activities in China. In particular, because these laws andregulations are relatively new, and because of the limited volume of publisheddecisions and their non-binding nature, the interpretation and enforcement ofthese laws and regulations involve uncertainties. In addition, publishedgovernmental policies and internal rules may have retroactive effect and, insome cases, the policies and rules are not published at all. As a result, wemay be unaware of our violation of these policies and rules until some timelater. See “—Risks Related to China’s Regulation of the Education andTelecommunication Sectors and Our Corporate Structure—If the Chineseauthorities determine that our organizational structure for operating ourbusiness does not comply with Chinese regulations, we could be subject tosanctions, including being required to discontinue all or a portion of ourbusiness.”

 

***Regulation and censorship of information disseminated overthe Internet in China may adversely affect our business and subject us toliability for information linked to our websites.***

 

The Chinese governmenthas adopted regulations governing Internet access and the distribution of newsand other information over the Internet. Under these regulations, ICPs andInternet publishers are prohibited from posting or displaying over the Internetcontent that, among other things, violates Chinese laws and regulations,impairs the national dignity of China, or is reactionary, obscene,superstitious, fraudulent or defamatory. Failure to comply with theserequirements may result in the revocation of licenses to provide Internetcontent and other licenses and the closure of the concerned websites. In thepast, failure to comply with these requirements has resulted in the closure ofwebsites found to be in violation of these regulations. The website operatormay also be held liable for such censored information displayed on or linked tothe website. There have been instances in which the Chinese government hasblocked the access in China to the websites of foreign universities as a resultof its concern with regard to the content on such sites, and the same actionscould be taken against websites of the online degree programs for which weprovide services and derive revenue, as well as our online tutoring program’swebsite and other websites that form part of our business. In addition, the MIIhas published regulations that subject website operators to potential liabilityfor content displayed on their websites and the actions of users of theirsystems, including liability for violations of Chinese laws prohibiting thedissemination of socially destabilizing content. The Ministry of PublicSecurity can order any local Internet service provider to block any Internetwebsite at its sole discretion. From time to time, the Ministry of PublicSecurity has stopped Internet dissemination of information that it believes tobe socially destabilizing. The State Secrecy Bureau can also block any websiteleaking state secrets or failing to meet the relevant regulations relating tothe protection of state secrets in the dissemination of online information.

 

If Chinese regulatoryauthorities determine that any of our websites or the websites of ouruniversity customers providing online degree programs is in violation of law orpolicy and takes action to close any such website or impose other sanctions,our business, financial condition and results of operations would be materiallyand adversely affected.

 

***Our insurance coverage may be inadequate to protect usagainst losses.***

 

The insurance industry inChina is still at an early stage of development. Insurance companies in Chinaoffer limited business insurance products and do not, to our knowledge, offerbusiness liability insurance or coverage for business interruption. As aresult, we do not have any business liability, loss of data or businessinterruption insurance coverage for our operations in China. If any claims forinjury are brought against us, or if we experience any business disruption,litigation or natural disaster, we might incur substantial costs and diversionof resources.

 

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***You may experience difficulties in effecting service oflegal process, enforcing foreign judgments or bringing original actions inChina based on United States or other foreign laws against us, our managementor the experts named in this annual report.***

 

We conduct substantiallyall of our operations in China and substantially all of our assets are locatedin China. In addition, the majority of our directors and executive officers andsome of the experts named in this annual report reside within China. As aresult, it may not be possible to effect service of process within the UnitedStates or elsewhere outside China upon us, our directors or executive officersor upon some of the experts named in the annual report. In addition, you mayfind it difficult or impossible to bring an original action against us or ourdirectors or executive officers in a Chinese court if you believe your rightshave been infringed under the U.S. federal securities law or otherwise.Moreover, we have been advised that China does not have treaties with theUnited States or many other countries providing for the reciprocal recognitionand enforcement of judgment of courts.

 

***Governmental restrictions of currency conversion may limitour ability to receive and use our revenue or financing effectively.***

 

The Chinese governmentimposes controls on the convertibility of the Renminbi into foreign currenciesand, in certain cases, the remittance of currency out of China. Substantiallyall of our revenue and expenses are denominated in Renminbi, which is currentlynot freely convertible to the extent of capital account items, such as directequity investments, loans and repatriation of investment. Under our currentstructure, substantially all of our income will be derived from dividendpayments from our Chinese subsidiaries. Shortages in the availability offoreign currency may restrict the ability of our Chinese subsidiaries to remitsufficient foreign currency to pay dividends to us, or otherwise satisfy theirforeign currency dominated obligations. Under existing Chinese foreign exchangeregulations, payments of current account items, including profit distributionsand interest payments, can be made in foreign currencies without prior approvalfrom SAFE by complying with certain procedural requirements. However, theChinese government may in the future restrict access to foreign currencies forcurrent account transactions. If we are unable to obtain sufficient foreigncurrency under the Chinese foreign exchange control system to satisfy ourcurrency demands, we may not be able to pay dividends in foreign currencies toour shareholders, including holders of our ADSs.

 

Foreign exchangetransactions by our subsidiaries in China under the capital account continue tobe subject to significant foreign exchange controls and require the approvalof, or registration with, Chinese governmental authorities. In particular, ifour subsidiaries in China borrow foreign currency loans from us or otherforeign lenders, these loans must be registered with the SAFE, and if wefinance them by means of additional capital contributions using, for instance,proceeds from our initial public offering these capital contributions must beapproved or registered by certain government authorities including theappropriate offices of SAFE and the Ministry of Commerce. These limitationscould affect the ability of these entities to obtain foreign exchange throughdebt or equity financing, and could adversely affect our business and financialcondition.

 

***The fluctuation of the Renminbi may materially and adverselyaffect your investment.***

 

The value of the RMBagainst the U.S. dollar and other currencies may fluctuate and is affected by,among other things, changes in political and economic conditions. Since July 2005,the Renminbi is no longer pegged solely to the U.S. dollar. Instead, its valueis measured against a basket of currencies, determined by the People’s Bank ofChina. For example, on August 26, 2008, the Renminbi appreciated against theU.S. dollar to approximately RMB6.78 to US$1.00, representing an upwardrevaluation of 0.99% of the Renminbi against the U.S. dollar, as compared tothe exchange rate on the previous day.**** The Renminbi may appreciate or depreciatesignificantly in value against the U.S. dollar in the future.  As ofJune 25, 2009, the Renminbi had continued toappreciate, reaching RMB6.8344 to U.S.$1.00.****Fluctuationsin the exchange rate will also affect the relative value of any dividend we mayissue, which will be exchanged into U.S. dollars, and earnings from and thevalue of any U.S. dollar-denominated investments we make in the future.

 

Limited hedgingtransactions are available in China to reduce our exposure to exchange ratefluctuations. To date, we have not entered into any hedging transactions toreduce our exposure to foreign currency exchange risk. While we may decide toenter into hedging transactions in the future, the availability andeffectiveness of these hedges may be limited and we may not be able tosuccessfully hedge our exposure at all. In addition, our currency exchangelosses may be magnified by Chinese exchange control regulations that restrictour ability to convert Renminbi into foreign currency.

 

***We face risks related to health epidemics and otheroutbreaks that could result in school closures or other similar disruptions,which could adversely impact our revenue and results of operations.***

 

Our business could beadversely affected by an outbreak of a contagious disease, such as the H5N1strain of avian flu, the recent H1N1 strain of swine flu or Severe AcuteRespiratory Syndrome, or SARS.  Duringthe spring of 2003, China experienced an outbreak of SARS that resulted in theclosure of schools, Internet cafes, and many office buildings and caused ageneral slowdown of business activity and the economy. China also reported anumber of cases of SARS in April 2004. There have also been recently reportedcases of swine flu in China and there are concerns that a pandemic coulddevelop rapidly if the swine flu spreads broadly in China.**** Areoccurrence of the SARs epidemic or the occurrence of another epidemic oroutbreak could adversely affect the demand for our products and services or ourability to market and service our customers and could require the closure ofour private primary and secondary schools. Our business operations could bedisrupted if any of our employees is suspected of having SARS, the avian flu,the swine flu or other contagious diseases, which would require that a certainnumber of our employees be quarantined and/or our offices be disinfected. Inaddition, our results of operations 

 

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could be adverselyaffected to the extent that an outbreak of SARS, the avian flu or othercontagious diseases harms the Chinese economy in general.

 

***Recent Chinese regulations relating to the establishment ofoffshore special purpose companies by Chinese residents may subject our Chineseresident shareholders to personal liability and limit our ability to acquireChinese companies or inject capital into our Chinese subsidiaries, limit ourChinese subsidiaries’ ability to distribute profits to us, or otherwisematerially and adversely affect us.***

 

The SAFE issued the*Notice on Issues Relating to the Administration ofForeign Exchange in Fund-Raising and Reverse Investment Activities of DomesticResidents Conducted via Offshore Special Purpose Companies*in October2005, which became effective in November 2005, and an implementing rule in May 2007,collectively the SAFE Rules. According to the SAFE Rules, Chinese residents,including both legal persons and natural persons and Chinese citizens andforeign citizens who reside in China, are required to register with the SAFE orits local branch before establishing or controlling any company outside China,referred to in the SAFE rules as an “offshore special purpose company,” for thepurpose of financing that offshore company with their ownership interests inthe assets of or their interests in any Chinese enterprise. In addition, aChinese resident that is a shareholder of an offshore special purpose companyis required to amend its SAFE registration with the local SAFE branch withrespect to that offshore special purpose company in connection with theinjection of equity interests or assets of a Chinese enterprise in the offshorecompany or overseas fund raising by the offshore company, or any other materialchange in the capital of the offshore company, including any increase ordecrease of capital, transfer or swap of share, merger, division, long-termequity or debt investment or creation of any security interest. The SAFE Rules applyretroactively. As a result, Chinese residents who have established or acquiredcontrol of offshore companies that have made onshore investments in China inthe past were required to complete the relevant registration procedures withthe competent local SAFE branch. If any resident of China failed to file itsSAFE registration for an existing offshore entity, any dividends remitted bythe onshore entity to its overseas parent since April 21, 2005 will beconsidered to be an evasion of foreign exchange purchase rules, and the paymentof the dividend will be illegal. As a result of any illegal action of thistype, both the onshore entity and its actual controlling person(s) can befined. In addition, failure to comply with the registration procedures mayresult in restrictions on the relevant onshore entity, including prohibitionson the payment of dividends and other distributions to its offshore parent oraffiliate and capital inflow from the offshore entity. Chinese residentshareholders of the offshore entity may also be subject to penalties underChinese foreign exchange administration regulations.

 

We have asked ourshareholders and beneficial owners who are Chinese residents to make thenecessary applications and filings as required under Notice 75 and otherrelated rules. However, due to uncertainty concerning the reconciliation ofNotice 75 with other approval or registration requirements, it remains unclearhow Notice 75, and any future legislation concerning offshore or cross-bordertransactions, will be interpreted, amended and implemented by the relevantgovernment authorities. We will attempt to comply, and attempt to ensure thatour shareholders and beneficial owners who are subject to these rules comply,with the relevant requirements. However, we cannot provide any assurances thatall of our shareholders and beneficial owners who are Chinese residents willcomply with our request to make or obtain any applicable registrations orcomply with other requirements required by Notice 75 or other related rules. Inaddition, certain of the holders of options to purchase our ordinary shares areChinese residents. It is unclear under the SAFE Rules whether theseoptionholders would be deemed to be beneficial owners of our company forpurposes of these rules as a result of holding these options. The failure orinability of our Chinese resident shareholders or beneficial owners to registerwith the SAFE in a timely manner pursuant to the SAFE Rules, or the failure orinability of any future Chinese resident shareholders or beneficial owners tomake any required SAFE registration or comply with other requirements under theSAFE Rules, may subject these shareholders or beneficial owners to fines orother sanctions and may also limit our ability to contribute additional capitalinto or provide loans to our Chinese, limit our Chinese subsidiaries’ abilityto pay dividends to us, repay shareholder loans or otherwise distribute profitsor proceeds from any reduction in capital, share transfer or liquidation to us,or otherwise adversely affect us.

 

***We may be subject to fines and legal sanctions imposed bySAFE or other Chinese government authorities if we or our Chinese employeesfail to comply with recent Chinese regulations relating to employee stock optionsgranted by offshore listed companies to Chinese citizens.***

 

On March 28, 2007, theSAFE issued the *Application Procedure ofForeign Exchange Administration for Domestic Individuals Participating inEmployee Stock Holding Plan or Stock Option Plan of Overseas-Listed Company*,or the Stock Option Rule. Under the Stock Option Rule, Chinese citizens who aregranted stock options by an offshore listed company are required, through aChinese agent or Chinese subsidiary of the offshore listed company, to registerwith the SAFE and complete certain other procedures. As an offshore listedcompany, we and our Chinese employees may be subject to fines and legalsanctions imposed by the SAFE or other Chinese government authorities. See “Item4. Information on the Company—B. Business Overview—Regulation—Regulation ofForeign Currency Exchange and Dividend Distribution—SAFE regulations onoverseas investment of Chinese residents and employee stock options.”

 

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**RisksRelated to Our ADSs**

 

***The market price for our ADSs may be volatile.***

 

The market price for ourADSs is highly volatile and may be subject to wide fluctuations in response tofactors including the following:

 

·                  actual or anticipated fluctuations in ourquarterly operating results;

 

·                  announcements of new services by us orour competitors;

 

·                  changes in financial estimates bysecurities analysts;

 

·                  changes in the business, regulatory andother conditions in the education services market in China;

 

·                  significant acquisitions, strategicpartnerships, collaborative alliances or capital commitments by us or ourcompetitors;

 

·                  additions or departures of key personnel;

 

·                  termination or release of lock-up orother transfer restrictions on our outstanding ADSs or ordinary shares or salesof additional ordinary shares or ADSs;

 

·                  potential litigation or regulatoryinvestigations;

 

·                  general economic or political conditionsin China;

 

·                  price fluctuations of publicly tradedsecurities of other China-based companies engaging in similar businesses; and

 

·                  general economic, business and othermarket conditions in the global economy.

 

In addition, a number ofChinese companies and companies with substantial operations in China thatoffered and sold securities in the United States have experienced significantvolatility in their share prices after their initial public offerings due tomarket fluctuations and other issues. Furthermore, the securities market hasfrom time to time experienced significant price and volume fluctuations thatare not related to the operating performance of particular companies. Thesemarket fluctuations may also materially and adversely affect the market priceof our ADSs.

 

***The future sales, or perceived future sales, by our existingshareholders of a substantial number of our ADSs in the public market couldadversely affect the price of our ADSs.***

 

If our shareholders sell,or are perceived as intending to sell, substantial amounts of our ordinaryshares or ADSs, including those issued upon the exercise of outstandingoptions, the market price of our ADSs could fall. Such sales, or perceivedpotential sales, also might make it more difficult for us to sell equity orequity related securities in the future at a time and price that we deemappropriate. The 20,460,000 ordinary shares represented by 6,820,000 ADSsoffered pursuant to our initial public offering in December 2007 (other thanthose held by our affiliates) were eligible for immediate resale in the publicmarket without restrictions. Ordinary shares held by our existing shareholdersand any ADSs held by our affiliates may also be sold in the public market inthe future under, and subject to the restrictions contained in, Rule 144 and Rule701 under the Securities Act of 1933, as amended, or the Securities Act, andapplicable lock-up agreements.

 

In addition, certainholders of our ordinary have the right to cause us to register the sale ofthose shares under the Securities Act. Registration of these shares under theSecurities Act would result in these shares becoming freely tradable withoutrestriction under the Securities Act immediately upon the effectiveness of thatregistration. Sales of additional registered shares in the public market could causethe price of our ADSs to decline.

 

***Your right to participate in any future rights offerings maybe limited, which may cause dilution of your holdings.***

 

We may from time to timedistribute rights to our shareholders, including rights to acquire our securities.Under the deposit agreement, the depositary bank will not offer you thoserights unless the distribution to ADS holders of both the rights and anyrelated securities is either registered under the Securities Act or exempt fromregistration under the Securities Act. We are under no obligation to file aregistration statement with respect to any such rights or securities or toendeavor to cause such a registration statement to be declared effective.Moreover, we may not be able to establish an exemption from registration underthe Securities Act. Accordingly, you may be unable to participate in our rightsofferings and may experience dilution in your holdings.

 

***We may need additional capital and may sell additional ADSsor other equity securities and/or incur indebtedness, which could result inadditional dilution to our shareholders or increase our debt serviceobligations.***

 

We believe that ourcurrent cash and cash equivalents, anticipated cash flows from operations willbe sufficient to meet our presently anticipated cash needs through the end offiscal year 2009.****We may, however,require additional cash resources due to changed business conditions or otherfuture developments, including any investments or acquisitions we may decide topursue. If these resources are insufficient to satisfy our cash requirements,we may seek to sell additional equity or debt securities or obtain a creditfacility. The sale of additional equity securities could result in additionaldilution to our 

 

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shareholders. Theincurrence of indebtedness would result in increased debt service obligationsand could result in operating and financing covenants that would restrict ouroperations. We have no current plans to undertake or secure any such equity ordebt financing, and we can provide no assurance that any such financing wouldbe available in amounts or on terms acceptable to us, if at all.

 

***You may not be able to exercise your right to vote.***

 

As a holder of ADSs, youmay only exercise voting rights with respect to the underlying ordinary sharesin accordance with the provisions of the deposit agreement between us and TheBank of New York, the depositary of our ADSs. Under the deposit agreement, youmust vote by giving voting instructions to the depositary. Upon receipt of yourvoting instructions, the depositary will vote the underlying ordinary shares inaccordance with your instructions. Otherwise, you will not be able to exerciseyour right to vote unless you withdraw the shares from the depositary. Underour fifth amended and restated memorandum and articles of association, theminimum notice period required for convening general shareholders’ meetings is10 days. When a general shareholders’ meeting is convened, you may not receivesufficient advance notice to withdraw the shares to allow you to vote withrespect to any specific matter. If we ask for your instructions, the depositarywill notify you of the upcoming vote and will arrange to deliver our votingmaterials to you. We cannot assure you that you will receive the votingmaterials in time to ensure that you can instruct the depositary to vote yourshares. In addition, the depositary and its agents are not responsible forfailing to carry out voting instructions or for the manner of carrying outvoting instructions. This means that you may not be able to exercise your rightto vote and the shares underlying your ADSs may not be voted as you requested.

 

***You may not receive distributions on ordinary shares or anyvalue for them if it is illegal or impractical to make them available to you.***

 

The depositary of ourADSs has agreed to pay to you the cash dividends or other distributions it orthe custodian receives on ordinary shares or other deposited securities afterdeducting its fees and expenses. You will receive these distributions inproportion to the number of ordinary shares your ADSs represent. However, thedepositary is not responsible if it decides that it is inequitable orimpractical to make a distribution available to any holders of ADSs. Forexample, the depositary may determine that it is not feasible to distributecertain property through the mail. Additionally, the value of certaindistributions may be less than the cost of mailing them. In these cases, thedepositary may determine not to distribute such property. We have no obligationto register under U.S. securities laws any ADSs, ordinary shares, rights or othersecurities received through such distributions. We also have no obligation totake any other action to permit the distribution of ADSs, ordinary shares,rights or anything else to holders of ADSs. This means that you may not receiveany distributions we make on our ordinary shares or any value for them if it isillegal or impractical to make them available to you. These restrictions mayhave a material adverse effect on the value of your ADSs.

 

***You may be subject to limitations on transfer of your ADSs.***

 

Your ADSs represented bythe ADRs are transferable on the books of the depositary. However, thedepositary may close its transfer books at any time or from time to time whenit deems expedient in connection with the performance of its duties. Inaddition, the depositary may refuse to deliver, transfer or register transfersof ADSs generally when our books or the books of the depositary are closed, orat any time if we or the depositary thinks it advisable to do so because of anyrequirement of law or of any government or governmental body, or under anyprovision of the deposit agreement, or for any other reason.

 

***You may face difficulties in protecting your interests, andyour ability to protect your rights through the U.S. federal courts may belimited, because we are incorporated under Cayman Islands law.***

 

We are a companyincorporated under the laws of the Cayman Islands, and our corporate affairsare governed by our memorandum and articles of association, the Cayman IslandsCompanies Law (2007 Revision) and the common law of the Cayman Islands. Therights of shareholders to take action against the directors, actions byminority shareholders and the fiduciary responsibilities of our directors to usunder Cayman Islands law are to a large extent governed by the common law ofthe Cayman Islands. The common law of the Cayman Islands is derived in partfrom comparatively limited judicial precedent in the Cayman Islands, as well asfrom English common law, the decisions of whose courts are of persuasive authority,but are not binding on a court in the Cayman Islands. The rights of ourshareholders and the fiduciary responsibilities of our directors under CaymanIslands law are not as clearly established as they would be under statutes orjudicial precedent in some jurisdictions in the United States. In particular,the Cayman Islands has a less developed body of securities laws as compared tothe United States, and some U.S. states, such as Delaware, have more fullydeveloped and judicially interpreted bodies of corporate law. In addition,Cayman Islands companies may not have standing to initiate a shareholderderivative action in a federal court of the United States.

 

The Cayman Islands courtsare also unlikely:

 

·                  to recognize or enforce against usjudgments of courts of the United States based on the civil liabilityprovisions of U.S. securities laws; and

 

·                  to impose liabilities against us, in original actionsbrought in the Cayman Islands, based on certain civil liability provisions ofU.S. securities laws that are penal in nature.

 

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There is no statutoryrecognition in the Cayman Islands of judgments obtained in the United States,although the courts of the Cayman Islands will in certain circumstancesrecognize and enforce a non-penal judgment of a foreign court of competentjurisdiction without retrial on the merits.

 

As a result of all of theabove, holders of our ADSs may have more difficulty in protecting theirinterests through actions against our management, directors or majorshareholders than they would as shareholders of a U.S. company.

 

**Item4.  Information on the Company**

 

A.           History and Development of the Company

 

We were incorporated asan exempted company in the Cayman Islands with limited liability on September 6,1999 and began our online degree services business in the same year, providingservices to Renmin University of China. Since our inception, we have rapidlygrown our online degree program services business and have added three newbusiness lines through a series of acquisitions in 2005 (online tutoring,private primary and secondary schools and curriculum services) and in 2006(vocational post-secondary education programs).

 

On December 14, 2007, weand certain selling shareholders of our company completed an initial publicoffering of 6,820,000 ADSs representing 20,460,000 of our ordinary shares.  Our ADSs are listed on the NASDAQ GlobalMarket under the symbol “CEDU.”

 

Our principal executiveoffices are located at 4th Floor-A, GeHua Building, No. 1 QinglongHutong,Dongcheng District, Beijing, 100007, People’s Republic of China. Our telephonenumber at this address is 86-10-84186655. Our registered office in the CaymanIslands is located at the offices of Codan Trust Company (Cayman) Limited atCricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, CaymanIslands.

 

Investor inquiries shouldbe directed to us at the address and telephone number of our principalexecutive offices set forth above. Our website is *www.chinaedu.net*. The information contained on our websiteand our other websites is not a part of this annual report. Our agent forservice of process in the United States is CT Corporation System located at 111Eighth Avenue, 13/F, New York, New York 10011.

 

For a description of ourprincipal capital expenditures, see “Item 5. Operating and Financial Review andProspects—B. Liquidity and Capital Resources—Capital Expenditures.”

 

B.**            **Business Overview

 

We are a leadingeducational services provider in China, incorporated as an exempted limitedliability company in the Cayman Islands. Established in 1999, our primarybusiness is to provide comprehensive services to the online degree programs ofleading Chinese universities. These services include academic programdevelopment, technology services, enrollment marketing, student supportservices and finance operations.  Ourother lines of businesses include the operation of private primary andsecondary schools, online interactive tutoring services, and marketing andsupport for international curriculum programs. We believe we are the largestservice provider to online degree programs in China in terms of the number ofhigher education institutions that are served and the number of studentenrollments supported. ** **We currently have 13 long-term,exclusive contracts that generally vary from 15 to 50 years in length.  We also perform recruiting services for 15universities through our nationwide learning center network.

 

We currently havestrategic relationships with 22 universities, 13 of which are under long-term,exclusive****contracts that generallyvary from 15 to 50 years in length. Ten of our university partners currentlyoperate their own online degree programs and three universities are awaitingregulatory approval to begin their online degree programs. As of December 31,2008, approximately 243,000****studentswere registered in the online degree programs that we service through theserelationships. These online degree programs are marketed under the brand namesof leading Chinese universities, which allows us to benefit from thesignificant brand equity that these higher education institutions haveestablished.

 

Our business hasexperienced significant growth since its inception in 1999. This growth hasbeen driven by the increased number of universities that we serve, theincreased enrollment of the online degree programs of our university partners,and our expansion into other education-related lines of business. We generateour revenue from service fees and tuition payments derived from students whoare enrolled in, or served by, our businesses. As of December 31, 2008, weprovided services to online degree programs that had an aggregate ofapproximately 243,000 registered students, and we served approximately 44,410****students in our other businesses. Our netrevenue increased from RMB213.5 million in 2006 to RMB265.0 million in 2007,and RMB317.7 million ($46.6 million) in 2008, representing a compound annualgrowth rate, or CAGR, of 22.0%. Net revenue from our online degree programscontributed 73.5%, 76.3% and 80.4% of our total net revenue for the years endedDecember 31, 2006, 2007 and 2008, respectively.

 

Our income fromoperations decreased by 29.6% from RMB57.2 million in the year ended December 31,2006 to RMB40.3 million for the year ended December 31, 2007. Our income fromoperations decreased from RMB40.3 million in the year ended December 31, 2007to a loss from operations of RMB13.1 million ($1.9 million) for the year ended December31, 2008. Our net income attributable to ordinary shareholders declined fromRMB25.5 million for the year ended December 31, 2006 to RMB2.5 million for theyear ended December 31, 2007. Our net income attributable to ordinaryshareholders also 

 

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declined from RMB2.5million for the year ended December 31, 2007 to a net loss attributable toordinary shareholders of RMB43.0 million ($6.3 million) for the year ended December31, 2008.

 

The decline in bothincome from operations and net income attributable to ordinary shareholdersfrom 2006 to 2007 and from 2007 to 2008 was primarily due to goodwillimpairment losses of RMB16.2 million for the year ended December 31, 2007 andto goodwill impairment and intangible assets impairment losses of RMB70.1****million ($10.3 million) for the year endedDecember 31, 2008.

 

**OurStrengths**

 

We believe that wepossess the following competitive strengths:

 

·                  ***Marketleadership and proven track record.***    We are oneof the market leaders in the education services market due to our early moveradvantage, proven track record and delivery of innovative services that are inhigh demand. We believe we are the leading company in China providingcomprehensive services, technology, and operating support to universitiesoffering online degree programs, in terms of both number of institutions servedand the number of enrollments that we support. Our experienced management team,established technology platform and capabilities, operational expertise andcontent portfolio allow us to effectively attract and retain customers as wellas identify new opportunities in the private education market.

 

·                  ***Substantialknowledge of our customers and the Chinese education market.***   Through our nine-year operating history, early efforts to develop anonline technology platform and comprehensive service offering for Chineseuniversities, we have acquired substantial knowledge of the Chinese educationmarket and the needs of its consumers. As we have expanded our serviceofferings, we have been able to take advantage of our market knowledge toaddress additional areas in which we believe we can leverage our experience,processes and technology to meet the needs of the market. As a result, we haveexpanded our business to include the distribution and support of internationalcurriculum, private primary and secondary schools and an online tutoringplatform.

 

·                  ***Providerof premier services for online degree programs.***   We believe our products position us as an attractive choice for bothacademic institutions and students for online degree programs. We have providedcomprehensive services and support to universities for their online degreeprograms since 1999. Our service model and technology platform have proven tobe successful, as shown by our leading position in terms of number ofinstitutions served. In addition, we have developed a wide array of proprietarycourseware, from which we currently tailor over 1,608****courses for our university partners based on their differentrequirements. Many of these courses can be used as a basis to develop similarcourses when we add new university customers, thus enabling us to benefit fromeconomies of scale. We use this service model with our reliable technologyplatforms, comprehensive library of courseware and operational and marketingexpertise to help universities achieve their academic and financial goals.

 

·                  ***Experiencedmanagement team with proven track record.***    We have anexperienced management team with an average of over 10 years of experience ineither the education services industry or the online services industry. We haverecruited strong leaders with proven skills to serve in key positions withinour management team, and our team includes members with substantial experiencein education, technology, marketing and finance.

 

**OurStrategy**

 

Our strategy consists ofthe following key elements:

 

·                  ***Expandthe penetration of our online degree program services.***   We plan to take advantage of our established leadership position andtrack record to expand the penetration of our services to online degreeprograms by increasing the number of universities that use our online degreeprogram services and by helping our existing university customers to increaseenrollment in their programs. We are actively targeting new universities tobecome our partners for their online education programs. In addition, we planto help our existing university customers to increase enrollment in theironline programs by helping them to expand their course offerings, to assistthem in improving their marketing and recruitment initiatives and to assistthem in reducing student attrition. We are also continually working to enhanceour technology platform to improve the students’ online learning experience.

 

·                  ***Expandour network of learning centers for online degree programs.***   To strengthen our ability to assist our customers’ online degreeprograms in recruiting students and improving student service quality, we arebuilding a network of learning centers, initially in key cities, and, ifregulatory approval is obtained, across China. In February 2007, we receivedprovisional approval from the MOE to operate 10 learning centers in theprovinces of Beijing, Shanghai, Jiangsu and Zhejiang for a trial period of upto 18 months.  Although this provisionalapproval has since expired, the MOE has not ordered us to terminate operationsat these 10 learning centers.  We havealso obtained provincial licenses from the Beijing, Shanghai and Jiangsueducation authorities (as well as informal approval from the Zhejiangauthorities) to operate a total of 17 learning centers, including the 10 thatreceived provisional approval from the MOE in February 2007. We have alsoentered into agreements to establish three cooperative learning centers in theprovinces of Jilin, Hainan, and Guangdong. Although these learning centers are not branded under the ChinaEdu name,we derive revenue from them by contributing significantly to their operations.We believe that the opening of these learning centers will allow us tosignificantly enhance our brand recognition, increase access to potentialstudents for online degree programs and enhance profitability. We also areactively 

 

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seeking to establishstrategic relationships with universities that currently are not our onlinedegree program customers to provide our learning center services to their onlinedegree programs.

 

In addition to the20 learning centers discussed above, we have also entered into agreements with32 third party learning centers pursuant to which we provide assistanceapplying for approval from provincial level education authorities as well assecuring additional university online degree programs.  In return, we receive a percentage of thetuition earned by these third party learning centers.

 

·                  ***Continueto strengthen our brand name and our reputation*****.**   We are focused on continuing to build our brand name and our reputationamong our existing customers, as well as among other Chinese and foreigneducation institutions. We believe that building our brand and reputation willallow us to attract new schools and students to our current business lines. Weare also increasing awareness of our online tutoring program and learningcenters by increasing advertising to continue to build brand recognition. Weare taking part in a wide range of activities to promote our brand andreputation, such as participating in conferences, sponsoring industry eventsand publishing articles in education trade journals.

 

·                  ***Developnew products and services to further enhance the learning experience ofexisting students and attract new students.***    We plan toincrease our research and development efforts to develop new products andservices with respect to our online tutoring and online degree programs tointroduce more robust online learning programs, to enhance the students’learning experience and to improve their sense of community. We further plan toenhance our online tutoring program by recruiting additional high qualityteachers, expanding the type of programs offered and incorporating moreinteractive technology to increase student retention and student usage ratesfor our programs. In addition, we plan to develop new products for childrenfrom pre-school age to grade 3 and their parents.

 

·                  ***Pursuestrategic acquisitions.***    During thepast several years, we have made strategic acquisitions to broaden our serviceofferings and to expand into additional segments of the Chinese educationalmarket. We will continue to consider and seek acquisition opportunities thatare complementary to our existing lines of business or that can further expandthe services that we can provide to our customers.

 

**OurBusiness**

 

We are a leadingeducational service provider in China. Our primary business is to providecomprehensive services to the online degree programs of leading Chineseuniversities. We also operate primary and secondary schools, marketinternational post-secondary and English language curriculum programs toestablished learning institutions, and offer online interactive tutoringservices to primary and secondary school students.

 

***Online Degree Programs***

 

Our primary business isto assist universities in China to establish, operate and expand their onlinedegree programs. We currently provide services to 18 universities with theironline degree programs and****to****three additional universities awaitingregulatory approval to begin their programs. These online degree programs hadapproximately 243,000 registered students as of December 31, 2008.****The online degree programs we currentlyservice offer associate and bachelor degree programs in a wide range ofsubjects, including, but not limited to, accounting, marketing, finance,business administration, international business, law, civil engineering,education, computer science, literature, project management, marketing andadministrative management. These online degree programs are aimed primarily atworking adults who have sufficient economic means to support their studies andwho value the flexibility of a self-paced online educational process. For theyears ended December 31, 2006, 2007 and 2008, we generated 73.5%, 76.3% and80.4 %, respectively, of our net revenue from online degree programs.

 

In addition to the 18universities referenced above, we also entered into an exclusive 10-yearcollaborative alliance agreement with Guangxi Radio and TV University (“GRTU”)in February 2009.  Pursuant to thisarrangement, we will provide online education services to GRTU’s studentsbeginning in the spring of 2009.

 

Online degree programs inChina must be approved by the MOE. At present, 67 universities in China havereceived approvals from the MOE to operate online degree programs, as well asthe China Central Radio and TV University, which functions primarily as adistance learning facility. The China Central Radio and TV University deliversits courses to students primarily over satellite and television, and we believeit currently does not compete with the other 67 universities in the onlinedegree program market. As of December 31, 2008, most of these 67 universitieshad registered students in their online degree programs, and we providedservices to 18 out of the 67 universities that have been approved to offeronline degree programs in China. Students registered in online degree programscan pursue either associate degrees or bachelors degrees at the universitylevel. They must generally prepay tuition for a minimum number of credits uponadmission and subsequent enrollment, which can be applied to credits soughtafter their initial semester. The total number of credits required to graduatefrom an online degree program offered by these universities generally rangesfrom 80 credits for associate degrees to 160 credits for bachelor degrees. Thetuition per credit ranges from approximately RMB65 to RMB180. The tuitioncharged to students is subject to the review and approval of the pricingadministration authority and the filing with the relevant education authority.

 

Learning centers assistuniversities with a number of vital functions for their online degree programs,including marketing, enrollment administration, student services and tuitioncollection. Learning centers also provide academic review sessions andtechnical support for students. The physical presence of learning centers iscomplementary to online distance 

 

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learning, since itfacilitates face-to-face tutorial sessions, student consultations, and coursematerial distribution. Learning centers also ensure the integrity ofexaminations, as entrance exams and final exams are conducted on site at thelearning centers, allowing testing to occur under controlled environments.Learning centers are generally operated by third parties that have entered intoagreements with universities. Many learning centers are owned by polytechnic,or vocational, schools, allowing these institutions to leverage theirinfrastructures to serve the higher education market.

 

In February 2007, wereceived provisional approval from the MOE to operate 10 learning centers inthe provinces of Beijing, Shanghai, Jiangsu and Zhejiang for a trial period ofup to 18 months.  Although thisprovisional approval has since expired, the MOE has not ordered us to terminateoperations at these 10 learning centers. We have also obtained provincial licenses from the Beijing, Shanghai andJiangsu education authorities (and informal approval from the Zhejiangauthorities)  to operate a total of 17learning centers, including the 10 that received provisional approval from theMOE in February 2007. We have also entered into agreements to establish threecooperative learning centers in the provinces of Jilin, Hainan, andGuangdong.  Although these learningcenters are not branded under the ChinaEdu name, we derive revenue from them bycontributing significantly to their operations. We believe that the opening ofthese learning centers will allow us to significantly enhance our brandrecognition, increase access to potential students for online degree programsand enhance profitability. We also are actively seeking to establish strategicrelationships with universities that currently are not our online degreeprogram customers to provide our learning center services to their onlinedegree programs.

 

*OurServices*

 

Through collaborativealliances and other revenue-sharing arrangements, we offer a comprehensiveservice platform to our university customers, including academic programdevelopment, technology services, enrollment marketing, student supportservices and finance operations. We also provide the initial capital resourcesneeded to establish their online degree programs. We believe we are the onlyservice provider in China that offers a comprehensive set of services to onlineuniversities that supports virtually all aspects of a student’s progressionthrough an online degree program. Through these services, we enable ourcustomers to quickly establish an online degree program with a high level ofstudent service quality and to significantly expand or improve existinginitiatives with minimal initial investment. Our strategic relationships withuniversities are based upon long-term contracts that generally vary in lengthfrom 15 to 50 years.

 

*AcademicProgram Development.*   Academic program development entails thedesign and development of instructional materials, multimedia learningmaterials and quality assurance processes. The overall development time for asingle course can range from as little as three weeks to as long as fourmonths, depending on the subject matter and complexity of the course materials.To date, we have developed over 1,608 online courses for our universitypartners’ programs, all of which are proprietary to us or to our universitycollaborative alliances. As such, many of our previously developed courses canbe used as the basis to develop similar courses when we add new universitycustomers, thus enabling us to benefit from economies of scale.

 

*Technology.*   Ourtechnological capabilities consist of a series of proprietary systems andtools, including our Learning Management System, or LMS, which enables theonline degree programs to manage the entire student life cycle from applicationto graduation by providing system support to the student’s learning process andthe university staff’s daily management process. We believe that our LMS is oneof the most advanced offering systems in the market. This system managescourseware, including multimedia lectures, assignments and quizzes, andprovides management information tools supporting the course offerings. We alsoprovide certain customers a learning content creation and management system,which enables the team working on courseware development to bring thecourseware from the concept and design stage to production and implementation.Our technology also supports an interactive, community-based learningenvironment through chat rooms, online forums and bulletin board systems. Wealso host and support all of the software and hardware and softwarerequirements of our online degree university partners.

 

*EnrollmentMarketing.*   Our support for universities’ studentrecruitment efforts includes the development and implementation of online andoffline marketing strategies and promotional events, as well as the creation ofcollateral material to support those efforts. We further assist universities inidentifying, retaining and supervising learning centers, including traininglearning center staff on executing our marketing programs. We constantly reviseour marketing programs to maximize demand for our university partners’programs. Our marketing programs emphasize the unique characteristics of eachof our university partners’ offerings.

 

*StudentSupport Services.*   We employ significant resources indeveloping student support services for our university partners’ programs toassist students in completing their course work and improving retention.Support services that we provide to students include online and offlinetutorial resources, academic review sessions, student consultations and mockexaminations. We also maintain a dedicated staff of student service counselorswhom students may call upon to address any questions they may have regardingthe student support services.

 

*Structureand Revenue Model*

 

Our relationships withour university partners are structured either as collaborative alliances or aslong-term contractual service arrangements. Each of our university customerspays our collaborative alliances or, in the case of service contracts, pays us,a share of the tuition collected such university, after deducting certainexpenses, including learning center fees.

 

*CollaborativeAlliances.*    Our relationships with 8 of our universitypartners, including the three universities still seeking regulatory approval tooperate their online degree programs, are structured as collaborativealliances. In our 

 

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collaborative alliancestructures, we establish a collaborative alliance with the university (or acommercial subsidiary of the university), which in turn provides services andsupport to the university’s online degree program. The collaborative allianceswith our university partners have terms ranging from 15 to 50 years and areexclusive in nature. We have a majority interest in each of these collaborativealliances and treat them as our consolidated subsidiaries. We are generallyresponsible for contributing the initial capital required for the establishmentand startup of the collaborative alliances, which has historically ranged fromapproximately RMB0.5 million to approximately RMB20.0 million. Our universitypartner pays to the collaborative alliance a service fee equal to a portion ofits tuition revenue from its online degree program, after deducting certainoperating expenses, administrative fees paid to the university, fees paid to learningcenters for services such as student recruitment and tuition collection and, insome cases, licensing or technical consulting fees paid to us.

 

In addition to abovereferenced collaborative alliances, we also entered into an exclusive 10-yeararrangement with GRTU in February 2009. Pursuant to this arrangement, which is also structured as acollaborative alliance, we will provide online education services to GRTUbeginning in the spring of 2009.

 

*Long-TermContractual Service Agreements.*    We also haveentered into long-term contractual service arrangements with four of ouruniversity partners, two of which are exclusive arrangements. Pursuant to theseagreements we provide services and technology to support each respectiveuniversity’s online degree program for a fixed period of time. We receiveservice fees equal to an agreed portion of tuition collected by the universityfrom students in their online degree programs. The amount of the payments isbased on a negotiated formula, which may depend on the number of students inthe program or students registered from certain geographic territories.

 

*Recruitingand Technology Agreements. *We have also entered into non-exclusivecontractual service arrangements with 15 university partners. Pursuant to theseagreements, we provide recruiting services and technology support for a fixedperiod of time, ranging from 2 to 8 years, through our network of learningcenters. We receive service fees equal to an agreed portion of the tuitioncollected from the students by the learning centers, which are subject toannual re-negotiation.

 

*UniversityCustomers*

 

The number of registeredstudents in the online degree programs we service has grown rapidly, fromapproximately 30,000 registered students at 2002 calendar year-end, whenenrollment commenced at our first university customer’s online degree program,to approximately 243,000 registered students at our 18 existing universitycustomers as of December 31, 2008. In February 2009, we continued this growthby entering into an exclusive 10-year collaborative alliance arrangement withGRTU, pursuant to which we will provide online education services to GRTU’sstudents beginning in the spring of 2009.

 

We have entered intoexclusive 20-year collaborative alliance arrangements with three additionaluniversity partners (Central University of Finance and Economics (December 2006);Shanghai University of Finance and Economics (November 2007); and BeijingForestry University (March 2008)), but these online degree programs are not yetoperational, and therefore we are not currently providing online educationservices to these universities.  In 2006,2007 and 2008, 67.3%, 68.2% and 67.3%, respectively, of our net revenue wasderived from our services to our five largest online degree program customers.Our three largest customers, Renmin University of China, China AgriculturalUniversity and Dongbei University of Finance and Economics,****accounted for 22.1%, 15.2%, 13.3%,respectively, of our net revenue in 2008.

 

The following map showsour existing university customers:

 

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*Salesand Marketing Strategy*

 

The two key elements ofour sales and marketing strategy are increasing the number of university onlinedegree programs utilizing our services and helping our current customersrecruit and retain more online degree students. We employ a businessdevelopment team to establish new relationships with universities, both thosewith existing online programs and others that are interested in developing newprograms. We are in discussions with additional universities regarding theironline programs**.**

 

The university’srelationship, as well as our relationship, with the learning centers isessential to the sales and marketing of online degree programs to new students.The learning centers assist the online programs with a number of vitalfunctions, including recruitment, marketing and logistic services for suchprograms. To provide a nationwide physical presence and to strengthen our salesnetwork, we have assisted our university partners in developing relationshipswith approximately 497 learning centers, which cover most major cities inChina. We provide student support training to many learning centers and assistlearning centers in advertising to solicit students. The relationships betweenthe learning center operator and the university are typically governed bynon-exclusive compensation arrangements that are subject to annualre-negotiation. The majority of the learning centers are owned and operated byindependent third parties.

 

To further expand ouraccess to potential students and enhance the sales and marketing of onlinedegree programs, we are developing our own network of learning centers. In February2007, we received provisional approval from the MOE to operate 10 learningcenters in the provinces of Beijing, Shanghai, Jiangsu and Zhejiang for a trialperiod of up to 18 months.  Although thisprovisional approval has since expired, the MOE has not ordered us to terminateoperations at these 10 learning centers. We have also obtained provinciallicenses from the Beijing, Shanghai and Jiangsu education authorities (andinformal approval from the Zhejiang authorities)  to operate a total of 17 learning centers,including the 10 that received provisional approval from the MOE in February 2007.We have also entered into agreements to establish three cooperative learningcenters in the provinces of Jilin, Hainan, and Guangdong.  Although these learning centers are notbranded under the ChinaEdu name, we derive revenue from them by contributingsignificantly to their operations. We believe that the opening of these learningcenters will allow us to significantly enhance our brand recognition, increaseaccess to potential students for online degree programs and enhanceprofitability. We also are actively seeking to establish strategicrelationships with universities that currently are not our online degree programcustomers to provide our learning center services to their online degreeprograms.

 

*Competition*

 

There are two maincomponents of competition within the online degree program market: (i) competitionamong service providers to attract and retain additional university partners;and (ii) competition among online degree programs seeking to enroll students.In addition to GRTU, we currently serve 18 out of the 67 universities that havebeen approved to offer online degree programs in China and we have contractedwith three additional universities that are awaiting regulatory approval to 

 

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start their programs. Thereare 49 otheruniversities currently offering online degree programs that eitherindependently run their programs or outsource services for their programs toother service providers. While we are trying to establish relationships withadditional universities with respect to their online programs, severalcompanies offer services that compete with our service offerings either on acomprehensive basis or, more commonly, on a service-by-service basis. Wecompete with these companies primarily on the scope and quality of our serviceofferings to university partners, and to a lesser extent, price.

 

Our revenue from theonline degree programs we service depends on these programs’ total tuition cashreceipts. The online degree programs that we service must compete with otheronline programs, as well as with other education and training programs that areseeking to enroll students. Recruitment of students for online degree programsrelies heavily on learning centers, most of which are owned and operated bythird parties. Although we have assisted our university customers in developingrelationships with approximately 497 learning centers, these learning centerscan be subject to varying degrees of customer loyalty due to the strongcompetitive position they occupy. In addition, many learning centers assistwith recruitment on behalf of other online degree programs, and, as a result,the online degree programs that we support face considerable competition forrecruiting at the learning centers.

 

***International Curriculum Programs***

 

We distribute and supportEnglish language programs to secondary schools and international polytechnicprograms to vocational schools in China. We provide all aspects of delivery andsupport for these programs, including program development and implementation,English teacher recruitment and administration, and other ancillary services.We generate revenue based on the enrollment fees students pay to theparticipating schools with whom we have entered into revenue sharingarrangements, based either on a fixed fee per student or a percentage of theenrollment fee per student. For the 2006-2007, 2007-2008 and 2008-2009 academicyears, respectively, approximately 4,700, 5,000, and 4,000 students wereenrolled in the international curriculum programs. In 2006, 2007 and 2008, wegenerated 13.3%, 11.9% and 8.7%, respectively, of our net revenue frominternational curriculum services.

 

Although there are manyChinese universities and colleges that have established relationships withforeign schools, we are not aware of any other similarly positioned company inChina that has a dedicated business line such as ours focused on distributingand supporting curriculum from established foreign educationalinstitutions.  We compete generally inthe market for K-12 students seeking to learn English with other providers ofEnglish language training programs. These providers include other privateschool operators that are offering English language programs, affiliate schoolprograms, after school programs, distance learning programs and self-studymaterials.

 

*TheSCC Program. *We have provided services with respect toEnglish language programs since September 2005. In February 2009, we entered into a partnership agreement with HoweSound Secondary School, located in School District No. 48 in British Columbia,Canada, which we refer to as the SCC program. The SCC program, for which we are currently in the process of signinglocal high school partners, provides secondary schools in China with high-qualityEnglish language instruction programs using native English speakers. Studentsat schools that participate in the SCC program must choose to be enrolled inthe SCC program when applying for admission to the school. The SCC program’sEnglish curriculum typically consists of five hours of class time each week.

 

*TheFEC Program. *In 2005, we acquired the right to serveas the exclusive service provider to all of Western Institute of Technology atTaranki’s English language programs within China until September 2020.  We refer to this program as the FECprogram.  Western Institute of Technologyat Taranki, or WITT, is a government-owned post-secondary education institutionbased in New Zealand that offers English language programs for overseasstudents. In December 2008, we mutually terminated our agreement with WITT dueto ongoing regulatory challenges. Schools that have been receiving support from us under the FEC program,however, can continue to recruit students under the FEC name even aftertermination of our agreement with WITT if they choose, since all educationrelated support is provided by us. However, we cannot assure you that any or all of the FEC contractedschools will continue to work with us in the future, and our partner schoolsmay face additional challenges obtaining re-approvals for replacing WITT withother overseas education institutions with whom we may partner.  While we believe that some of our existingcontracted schools participating in the FEC program may switch to either ournewly established SCC program or to other programs that we may provide, therecan be no assurance they will.

 

Despite a reduction instudent enrollment and the ongoing regulatory challenges that resulted in themutual termination of our agreement with WITT, we believe that our Englishlanguage program has been and, in the case of our SCC program, will continue tobe well-received by parents and students due to the high quality of the Englishlanguage instruction.** **We also believe that there is avast market of students throughout China whose needs for high quality Englishlanguage instruction are not currently being met by the Chinese public schools.We intend to target schools in the markets where the Chinese public schools donot meet the public need for English language instruction. In addition, a coreelement of our marketing strategy is highlighting our English language program’srole in enabling students to differentiate themselves for college entranceexaminations and to better compete in a competitive education system and jobmarket.

 

*TheBCIT Program*.    We entered into an exclusive serviceprovider relationship with the British Columbia Institute of Technology, orBCIT, a leading polytechnic institute in Canada, in February 2006. Through thisprogram, we provide services to BCIT in implementing internationalpost-secondary education programs and market these programs to selectedpolytechnic colleges in China approved by BCIT from time to time, enablingthese colleges to offer up-to-date courses across a wide variety of majors andsubjects to their students. We are BCIT’s exclusive service provider in Chinafor these selected 

 

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polytechnic collegesuntil 2020. At present, we provide services to the BCIT programs of sixpolytechnic colleges approved by BCIT to offer these programs. The BCIT programprovides a three-year associate degree program to high school graduates seekinginternational vocational education within the environment of a Chinesepolytechnic college. Through the participating colleges in China, the programoffers a wide variety of majors and subjects such as business, computing andinformation technology, manufacturing, electronics, construction, environment,transportation and health science, all developed by BCIT. The program is uniquein that entry-level courses and related course materials are in Chinese, butinstruction and course materials for more advanced courses are transitioned toEnglish.

 

We believe that the BCITprogram is highly attractive to students as it offers them the opportunity topursue a foreign degree and provides them with practical, job-orientedvocational training in English, which enables the students to improve theirlanguage skills in their respective professional areas. For participatingChinese polytechnic colleges, the BCIT program enables them to distinguishthemselves from their peers by offering an international dual degree program witha world-class polytechnic curriculum and overseas-trained faculty. Suchdifferentiation also enables these colleges to collect higher tuition fees fromthe students enrolling in the program.

 

We intend to expand thenumber of schools offering the BCIT program by actively marketing the programsto polytechnic colleges and secondary schools in China. The market for Englishlanguage instruction services is highly competitive in China, yet extremelyfragmented and localized. We intend to concentrate on adding new schools in thecoastal and relatively more affluent regions of China, which includeapproximately 150 cities. In addition to adding new Chinese polytechniccolleges offering the BCIT program, we plan to increase the number of majorsand subjects covered by the international post-secondary education program inorder to attract additional students. We also plan to explore strategicrelationship opportunities with other polytechnic colleges in the U.S., Canada,the United Kingdom and Australia. In the near term, however, our plans to addnew polytechnic colleges to our BCIT program and explore strategic relationshipwith other polytechnic colleges have been postponed until at least the end of2009****due to the general suspensionof approvals for new Chinese-foreign cooperative polytechnic education programsby the MOE. See “—Regulation—Regulations on Operating Private Schools.” Seealso the risk factor titled “*Chinese-foreigncooperative education programs, such as our international curriculum programs,are heavily regulated, and our ability to conduct business in this area ishighly dependent on regulatory policies and our compliance with these policies.”*

 

***Private Primary and Secondary Schools***

 

The market for privateprimary and secondary schools in China is growing rapidly. We believe thatprivate primary and secondary schools will play an increasingly important rolein providing quality education in China, particularly to the children of theemerging middle class. Parents in China, as in the rest of the world, arecontinuously searching for the best educational solutions for their children.By acquiring or partnering with leading established institutions, we believethe private primary and secondary school business represents a compellingbusiness opportunity for us. According to the World Bank Study, between 2002and 2005, China accounted for approximately 70% of global primary and secondaryenrollment growth. As a result of this market opportunity, we acquired threeprivate schools in 2005. We believe this market opportunity is attractive,complements our existing sources of revenue and also provides us withopportunities to realize synergies with our other K-12 business lines,specifically our 101 Online School and our newly established SCC program.English language training is a core element of our curriculum at each of ourschools and is a central to our strategy of establishing schools with elitereputations. In each of our three schools, we have introduced, or plan tointroduce, a performance-based incentive system for teachers andadministrators, improved management systems, and enhanced academic offerings.We also provide technical services to enhance their operations. We have alsoimproved, or plan to improve, the existing infrastructure of these schools orto build new facilities to accommodate larger student populations. Our schooloperations are currently located in: Anqing, Anhui province; Jingzhou, Hubeiprovince; and Pingdingshan, Henan province. In 2006, 2007 and 2008, wegenerated 5.1%, 5.0% and 6.1%, respectively, of our net revenue from this lineof business.

 

*AnqingForeign Language School*

 

Through our Chineseaffiliated entity, Hongcheng Education, we currently operate the Anqing ForeignLanguage School, or the Anqing School, a private primary school, grades 7 to 9,which has been operational since 2004. The Anqing School is regarded as one ofthe leading schools in the market that it serves. We completed Phase Iconstruction of the new campus during 2008, and we are in the process ofcompleting Phase II construction to accommodate a larger student population,which we expect to be completed by the fall of 2009. During the 2006-2007academic year, the Anqing School had an enrollment of approximately 1,400students, which grew to approximately 1,600 during the 2007-2008 academic yearand increased to approximately 2,500 students during the 2008-2009 academicyear. In 2007, the Anqing School had the highest exam scores in Anqing****for students enrolled in grades 7 and 9.The school is also well regarded for its English language program and foreignEnglish language teachers.

 

*JingzhouSchool (Southern Campus)*

 

Through our Chineseaffiliated entity, Hongcheng Education, we had plans to construct a new privatesecondary school, Jingzhou School (Southern Campus)*,*for students in grades 9-12 in Jingzhou, Hubei province.The Jingzhou School (Southern Campus) will be established as a partnership withJingzhou High School, whereby we will own 54.4% of the new school, our partner,Jingzhou High School, will own 25%, and one minority shareholder will own theremaining 20.6%. Under the cooperation agreement between Hongcheng Educationand Jingzhou High School, we will undertake construction of the new 

 

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campus and Jingzhou HighSchool will contribute its brand as well as management and teaching resourcesto the school.  We initially planned tocomplete construction of the new campus by the fall 2006 recruiting season,however, we have encountered delays in obtaining the land-use rights for thenew campus site, as well as delays due to inclement weather in early 2008,which lead to an increase in construction costs.  As a result, we cannot assure you that wewill begin construction in time for enrollment in the fall of 2009, or at all.

 

*PingdingshanBilingual School*

 

In 2005, we acquired allof the rights and interests in the Pingdingshan Bilingual School, orPingdingshan School. The Pingdingshan School is a private primary school,grades 1-9, in Pingdingshan, Henan province. The Pingdingshan School isregarded as one of the leading schools in its market. During each of the2006-2007, 2007-2008 and 2008-2009 academic years, the Pingdingshan School hadan enrollment of approximately 1,200 students.

 

***Online Tutoring and Test Preparation Programs***

 

We provide onlinetutoring and test preparation services to primary and secondary school studentsin China through a separately branded program known as the “101 DistanceLearning Center” or the “101 Online School,” which we acquired 80% of in January2005 and the remaining 20% equity interest in May 2008. The 101 Online Schoolwas originally founded in 1996, and over the past decade has developed a strongreputation as a valuable learning tool with students and teachers alike. The101 Online School, which currently has over 1 million users, concentrates onthe online tutoring and education of pre-kindergarten through high schoolstudents in China and is the leading educational website for elementary andmiddle school students.   The websiteaddress for our 101 Online School is *www.chinaedu.com*.

 

As of December 31, 2008,the 101 Online School served more than 36,800 revenue students.  In 2006, 2007 and 2008, we generated 8.1%,****6.8% and 4.8%, respectively, of our netrevenue from the 101 Online School through subscription fees paid by studentsfor the online tutoring service.

 

Using our proprietarye-learning platform, the 101 Online School provides interactive tutoringservices to primary and secondary school students in virtually all academicsubjects offered to these students in China. Our online tutoring and testpreparation services also assist secondary school students in preparing for keyexaminations administered in China, including the national college entranceexamination. All of the tutoring and test preparation materials used by our 101Online School are developed by qualified teachers and subject to review by ourquality control staff. By providing tutoring and test preparation servicesonline, the 101 Online School makes the tutoring and test preparation processmore convenient and accessible for students, especially those with limitedaccess to traditional tutoring or test preparation services. In addition, wecontinue to innovate new services designed to attract and retain students forour 101 Online School. Recently, we introduced a new service, “Homework Help,”to assist students online on their homework assignments. In 2008, we alsolaunched a new product series called “Yo-Yo Bear” for children, from pre-schoolage to grade 3, and their parents.

 

We currently market our101 Online School through exclusive regional third-party distributors and ourown sales centers in Beijing, Tianjin and other cities and provinces in China.More than 200 distributors located in major cities in China purchase bulksubscriptions to our 101 Online School and resell these subscriptions tostudents. Bulk subscription sales to distributors accounted for 48.0%, 62.3%and 68.2% of our 101 Online School revenue in 2006, 2007 and 2008,respectively.

 

In addition, we haveentered into an arrangement with Lenovo Group Limited, a personal computermanufacturer in China, to distribute our online tutoring services in variouslines of Lenovo personal computers**.**

 

**Seasonality**

 

We have experienced, andexpect to continue to experience, seasonal fluctuations in our revenue andresults of operations, primarily due to seasonal changes in the number ofstudents who are enrolled in, or served by, our businesses. Historically, ourlargest revenue student enrollments occur in the fall, and we generallyrecognize revenue over the six-month period following these enrollments. As aresult, our revenue in the fourth quarter and first quarter of each year,representing the fall semester, have been higher than the other two quarters,which represent the spring semester. Our expenses and costs, however, do notnecessarily correspond with changes in our revenue or the number of studentswho are enrolled in, or served by, our businesses. We expect quarterlyfluctuations in our revenue and results of operations to continue. As ourrevenue grows, these seasonal fluctuations may become more pronounced.

 

**Regulation**

 

The Chinese governmentregulates the education services industry and the provision of Internetcontent. This section summarizes the principal Chinese regulations relating toour businesses.

 

We operate our businessin China under a legal framework that consists of the State Council, which isthe highest executive authority of the Chinese central government, and severalministries and agencies under its authority, including the Ministry ofEducation, or MOE, the State Administration of Foreign Exchange, or SAFE, theGeneral Administration of Press and Publication, or GAPP, the Ministry ofInformation Industry, or MII, the State Administration for Industry andCommerce, or SAIC, the Ministry of Civil Affairs, or MCA, and their respectiveauthorized local counterparts.

 

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***Regulations on Online Education***

 

Pursuant to the *Administrative Regulations on Educational Websitesand Online and Distance Education Schools*, issued by the MOE in2000, educational websites and online education schools may provide educationalservices in relation to higher education, elementary education, pre-schooleducation, teacher education, occupational education, adult education, othereducation and public educational information services. “Educational websites”refers to organizations providing education or education-related informationservices to website visitors by means of a database or online educationplatform connected via the Internet or an educational television station. “Onlineeducation schools” refers to education websites that issue educationalcertificates in connection with their providing academic education services ortraining services.

 

On June 29, 2004, theState Council issued the *Decision on SettingDown Administrative Licenses for the Administrative Examination and ApprovalItems Really Necessary to be Retained*, which provides that anadministrative license is required for “online education schools” that providedegree education to students, but not for “educational websites” that do notprovide degree education to students.

 

The MOE issued *Certain Opinions on the Pilot Program of SupportingCertain Higher Education Institutions to Establish Online Education Colleges toDevelop Modern Long-Distance Education* in 2000 and *Certain Opinions regarding the Enhancement of theAdministration of Higher Education Institution Online Education Colleges andthe Improvement of Education Quality*in 2002 to regulate onlinehigher education. And, on March 18, 2009, the MOE issued a *Circular on the Student Enrollment of Online DegreeEducation by the Pilot Universities which are Permitted to Operate OnlineDegree Education*, or the 2009 circular, to regulate the recruitmentof online degree students. The 2009 circular prohibits universities fromrecruiting existing full-time students and instructs schools offering onlinedegrees to recruit only working adults for their programs. The 2009 circularalso required universities to tighten their admission criteria for their onlineprograms and to improve the quality of their recruiting materials. As of December31, 2008, 67 universities and colleges had been approved by the MOE to operateonline education programs as part of the MOE pilot program.** **Eighteenof the 22 universities to which we currently provide, or have entered intoagreements to provide, online degree program services are included within thepilot program. Central University of Finance and Economics, Beijing ForestryUniversity and Shanghai University of Finance and Economics, three otheruniversities that we serve, are not in the pilot program and are currently inthe process of applying for the MOE approval to offer online degrees.

 

To regulate the learningcenters that provide services to online degree programs, the MOE issued the *Principles on the Establishment and Administration ofModern Distance Education Off-campus Learning Center (Pilot)*, in January2002, and, in March 2003, promulgated the *InterimProvisions* on *Administration ofModern Distance Education Off-campus Learning Center*. According tothese two regulations, learning centers are not authorized to independentlycarry out activities such as recruiting students, teaching and issuing degreesfor modern distance education—all activities that must be done in conjunctionwith the universities offering the degrees. These regulations also requirelearning centers not to pursue business that is irrelevant to online educationservices. Each learning center is required to be associated with at least oneeducational institution or other entity approved by the MOE to provide onlineeducation services, and can only provide logistics services for recruitment andexamination administration to educational institution(s).

 

Each learning center andthe educational institution with which it is associated must jointly apply tothe education authorities for approval before the learning center can provideservices to any online education program. Additional approvals are required fora learning center if it intends to provide support services to additionaleducational institutions. The education authorities have the authority tosupervise, inspect and evaluate the learning centers from time to time. Alearning center’s approvals may be withdrawn by the education authorities ifduring a periodic inspection they determine that the learning center isunqualified to continue operations.

 

On February 9, 2007, wereceived a provisional approval from the MOE to operate 10 learning centers infour provinces (Beijing, Shanghai, Jiangsu and Zhejiang) for a trial period ofup to 18 months. Upon the receipt of the related approval from the educationalauthorities of these four provinces, we plan to establish and operate learningcenters in those provinces. In August 2007, we received the relatedprovincial-level approval from the Beijing education authorities to operatelearning centers in Beijing and opened one learning center in Beijing. Inaddition, during the first quarter of 2008, after receiving the relatedprovincial-level approval from the Shanghai and Jiangsu education authorities,as well as informal approval from the Zhejiang education authorities, we openedthe other nine learning centers.**** The MOE has not yet issued to us a finalapproval to operate learning centers on a nationwide basis in China based onthe performance and operation of our learning centers during the trial period.

 

***Regulations on Operating Private Schools***

 

The principal regulationsgoverning private education in China consist of the *Education Law of China*, *TheLaw for Promoting Private Education (2003),**The Implementation Rules for the Law for PromotingPrivate Education (2004)* and the *Regulationson Chinese-Foreign Cooperation in Operating Schools*. Theseregulations are summarized below.

 

*EducationLaw of China*

 

The *Education Law of China*, or the*Education Law*, was enacted on March 18,1995. The*Education Law* setsforth provisions relating to the fundamental education systems of China,including a system of pre-school education, primary education, secondaryeducation and higher education, a system of nine-year compulsory education anda system of education certificates. The *EducationLaw* requires the government to formulate plans for the developmentof education and the 

 

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establishment andoperation of schools and other education institutions. In principle,enterprises, social organizations and individuals are encouraged to operateschools and other types of educational organizations in accordance with Chineselaws and regulations. Nevertheless, no school or any other educationalinstitution may be established for profit-making purposes. However, private schoolsmay be operated for “reasonable returns,” as described in more detail below.

 

*TheLaw for Promoting Private Education (2003) and The Implementation Rules for theLaw for Promoting Private Education (2004)*

 

The*Law for Promoting Private Education (2003)*became effective on September 1, 2003, and its implementing regulations, *The Implementation Rules for the Law for PromotingPrivate Education (2004)*, became effective on April 1, 2004. Underthese regulations, “private schools” are defined as schools established byindividuals or private social organizations using private funds. Privateschools providing degree education, pre-school education, education forself-study aid and other academic education are subject to approval by theeducation authorities, while private schools engaging in occupationalqualification training and occupational skill training are subject to approvalsfrom the authorities in charge of labor and social welfare. An approved privateschool will be granted an operating permit, and it must be registered with theMCA or its local counterpart as a privately run non-enterprise legal person.Two of our private primary and secondary schools, the Anqing School and thePingdingshan School, have obtained operating permits and have been registeredwith the relevant local office of the MCA. We will apply for the permit foroperating a private school for the Jingzhou School (Southern Campus) when wecomplete construction of the new southern campus.

 

The operation of privateschools is highly regulated. For example, the types and amounts of fees chargedby private schools offering certifications must be approved by the relevantgovernmental authority and be publicly disclosed, and the types and amounts offees charged by private schools that do not offer certifications need only befiled with the relevant governmental authority and be publicly disclosed. OurAnqing School and Pingdingshan School currently offer certifications tostudents, and we expect our Jingzhou School (Southern Campus) to do so once itbegins operations.

 

Private education istreated as a public welfare undertaking under the regulations. Nonetheless,investors in a private school may elect to require “reasonable returns” fromthe schools. Under the regulations, an election to establish a private schoolas one requiring reasonable returns must be made in the articles of associationof the school. For schools that have made this election, the amount ofreasonable return that can be distributed to investors each year is determinedbased on a percentage of the school’s “operating surplus,” which is equal tothe school’s annual net income less the aggregate amount of donations received,government subsidies, if any, the amount required to be reserved for the school’sdevelopment fund and other expenses as required by the regulations. Thispercentage is determined by the school’s board of directors, taking intoconsideration the following factors: (i) the school’s tuition and other fees, (ii)the ratio of the school’s expenses used for educational activities andimproving the educational conditions to the total fees collected; and (iii) theschool’s admission standards and educational quality. Information relating tothese factors must be publicly disclosed before the school’s board determinesthe percentage of the school’s annual net balance that can be distributed asreasonable returns. This disclosed information and the decision to distributereasonable returns must also be filed with the approval authorities within 15days from the decision made by the board. However, none of the current Chineselaws and regulations provides a formula or other guidelines for determining “reasonablereturns.” In addition, none of the current Chinese laws and regulations setsforth different requirements or restrictions on a private school’s ability tooperate its education business based on such school’s status as a school thatrequires reasonable returns or a school that has not made this election. TheAnqing School was established as a school that requires reasonable returns. Weare in the process of changing the status of the Pingdingshan School to aschool that requires reasonable returns.****Afterthe completion of the construction of the new campus for the Jingzhou School(Southern Campus), we plan to elect to require reasonable returns.

 

At the end of each fiscalyear, private schools are required to allocate a certain amount to theirdevelopment fund for the construction and maintenance of the school and theprocurement and upgrade of educational equipment. For private schools thatrequire reasonable returns, this amount must be no less than 25% of the annualnet income or the annual increase in the net assets of the school, while forother private schools, this amount must be no less than 25% of the annualincrease in the net assets of the school, if any. Private schools that have notelected to require reasonable returns are entitled to the same preferential taxtreatment as public schools. The regulations require that preferential taxtreatment policies applicable to private schools requiring reasonable returnsto be formulated by the finance authority, taxation authority and otherauthorities under the State Council, but to date no such regulations have beenpromulgated by the relevant authorities.

 

***Regulations on Chinese-Foreign Cooperation in OperatingSchools***

 

Chinese-foreigncooperation in the operation of schools and training programs is governed bythe *Regulations on Operating Chinese-ForeignSchools*, issued by the State Council in 2003 in accordance with the *Education Law*, the *Occupational Education Law* and the *Law for Promoting Private Education*.

 

The *Regulations on Operating Chinese-foreign Schools*andits implementing regulations, the *ImplementingRules for the Regulations on Operating Chinese-foreign Schools*, orthe *Implementing Rules*, whichwere issued by the MOE in 2004, encourage substantive cooperation betweenoverseas educational organizations, which are required to have relevantqualifications and experience in providing high-quality education, and Chineseeducational organizations to jointly operate various types of schools in China.

 

Permits forChinese-foreign cooperation in operating schools must be obtained from therelevant education authorities or the authorities that regulate labor andsocial welfare in China. Since all of our private primary and secondary schoolsare 

 

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operated by our Chineseaffiliated entities and not by us, we believe, based on the advice of ourChinese counsel, that we are not required to apply for these permits.

 

Additionally, the *Regulations on Operating Chinese-Foreign Schools*andits *Implementing Rules*requirethat the foreign party to Chinese-foreign cooperative educational institutionsor programs be a “foreign educational institution,” and under thoseregulations, a for-profit company, such as us, cannot qualify as a foreigneducational institution. As a result, we cannot directly operate the SCC, FECor BCIT programs, and instead we are a service provider to these programs.

 

In August 2004, the MOEpromulgated the *Announcement RegardingRe-Approval of Chinese-foreign Cooperative Educational Institutions and Programs*,which requires Chinese-foreign cooperative educational institutions andprograms that were established before July 1, 2004 (the effective date for the *Implementing Rules*) to obtain re-approvalfrom the MOE. Only four of our 19 contracted schools have obtained re-approvalfrom the MOE.** **If the other 15 schools cannot obtain the MOE’s re-approval,they may have to terminate their FEC programs.

 

In April 2007, the MOEissued the *Circular on Further RegulatingChinese-foreign Cooperative Education Programs*. The circular directsthe local education authorities generally to suspend the approval of any newChinese-foreign cooperative polytechnic education programs until the end of2008. To ensure the quality of the Chinese-foreign education programs, thecircular emphasizes the regulatory supervision of these programs and adviseslocal education authorities to closely supervise and monitor the existingprograms, especially in recruiting materials, advertisement, and issuance ofdegrees and diplomas, and directs them to report and remedy any non-complianceby existing programs of the applicable regulations. As a result of thiscircular, our BCIT program has not been able to contract new schools for theprogram, and we do not expect it to until at least 2009.  Although the circular only discusses thesuspension of approvals through the end of 2008, we cannot assure you that ourBCIT program will be able to contract new schools during 2009, or at any timeafter that.

 

***Regulations on Internet Information Services***

 

Following the StateCouncil’s issuance of the *TelecomRegulations and the Internet Information Services Administrative Measures*,or the *Internet Information Measures*,on September 25, 2000, the MII and other regulatory authorities have issued anumber of Internet-related regulations, including the *Internet Electronic Bulletin Board ServiceAdministrative Measures*, or the *BBSMeasures*.

 

The *Internet Information Measures* require thatcommercial Internet content providers, or ICPs, must either obtain a licensefor Internet information services, or an ICP license, from, or make an ICPfiling with, the appropriate telecommunications authorities to carry on anycommercial Internet information services in China. Generally, an ICP license isrequired to provide Internet information services for profit-making purposes,whereas only an ICP filing is required to provide Internet information serviceson a non-profit basis. The telecommunications authorities generally considerthat the online degree programs established by universities are not forprofit-making purposes, and the universities are only required to make an ICPfiling, rather than obtain an ICP license, for their online degree programs.The telecommunications authorities could, however, require the universities toobtain ICP licenses in the future. In addition, some of our university partnersfor online degree programs have not made the required filing with thetelecommunications authorities. If our university partners fail to make an ICPfiling, or obtain an ICP license (if required), these online degree programsmay be sanctioned or suspended.

 

The 101 Online School, aprofit-making business, is required to obtain an ICP license. Gotop Electronic,a subsidiary of one of our Chinese affiliated entities, holds the ICP licensefor our 101 Online School. Before we acquired Gotop Electronic, it had alreadyobtained an ICP license. Following our initial acquisition of Gotop Electronic,our affiliate entity, Xiandai Xingye, directly held an 80% equity interest ofGotop Electronic.****Althoughapprovals of the MII, the MOE and the MOC were required for this transaction,we did not apply for or obtain these approvals. Subsequent to the acquisition,we have transferred our equity interests in Gotop Electronic to one of ourChinese affiliated entities. In addition, at the time when Gotop Electronic wasapproved by relevant Chinese authorities to engage in the ICP business, itsregistered capital did not meet the minimum requirement specified under Chineselaw for ICP license holders. We have subsequently increased the registeredcapital of Gotop Electronic to satisfy this requirement. As a result, webelieve that any regulatory issues relating to our interest in Gotop Electronichave been resolved.

 

Under the *Internet Information**Measures*, Internet information serviceproviders are prohibited from producing, copying, publishing or distributinginformation that insults or slanders a third party or that infringes the lawfulrights and interests of others. Depending on the nature of a violation, ICPsthat violate this provision may face criminal charges or be sanctioned bysecurity authorities. In addition, they may be ordered to temporarily suspendtheir service, or their licenses may be revoked.

 

The *BBS Measures* provide that ICPs engaged inproviding online bulletin board services, or BBS, must comply with a specialapproval process and make a specific filing with the relevanttelecommunications industry authorities. ICPs that provide electronic messagingservices must not disclose user personal information to any third party withoutthe consent of the user, unless the law otherwise requires that the data bedisclosed. The regulations authorize the relevant telecommunicationsauthorities to require ICPs to rectify any unauthorized disclosure. ICPs couldbe liable if unauthorized disclosure causes damages or losses to users. TheChinese government can require ICPs to provide the government with Internetusers’ personal information if the users post any prohibited content or engagein illegal activities on the Internet. Our 101 Online School 

 

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provides BBS or similarservices. Gotop Electronic, the ICP license holder and website operator of our101 Online School, has obtained the BBS license, which is valid until September24, 2011 and is subject to annual inspection.

 

In July 2006, the MIIissued the *Notice on StrengtheningManagement of Foreign Investment in Operating Value-Added Telecom Services*.The notice prohibits Chinese ICPs engaged in providing value-added telecomservices from leasing, transferring or selling their ICP licenses or providingfacilities or other resources to illegal foreign investors. The notice requiresChinese ICPs to directly own the trademarks and domain names for the websitesthey operate, as well as servers and other infrastructure used to support thesewebsites. The notice also requires Chinese ICPs to evaluate their compliancewith the notice by November 1, 2006 and correct any non-compliance. A ChineseICP’s failure to complete the procedures by November 1, 2006 could be the basisfor revocation of its ICP license.

 

We operate *www.chinaedu.com*, the operating website forour 101 Online School, through Gotop Electronic, a subsidiary of XiandaiTechnology, our Chinese affiliated entity. Gotop Electronic holds the ICPlicense for this website. The ICP license is valid until 2011 and is subject toannual inspection. Gotop Electronic passed the annual inspection in 2008. Weoperate our corporate websites, *www.chinaedu.net*and*www.prcedu.com,*through Xiandai Technology, which holds the ICP license for these websites. TheICP license is valid for five years beginning in November 2004 and is subjectto annual inspection.  Xiandai Technologypassed the annual inspection in 2008.  Weintend to renew the ICP license for**our*www.chinaedu.net*and*www.prcedu.com* websites in 2009. We havenot transferred the domain name and trademark for our *www.chinaedu.net*and*www.prcedu.com* websites to  Xiandai Technology. We may be required tomake such transfer in the future and, if we are unable to do so, the ICPlicense held by Xiandai Technology may be suspended or revoked by MII.

 

***Regulations on Online Publications***

 

The GAPP and the MIIjointly promulgated the *Tentative InternetPublishing Administrative Measures,*or the*Internet Publishing Measures*, which took effect on August 1,2002. The *Internet Publishing Measures*require Internet publishers to obtain approval from the GAPP. The term “Internetpublishing” is defined in these regulations as online dissemination throughwhich Internet information service providers select, edit and process workscreated by themselves or others (including content from books, newspapers,periodicals, audio and video products, electronic publications, and othersources that have already been formally published or works that have been madepublic in other media) and subsequently post this content on the Internet or transmitit to users over the Internet for browsing, use or downloading by the public.

 

Gotop Electronic, ourChinese affiliated entity that operates our 101 Online School, received verbalconfirmation from the GAPP that the online content services that it provides donot fall within the scope of “Internet publishing” that would require approvalor a license from GAPP. Obtaining an online publication license requirescompliance with certain conditions, including having five or more qualifiededitors, which Gotop Electronic cannot satisfy. However, because there is nofurther official or publicly-available interpretation of “Internet publishing,”we cannot assure you that Gotop Electronic will not require an onlinepublication license in the future.

 

***Regulations on Internet Culture Activities***

 

The Ministry of Cultureof China promulgated the *Internet CultureAdministration Tentative Measures,*or the*Internet Culture Measures*, on May 10, 2003. These measuresbecame effective on July 1, 2003 and were amended on July 1, 2004. The *Internet Culture Measures* require ICPsengaging in Internet culture activities to obtain an Internet culture businessoperations license from the Ministry of Culture in accordance with the *Internet Culture Measures*. As definedunder the *Internet Culture Measures*,the term “Internet culture activities” includes, among other things, acts ofonline dissemination of Internet cultural products, such as audio-visualproducts, games, performances of plays or programs, works of art and cartoons,and the production, reproduction, importation, sale (wholesale or retail),leasing and broadcasting of Internet cultural products.

 

Gotop Electronic, ourChinese affiliated entity that operates our 101 Online School, is engaged inthe distribution of certain audio-visual products through the Internet. GotopElectronic received verbal confirmation from the Ministry of Culture that itsproducts do not fall within the definition of “Internet culture products” andits operations do not fall within the definition of “Internet cultureactivities” as defined under the *InternetCulture Measures*. Accordingly, Gotop Electronic is not required toobtain an Internet culture business operations license. However, because thereis no further official or publicly-available interpretation of thesedefinitions, we cannot assure you that Gotop Electronic will not need anInternet culture business operations license in the future.

 

***Regulations relating to Information Security***

 

On December 28, 2000, theNational People’s Congress enacted the *DecisionsRegarding Maintaining Internet Security*, which prohibits any use ofthe Internet that results in a breach of public security, dissemination ofsocially destabilizing content or divulgence of state secrets. The conductprohibited is broadly defined under the decisions.

 

According to otherrelevant regulations, ICPs must complete mandatory security filing procedureswith local public security authorities and must also report any publicdissemination of prohibited content. According to the *Interim Measures for the Administration of Filingsfor Commercial Web Sites* promulgated by the Beijing Administrationof Industry and Commerce, or the Beijing AIC, and other related regulations, wemust file and register our websites with Beijing AIC and obtain electronicregistration marks. We have filed and registered our websites, *www.chinaedu.com*, *www.chinaedu.net* and *www.prcedu.com* with Beijing AIC andobtained electronic registration marks.

 

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***Regulations on Broadcasting Audio-Video Programs through theInternet or Other Information Network***

 

The State Administrationof Radio, Film and Television, or SARFT, promulgated the Rules forAdministration of*Broadcasting ofAudio-Video Programs through the Internet and Other Information Networks*,or the *Broadcasting Rules*, whichbecame effective on October 11, 2004. The *BroadcastingRules*apply to the activities of broadcasting, integration,transmission, downloading of audio-video programs with computers, televisionsor mobile phones as the main terminals and through various types of informationnetworks. Pursuant to the *Broadcasting Rules*,a permit for broadcasting audio-video programs through an information networkis required to engage in these Internet broadcasting activities. On April 13,2005, the State Council announced a policy on private investments in businessesin China that relate to cultural matters, which prohibits private investmentsin businesses relating to the dissemination of audio-video programs throughinformation networks. As these regulations are relatively new, there aresignificant uncertainties relating to their interpretation and implementation, includingthe definition of “audio-video programs” as specified in these regulations.Gotop Electronic, our Chinese affiliated entity engaging in online tutoringservices, does not now possess a permit for broadcasting audio-video programs,and we cannot assure you that it will not be required to obtain one in thefuture.

 

***Regulations on Protection of the Right of Disseminationthrough Information Networks***

 

On May 18, 2006, theState Council issued the *Regulations onProtection of the Right of Dissemination through Information Networks*,and they became effective on July 1, 2006. These regulations require that everyorganization or individual who disseminates a third party’s work, performance,audio or visual recording products to the public through an information networkmust obtain permission from, and pay compensation to, the copyright owner ofthese products, unless otherwise provided under relevant laws and regulations.The copyright owner may take technical measures to protect his or her right ofdissemination through information networks and any organization or individualmay not intentionally evade, destroy or otherwise assist others in evadingthese protective measures unless permissible under law. These regulations alsoprovide that permission from and compensation for the copyright owner are notrequired in the event of limited dissemination to teaching or research stafffor the purpose of school teaching or scientific research.

 

We own the copyrights toall of the educational materials of our 101 Online School, and the copyrightsto all of the online courses for our university partners’ online degreeprograms are either owned by us or by collaborative alliances with theuniversity partners. However, users of our BBS for our 101 Online School maypost copyrighted materials from time to time, without our prior knowledge. Weactively monitor the contents posted on our BBS and will remove any materialsthat we believe may infringe the copyrights of third parties.

 

***Regulations on Copyright and Trademark Protection***

 

China has adoptedlegislation governing intellectual property rights, including copyrights andtrademarks. China is a signatory to the main international conventions onintellectual property rights and became a member of the *Agreement on Trade Related Aspects of IntellectualProperty Rights*, or *TRIPS*,upon its accession to the World Trade Organization in December 2001.

 

*Copyright*.   The National People’s Congress amended its *Copyright Law* in 2001 to widen the scope of works and rightsthat are eligible for copyright protection. The amended *Copyright Law* extends copyright protectionto Internet activities, products disseminated over the Internet and softwareproducts. In addition, there is a voluntary registration system administered bythe China Copyright Protection Center.

 

To address the problem ofcopyright infringement related to content posted or transmitted over theInternet, the National Copyright Administration and the MII jointly issued the *Administrative Measures for Copyright Protection Relatedto the Internet* on April 30, 2005. These measures became effectiveon May 30, 2005.

 

We own the copyrights toall of the educational materials of our 101 Online School, and the copyrightsto all of the online courses for our university partners’ programs are eitherowned by us or by our university collaborative alliances.

 

*Trademark.*   The *Chinese Trademark Law*,adopted in 1982 and revised in 2001, protects the proprietary rights toregistered trademarks. The Trademark Office, which is under the SAIC, handlestrademark registrations and grants a ten-year term to registered trademarks,subject to renewal for another ten years. Trademark license agreements must befiled with the Trademark Office for record. We have registered nine trademarkswith the Trademark Office and are in the process of registering additionalmarks. In addition, if a registered trademark is recognized as a well-knowntrademark, the proprietary right of the trademark holder may be extended beyondthe registered sphere of products and services of the trademark.

 

On November 5, 2004, theMII amended the *Measures for Administrationof Domain Names for the Chinese Internet*, or the *Domain Name Measures*. The *Domain Name Measures* regulate theregistration of domain names, such as the first tier domain name “.cn.” In February2006, China Internet Network Information Center, or CINIC, issued the*Implementing Rules for Domain Name Registration andthe Measures on Domain Name Disputes Resolution*, pursuant to whichCINIC can authorize a domain name dispute resolution institution to decidedisputes. We have registered the domain names for our main websites,*www.chinaedu.net*, *www.chinaedu.com* and *www.prcedu.com,* with CINIC. We are alsothe registered owner of several other domain names such as *www.prc-edu.com, www.ecustmde.com, www.edufe.com.cn,www.edufe.net.cn, www.cmjnu.com.cn, www.cmr.com.cn, www.ruc.com.cn,*and*www.cmr.net.cn*. We license certain of ourdomain names to some of our university partners for them to operate theironline degree programs, and some of our university partners are the registeredowners of the domain names under which their programs operate.

 

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***Limitations on Foreign Ownership of Our Businesses***

 

The Foreign InvestmentIndustry Guidance Catalogue (amended in 2007), the Regulations onChinese-Foreign Cooperation in Operating School, the Implementation Measuresfor the Regulations on Sino-Foreign Cooperation in Operating Schools and otherapplicable laws and regulations limit foreign ownership in entities, or foreignparticipation in entities, engaging in specified education activities by:

 

·                  requiring that the foreign party in anyChinese-foreign cooperation in operating schools be a qualified foreigneducational institution;

 

·                  requiring regulatory approval for anyChinese-foreign cooperation in operating schools;

 

·                  prohibiting foreign investment in schoolsproviding compulsory education (that is, the first grade through the ninthgrade, or primary school and junior high school education); and

 

·                  restricting foreign investment ineducational websites.

 

Moreover, from apractical perspective, the MOE will not approve any foreign investment orparticipation in online degree education.

 

Our corporate structureis designed to comply with current regulatory limitations on foreign ownershipand participation while engaging in our core business activities. For details,see “—C. Organizational Structure.”

 

***Compliance with Chinese Regulations on the EducationServices Industry, Publishing, Internet Activities and Copyrights andTrademarks***

 

We believe that, exceptfor the online publication license, the Internet culture business operationslicense and the license for broadcasting audio-video programs through theInternet discussed above, no consent, approval or license other than thosealready obtained by our Chinese subsidiaries and affiliates is required underany of the existing laws and regulations of China for our business andoperations.

 

***Regulation of Foreign Currency Exchange and DividendDistribution***

 

*Foreigncurrency exchange*

 

The principal regulationsgoverning foreign currency exchange in China are the *Foreign Currency Administration Regulations* (1996), asamended. Under these regulations, the Renminbi is convertible for currentaccount items, including the distribution of dividends, interest payments,trade and service-related foreign exchange transactions. Conversion of theRenminbi for capital account items, such as direct investment, loans,repatriation of investment and investment in securities outside China, however,is still subject to SAFE approval.

 

Dividends paid by asubsidiary to its shareholder are deemed income of the shareholder and aretaxable in China. Pursuant to the *AdministrationRules of the Settlement, Sale and Payment of Foreign Exchange*(1996), foreign-invested enterprises in China may purchase or remit foreignexchange, subject to a cap approved by the SAFE, for settlement of currentaccount transactions without the approval of the SAFE. Foreign exchangetransactions under the capital account are still subject to limitations andrequire approvals from, or registration with, the SAFE and other relevantChinese governmental authorities.

 

*Dividenddistribution*

 

The principal regulationsgoverning distribution of dividends of foreign holding companies include the *Foreign Investment Enterprise Law*(1986),as amended, and the *Administrative Rules underthe Foreign Investment Enterprise Law* (2001). Under theseregulations, foreign investment enterprises, or FIEs, in China may paydividends only out of their accumulated profits, if any, determined inaccordance with Chinese accounting standards and regulations. In addition, FIEsin China are required to allocate at least 10% of their accumulated profitseach year, if any, to fund certain reserve funds unless these reserves havereached 50% of the registered capital of the enterprises. These reserves arenot distributable as cash dividends. Our Chinese subsidiaries, which are allFIEs, are restricted from distributing any dividends to us until they have metthe requirements set out in these regulations.

 

Pursuant to the EIT Law,which became effective on January 1, 2008, and subsequently issuedimplementation rules and a related circular, dividends payable by a FIE to itsforeign investors are subject to a 10% withholding tax, unless the foreigninvestor’s jurisdiction of incorporation has a tax treaty with China thatprovides for a different withholding arrangement. The Cayman Islands, where weare incorporated, does not have a tax treaty with China. Although the new taxlaw contemplates the possibility of exemptions from withholding taxes forChina-sourced income of FIEs, the Chinese tax authorities have not promulgatedany related implementation rules and it remains unclear whether we would beable to obtain exemptions from Chinese withholding taxes for future dividendsdistributed to us by our Chinese subsidiaries.

 

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*SAFEregulations on overseas investment of Chinese residents and employee stockoptions*

 

The SAFE issued *The Notice on Issues Relating to the Administrationof Foreign Exchange in Fund-Raising and Reverse Investment Activities ofDomestic Residents Conducted via Offshore Special Purpose Companies*inOctober 2005, which became effective in November 2005, and an implementing rulein May 2007, collectively the SAFE Rules. According to the SAFE Rules, Chineseresidents, including both legal persons and natural persons and Chinesecitizens and foreign citizens who reside in China, are required to registerwith the SAFE or its local branch before establishing or controlling anycompany outside China, referred to in the SAFE rules as an “offshore specialpurpose company,” for the purpose of financing that offshore company with theirownership interests in the assets of or their interests in any Chineseenterprise. In addition, a Chinese resident that is a shareholder of anoffshore special purpose company is required to amend its SAFE registrationwith the local SAFE branch with respect to that offshore special purposecompany in connection with the injection of equity interests or assets of aChinese enterprise in the offshore company or overseas fund raising by theoffshore company, or any other material change in the capital of the offshorecompany, including any increase or decrease of capital, transfer or swap ofshare, merger, division, long-term equity or debt investment or creation of anysecurity interest. The SAFE Rules apply retroactively. As a result, Chineseresidents who have established or acquired control of offshore companies thathave made onshore investments in China in the past were required to completethe relevant registration procedures with the competent local SAFE branch. Ifany resident of China failed to file its SAFE registration for an existingoffshore entity, any dividends remitted by the onshore entity to its overseasparent since April 21, 2005 will be considered to be an evasion of foreignexchange purchase rules, and the payment of the dividend will be illegal. As aresult of any illegal action of this type, both the onshore entity and itsactual controlling person(s) can be fined. In addition, failure to comply withthe registration procedures may result in restrictions on the relevant onshoreentity, including prohibitions on the payment of dividends and otherdistributions to its offshore parent or affiliate and capital inflow from theoffshore entity. Chinese resident shareholders of the offshore entity may alsobe subject to penalties under Chinese foreign exchange administrationregulations.

 

We have asked ourshareholders and beneficial owners who are Chinese residents to make thenecessary applications and filings as required under Notice 75 and otherrelated rules. However, due to uncertainty concerning the reconciliation ofNotice 75 with other approval or registration requirements, it remains unclearhow Notice 75, and any future legislation concerning offshore or cross-bordertransactions, will be interpreted, amended and implemented by the relevantgovernment authorities. We will attempt to comply, and attempt to ensure thatour shareholders and beneficial owners who are subject to these rules comply,with the relevant requirements. However, we cannot provide any assurances thatall of our shareholders and beneficial owners who are Chinese residents willcomply with our request to make or obtain any applicable registrations orcomply with other requirements required by Notice 75 or other related rules. Inaddition, certain of the holders of options to purchase our ordinary shares areChinese residents. We have been advised that it is unclear under the SAFE Ruleswhether these option holders would be deemed to be beneficial owners of ourcompany for the purposes of these rules as a result of holding these options.We are currently in the process of confirming the beneficial ownership statusof these option holders with the SAFE. The failure or inability of our Chineseresident shareholders or beneficial owners to register with the SAFE in atimely manner pursuant to the SAFE Rules, or the failure or inability of anyfuture Chinese resident shareholders or beneficial owners to make any requiredSAFE registration or comply with other requirements under the SAFE Rules maysubject these shareholders or beneficial owners to fines or other sanctions andmay also limit our ability to contribute additional capital into or provideloans to our Chinese subsidiaries, limit our Chinese subsidiaries’ ability topay dividends to us, repay shareholder loans or otherwise distribute profits orproceeds from any reduction in capital, share transfer or liquidation to us, orotherwise adversely affect us.

 

On March 28, 2007, SAFEpromulgated the *Application Procedure ofForeign Exchange Administration for Domestic Individuals Participating inEmployee Stock Option Holding Plan or Stock Option Plan of Overseas ListedCompany*, or the *Stock Option Rule*.The purpose of the *Stock Option Rule*isto regulate foreign exchange administration of Chinese citizens who participatein employee stock holding plans and stock option plans of offshore listedcompanies. According to the *Stock OptionRule*, if a Chinese citizen participates in any employee stockholding plan or stock option plan of an offshore listed company, a Chinesedomestic agent or the Chinese subsidiary of the offshore listed company isrequired to file, on behalf of the individual, an application with the SAFE toobtain approval for an annual allowance with respect to the purchase of foreignexchange in connection with stock holding or stock option exercises. Thisrestriction exists because a Chinese citizen may not directly use offshorefunds to purchase stock or exercise stock options. Concurrent with the filingof the required application with the SAFE, the Chinese domestic agent or theChinese subsidiary must obtain approval from the SAFE to open a special foreignexchange account at a Chinese domestic bank to hold the funds required inconnection with the stock purchase or option exercise, any returned principalprofits upon sales of stock, any dividends issued on the stock and any otherincome or expenditures approved by the SAFE. The Chinese domestic agent or theChinese subsidiary also is required to obtain approval from the SAFE to open anoffshore special foreign exchange account at an offshore trust bank to hold offshorefunds used in connection with any employee stock holding plans.

 

All proceeds obtained bya Chinese citizen from dividends acquired from the offshore listed companythrough employee stock holding plans or stock option plans, or sales of theoffshore listed company’s stock acquired through other methods, must beremitted back to China after relevant offshore expenses are deducted. Theforeign exchange proceeds from these sales can be converted into Renminbi ortransferred to the individuals’ foreign exchange savings account after theproceeds have been remitted back to the special foreign exchange account openedat a Chinese bank. If stock options are exercised in a cashless exercise, theChinese individuals exercising them are required to remit the proceeds to thespecial foreign exchange account. Although the *StockOption Rule*has been promulgated recently and many issues requirefurther interpretation, we and our Chinese employees who have been grantedstock options will be subject to the *StockOption Rule*when our company becomes an offshore listed company. Ifwe or our Chinese employees fail to comply with the *Stock Option Rule*, we and/or our Chinese employees may facesanctions imposed by foreign exchange authority or any other Chinese governmentauthorities.

 

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***Regulation of Merger and Acquisitions of DomesticEnterprises by Foreign Investors***

 

On August 8, 2006, sixChinese regulatory agencies, including the Ministry of Commerce, the StateAssets Supervision and Administration Commission, the State Administration forTaxation, the State Administration for Industry and Commerce, the CSRC, and theSAFE, jointly issued the *Regulations onMergers and Acquisitions of Domestic Enterprises by Foreign Investors*,or the *New M&A Rule*, whichbecame effective on September 8, 2006. Under the *New M&A Rule*, equity or asset purchases from, andmergers and acquisitions of, Chinese enterprises by foreign investors will besubject to the approval from the Ministry of Commerce. This regulation alsoincludes provisions that require special purpose companies formed for purposesof offshore listing of equity interests in Chinese companies to obtain theapproval of the CSRC prior to the listing and trading of their securities onany offshore stock exchange. As defined in the *NewM&A Rule*, a special purpose vehicle is an offshore company thatis, directly or indirectly, established or controlled by Chinese entities orindividuals for the purposes of an overseas listing.

 

On September 21, 2006,the CSRC published on its website procedures regarding its approval of offshorelistings by special purpose vehicles. These procedures require the filing of anumber of documents with the CSRC and it would take several months to completethe approval process. The application of the *NewM&A Rule*with respect to offshore listings of special purposecompanies remains unclear with no consensus currently existing among leadingChinese law firms regarding the scope of the applicability of the CSRC approvalrequirement.

 

In connection with ourinitial public offering, our Chinese counsel, Jun He Law Offices advised usthat, based on the their understanding of Chinese laws, regulations and rules,including the *New M&A Rule*andthe CSRC procedures announced on September 21, 2006:

 

·                  Since we had not engaged in any merger oracquisition after the effectiveness of the *NewM&A Rule*, this regulation did not require us to submit anapplication to the CSRC for its approval prior to the issuance and sale of ourADSs, or the listing and trading of our ADSs on the NASDAQ Global Market; and

 

·                  The issuance, sale, listing and tradingof our ADSs in connection with our initial public offering did not conflictwith or violate this new regulation.

 

C.  Organizational Structure

 

**Overview**

 

We were incorporated asan exempted company in the Cayman Islands with limited liability in 1999. Weare a holding company, and we conduct our business primarily through oursubsidiaries and Chinese affiliated entities incorporated in China. Chineselaws and regulations limit the ability of foreign-owned entities to participatein the education and telecommunication sectors in China. Our corporatestructure is designed to comply with current Chinese limitations on foreignownership of, and participation in, companies operating in the education andtelecommunication sectors in China. For a discussion of these restrictions see “—B.Business Overview—Regulation—Limitations on Foreign Ownership of Our Businesses”and “Item 3. Key Information—D. Risk Factors—Risks Related to China’sRegulation of the Education and Telecommunication Sectors and Our CorporateStructure.”

 

**OurCorporate Structure and Contractual Arrangements**

 

Our primary business isto provide comprehensive services to the online degree programs of leadingChinese universities. We conduct this business and our international curriculumprogram business through our three Chinese subsidiaries, except for two onlinedegree programs that are serviced through one of our Chinese affiliatedentities. Due to restrictions on the foreign ownership and operation of ouronline tutoring business and our private primary and secondary school business,we conduct these businesses through arrangements with our Chinese affiliatedentities. We direct these companies’ business affairs and receive substantiallyall of their net income through our contractual arrangements. In 2008, 71.3% ofour net revenue was derived from businesses conducted by our three principalChinese subsidiaries.

 

Our principalsubsidiaries in China currently are:

 

·                  Beijing Hongcheng Liye Technology Co.,Ltd, or Hongcheng Liye, our wholly owned subsidiary, which has establishedcollaborative alliances with five Chinese universities to provide services tothe universities for the establishment, operation, and expansion of theironline degree programs. These collaborative alliances are majority ownedsubsidiaries of Hongcheng Liye. Hongcheng Liye’s collaborative alliancepartners for online degree programs are Beijing Language and CultureUniversity, China Agricultural University, Dongbei University of Finance andEconomics, Central University of Finance and Economics and Beijing ForestryUniversity. Our service revenue from these five universities in aggregateaccounted for 34.2% of our net revenue in 2008. Hongcheng Liye also providesour learning-based products and services, which include our English languagetraining, online tutoring programs and post-secondary vocational educationalprograms;

 

·                  Hongcheng Technology Development Co.,Ltd., or Hongcheng Technology, our wholly owned subsidiary, which hasestablished three collaborative alliances with Chongqing University, ShanghaiUniversity of Finance & Economics and Guangxi Radio and TV University(GRTU) to provide services for the establishment, operation, and expansion ofthese universities’ online degree programs. Hongcheng Technology also providesservices to two 

 

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otheruniversities, Jiangnan University and Nanjing University, for their onlinedegree programs. Our service revenue from these five universities in aggregateaccounted for 14.6% of our net revenue in 2008. Hongcheng Technology alsooperates our 17 learning centers in Beijing, Shanghai, Jiangsu and Zhejiang andthree cooperative learning centers in the provinces of Jilin, Hainan, andGuangdong.  In February 2007, we receivedprovisional approval from the MOE to operate 10 learning centers in theprovinces of Beijing, Shanghai, Jiangsu and Zhejiang for a trial period of upto 18 months. Notwithstanding that this trial period has lapsed, there has beenno revocation of the provisional authority granted by the MOE, and we continueto operate these learning centers; and

 

·                  CMR Web Learning Co., Ltd., or CMR Web,our 70% owned subsidiary, which has established a collaborative alliance withRenmin University of China to provide services to Renmin University of Chinafor the establishment, operation, and expansion of its online degree program.The remaining 30% of CMR Web is owned by Rendashiji Technology Development Co.,Ltd., a wholly owned subsidiary of Renmin University of China. Our servicerevenue from Renmin University of China accounted for 22.5% of our net revenuein 2008.

 

Our Chinese affiliatedentities are:

 

·                  Beijing Hongcheng Education TechnologyCo., Ltd., or Hongcheng Education, through which we own and operate threeprivate primary and secondary schools and provide services to LanzhouUniversity and East China University of Science and Technology for their onlinedegree programs. Our service revenue from these online degree programs inaggregate accounted for 14.6% of our net revenue in 2008; and

 

·                  Xiandai Xingye Network Technology Co.,Ltd., or Xiandai Technology, and its subsidiary, Gotop Electronic, which holdsthe ICP licenses for the operation of our websites, *www.chinaedu.net* and *www.prcedu.com*,and *www.chinaedu.com*,respectively.

 

The following diagramillustrates our corporate structure as of December 31, 2008.

 

 

We have been, and expectto continue to be, dependent on our Chinese subsidiaries and Chinese affiliatedentities to conduct our core businesses in China. Through one of oursubsidiaries, we have entered into a series of contractual arrangements withour Chinese affiliated entities and their shareholders that are intended toprovide us with the control over, and the economic benefits enjoyed by, theseChinese affiliated entities. Pursuant to the terms of these contractualarrangements:

 

·                  we effectively control our Chineseaffiliated entities and their respective subsidiaries;

 

·                  substantially all of the economic benefits of ourChinese affiliated entities are transferred to us; and

 

·                  our Chinese subsidiaries or theirrespective designees have an exclusive option to purchase all or substantiallyall of the equity interests in our Chinese affiliated entities, to the extentpermitted by Chinese law.

 

*TechnicalConsulting and Services Agreements.*    Through ourwholly owned subsidiary, Hongcheng Technology, we have entered into exclusivetechnical consulting and service agreements with each of Hongcheng Educationand Xiandai Technology. Each of these consulting and service agreements has aninitial term of ten years and will be automatically renewed for successiveperiods of ten years thereafter, unless Hongcheng Technology provides writtennotice to the other party prior to the expiration of the then current term ofits election not to renew the agreement. Under the agreement with 

 

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Hongcheng Education,Hongcheng Technology provides courseware and product development services,website design services, maintenance and security services, employee trainingservices and any other services that may be agreed upon by the parties. Underthe agreement with Xiandai Technology, Hongcheng Technology provides networktechnology development services, website design services, maintenance andsecurity services and employee training services, as well as any other servicesthat may be agreed upon by the parties. Under each of these agreements the feespayable to Hongcheng Technology are based on the gross revenue of the servicerecipient and are paid once annually within 30 days of the year-end.

 

We operate three privateprimary and secondary schools through Hongcheng Education, and have enteredinto a series of agreements with the shareholders of Hongcheng Education, Mr. ChangqingXie, one of our officers, and Mr. Xueshan Yang, one of our former directors, tomaintain effective control over Hongcheng Education. Currently, Mr. Xie and Mr.Yang hold 72% and 28%, respectively, of the equity interest in HongchengEducation.

 

We have also entered intoa series of agreements with the shareholders of Xiandai Technology, our formerdirectors Mr. Gongquan Wang and Mr. Xueshan Yang, to maintain effective controlover Xiandai Technology. Currently, Mr. Wang and Mr. Yang each hold 50% of theequity interest of Xiandai Technology.

 

*LoanAgreements*.    In 2005, we loaned approximately $4.8million to Mr. Xie and approximately $1.8 million to Mr. Yang to fund theregistered capital requirements of Hongcheng Education. The terms of theseloans are 20 years and may be extended with the consent of the parties. To theextent permitted by Chinese law, each loan may be repaid only by the transferby Mr. Xie or Mr. Yang of his equity interests in Hongcheng Education to us orour designee. Mr. Xie and Mr. Yang each have granted us the right to appointall directors to the board of Hongcheng Education, a right that they otherwisewould be entitled to as shareholders.

 

Similarly, HongchengTechnology entered into loan agreements with Mr. Wang and Mr. Yang under whichHongcheng Technology loaned them each RMB0.3 million to fund the registeredcapital requirements of Xiandai Technology. The terms of the loans are 20 yearsand may be extended with the consent of the parties. To the extent permitted byChinese law, each loan may be repaid only by the transfer by Mr. Wang or Mr. Yangof his equity interests in Xiandai Technology to Hongcheng Technology or itsdesignee. Mr. Wang and Mr. Yang each have granted Hongcheng Technology theright to appoint all directors to the board of Xiandai Technology, a right thatthey otherwise would be entitled to as shareholders.

 

*ShareholderVoting Rights Entrustment Agreements*.    Inconnection with the Hongcheng Education loan agreements described above, in2005, Mr. Xie and Mr. Yang entered into shareholder voting rights entrustmentagreements with Hongcheng Technology. Pursuant to these agreements, Mr. Xie andMr. Yang each irrevocably entrusted Hongcheng Technology with the right to actas their proxy and vote all of their shares in Hongcheng Education. Each ofthese agreements will remain effective as long as Mr. Xie or Mr. Yang remains ashareholder in Hongcheng Education.

 

Similarly, in connectionwith the Xiandai Technology loans described above, in 2005, Mr. Wang and Mr. Yangentered into shareholder voting rights entrustment agreements with HongchengTechnology. Pursuant to these agreements, Mr. Wang and Mr. Yang irrevocablyentrusted Hongcheng Technology with the right to act as their proxy and voteall of their shares in Xiandai Technology. Each of these agreements will remaineffective as long as Mr. Wang or Mr. Yang remains a shareholder in XiandaiTechnology.

 

*CallOption Agreements*.    Mr. Xie and Mr. Yang each entered into calloption agreements with Hongcheng Technology in 2005. Pursuant to theseagreements, Mr. Xie and Mr. Yang each granted irrevocable options to purchaseall of their respective equity interests in Hongcheng Education to HongchengTechnology at the lowest price permitted under applicable Chinese laws.

 

Similarly, Mr. Wang and Mr.Yang each entered into call option agreements with Hongcheng Technology underwhich Mr. Wang and Mr. Yang each granted to Hongcheng Technology or itsdesignee irrevocable options to purchase all of their respective equityinterests in Xiandai Technology at the lowest price permitted under applicableChinese laws.

 

*EquityPledge Agreements and Powers of Attorney*.    As securityfor their obligations under their call option agreements and shareholder votingrights entrustment agreements with Hongcheng Technology and Hongcheng Education’sobligations under the technical consulting and services agreement withHongcheng Technology, in 2005, Mr. Xie and Mr. Yang entered into equity pledgeagreements with Hongcheng Education to pledge all of their equity interests inHongcheng Education and all distributions arising from those interests toHongcheng Technology.

 

Similarly, in 2005, Mr. Wangand Mr. Yang entered into equity pledge agreements with Xiandai Technology topledge all of their equity interests in Xiandai Technology and alldistributions arising from those interests to Hongcheng Technology, as securityfor their obligations under their call option agreements and shareholder votingrights entrustment agreements with Hongcheng Technology and Xiandai Technology’sobligations under the technical consulting and services agreement withHongcheng Technology.

 

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**OurSignificant Subsidiaries**

 

A summary of oursubsidiaries and variable interest entities as of December 31, 2008 is asfollows:

 
| **Name of subsidiaries and/or********variable interest entities**                                  | ** ** | **Date of********incorporation********or establishment** | ** ** | **Percentage of  ownership** | ** ** | **Principal********activity**                   |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------|------------|-------------------------------------------------|
|                                                                                               |       |                                                     |       |                              |       |                                            |
| CMR Web-learning Co., Ltd. (“CMR Web”)                                                   |       | July 29, 1999                                  |       | 70                                | %          | Online degree program                 |
| Beijing Hongcheng Liye Technology Co., Ltd.  (“Hongcheng Liye”)                          |       | April 15, 2003                                      |       | 100                               | %          | Online degree program                           |
| Beijing Beiyuda Education Technology Co., Ltd.  (“Beiyuda”)                              |       | September 26, 2006                                  |       | 51                                | %          | Online degree program                           |
| Dalian Dongcai Technology Co., Ltd.   (“Dongcai”)                                        |       | June 4, 2003                                        |       | 70                                | %          | Online degree program                 |
| Zhong Nongda Networks Development Co., Ltd.  (“Zhongnongda Networks”)                    |       | October 30, 2001                                    |       | 55                                | %          | Online degree program                           |
| Beijing WITT Education Consultant Management Co., Ltd.  (“WITT Education”)               |       | July 4, 2003                                        |       | 100                               | %          | International curriculumprogram                 |
| Beijing WITT Science Co., Ltd.  (“WITT Science”)                                         |       | December 26, 2005                                   |       | 100                               | %          | International curriculumprogram            |
| Beijing BCIT Science and Education Management Consulting  Limited (“Beijing BCIT”) (PRC) |       | January 13, 2005                                    |       | 100                               | %          | International curriculum program                |
| Beijing Xuezhi Times Education Science Co., Ltd.  (“Beijing Xuezhi”)                     |       | October 18, 2001                                    |       | 100                               | %          | Online tutoring                                 |
| Beijing Gotop Education Co., Ltd.  (“Gotop Hongcheng”)                                   |       | December 26, 2005                              |       | 100                               | %          | Online tutoring                                 |
| Tianjin Gaotuo Hongcheng Education Technology Co., Ltd.  (“Tianjin Gaotuo Hongcheng”)    |       | June 26, 2006                                       |       | 100                               | %          | Online tutoring                                 |
| Beijing Distance Education Technology Co., Ltd.  (“Yuancheng Education”)                 |       | March 31, 2006                                      |       | 61                                | %          | Online tutoring                                 |
| Hongcheng Technology Development Co., Ltd.  (“Hongcheng Technology”)                     |       | July 31, 2000                                       |       | 100                               | %          | Online degree program                           |
| Chongqing Chongda Yuanxing Co., Ltd.  (“Chongda”)                                        |       | December 24, 2003                              |       | 51                                | %          | Online degree program                           |
| Beijing BCIT Science and Education Management Consulting  Limited (BVI) (“BJ- BCIT”)     |       | February 10, 2006                                   |       | 100                               | %          | International curriculum program                |
| BJ—WITT EDU MAN. LTD. (BVI) (“BJ—WITT”)                                        |       | July 4, 2003                                        |       | 100                               | %          | International curriculum program                |
| Xiandai Xingye Network Technology Co., Ltd.  (“Xiandai Technology”)                      |       | November 7, 2000                                    |       | N/A                               | (1)        | Provision of internet content                   |
| Beijing Gotop Electronic Science Co., Ltd.  (“Gotop Electronic”)                         |       | November 29, 1995                                   |       | 100                               | %          | Provision of internet content                   |
| Beijing Hongcheng Education Technology Co., Ltd.  (“Hongcheng Education”)                |       | March 7, 2005                                       |       | N/A                               | (1)        | Private primary and secondary schools           |
| Jingzhou Tianchang Investment Co., Ltd.  (“Tianchang”)                                   |       | September 6, 2005                                   |       | 72.5                              | %          | Private primary and secondary schools           |
| Jingzhou Middle School South Campus  (“South Campus”)                                    |       | December 28, 2005                                   |       | 54                                | %          | Private primary and secondary schools           |
| Pingdingshan Wellent Bilingual School  (“Pingdingshan”)                                  |       | September 3, 2002                                   |       | 100                               | %          | Private primary and secondary schools           |
| Anqing Foreign Language Middle School  (“Anqing Foreign Language”)                       |       | August 2, 2004                                      |       | 100                               | %          | Private primary and secondary schools |

 

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| **Name of subsidiaries and/or********variable interest entities**       | ** ** | **Date of********incorporation********or establishment** | ** ** | **Percentage of  ownership** | ** ** | **Principal********activity** |
|-------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------|------------|-------------------------------|
|                                                                    |       |                                                     |       |                              |       |                          |
| Beijing Mingdaoyuan Technology Co., Ltd  (“Zhongcai”)         |       | March 27, 2007                                      |       | 51                                | %          | Online degree program         |
| Shanghai Shangcai Education Technology Co., Ltd  (“Shangcai”) |       | April 18, 2008                                      |       | 51                                | %          | Online degree program         |
| Dongcai Online Training Center  (“Dongcai Online”)            |       | July 10, 2008                                       |       | 70                                | %          | Online degree program         |
| Beijing Zhonglin Education Technology Co., Ltd  (“Zhonglin”)  |       | November 3, 2008                                    |       | 100                               | %          | Online degree program         |

 

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(1) PRCregulations currently limit foreign ownership of entities that provide Internetcontent and engage in primary and junior high school education.  To comply with PRC laws and regulations, weprovide such services in China through our variable interest entities, XiandaiTechnology and Hongcheng Education, and their respective subsidiaries.

 

D.  Property, Plants and Equipment

 

Our principal executiveoffice is located at 4th Floor-A, GeHua Building, No. 1QinglongHutong, Dongcheng District, Beijing, 100007, People’s Republic ofChina, where we own approximately 3,450 square meters.  We also lease or own other operating space inBeijing, Shanghai, Wuxi, Chongqing and Dalian. Each of our three schools(Pingdingshan School, Anqing School and Jingzhou School (Southern Campus)) hasassociated properties that we own or lease. Other than Anqing School andPingdingshan School, we believe that our existing facilities, together with thefacilities under construction, are adequate for our current and foreseeablefuture operations.

 

We recently undertook acapital improvements program at our Anqing School and Pingdingshan School. Therenovations and improvements include, or will include, a new campus for AnqingSchool to accommodate larger student populations and general facility upgradesand a new building for Pingdingshan School to improve the level of education.We spent a total of RMB26.0 million ($3.8 million) in 2008 on the renovation ofthese schools, and we anticipate incurring additional capital expendituresrelated to such improvements of approximately RMB87.4 million.

 

In addition, although weinitially planned to complete construction of a new campus at the JingzhouSchool (Southern Campus) by the fall 2006 recruiting season, we haveencountered delays obtaining the land-use rights for the new campus site, aswell as delays due to inclement weather in early 2008. Although there is RMB4.0million that remains payable with third-party contractors for the constructionof the new campus at the Jingzhou School (Southern Campus), there is noassurance we will begin construction in time for the fall 2009 recruiting season,or at all.

 

In addition to the abovecapital expenditures, we also had capital commitments related to theacquisition and further expansion of the Anqing School and Jinzhou School(Southern Campus) of RMB38.2 million and RMB65.0 million, respectively, as of December 31,2008.  For further discussion of thesecapital expenditures and commitments, please refer to “*Item 5. Operating and Financial Review and Prospects — B. Liquidity and CapitalResources.”*

 

The following table liststhe properties that we owned or leased as of December 31, 2008:

 
| **Property  Address**                                                       | ** ** | **Use  of  Property** | ** ** | **Owned/Leased** | ** ** | **Approximate  Size (m****2****)** |
|-----------------------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|------------------------------------|
| Suite 501  and503, Tower A, Jin Feng He Office Building,               |       |                  |       |             |       |                               |
| No. 8 Xinjiekouwai Road, Beijing                                       |       | Office                |       | Leased           |       | 99                                 |
| Suite 416-2,  F4, Tower C, Hui Long Sem                                |       |                  |       |             |       |                               |
| International  Enterprise Technology Park, Beijing                          |       |                  |       |             |       |                               |
| Economic  and Technology Zone, 18 South West                                |       |                  |       |             |       |                               |
| Ring  Road, Beijing                                                         |       | Office                |       | Leased           |       | 50                                 |
| Suite 205,  F2, Tower B, Hui Long Sem                                  |       |                  |       |             |       |                               |
| International  Enterprise Hatch Park, Beijing                               |       |                  |       |             |       |                               |
| Economic  and Technology Zone, No. 14 Zhong                            |       |                  |       |             |       |                               |
| He  Jie, Beijing                                                            |       | Office                |       | Leased           |       | 68                                 |
| 17  F, 19F Renda Technology and Education                                   |       |                  |       |             |       |                               |
| Centre,  No. 59, Zhongguancun Road, Haidian                            |       |                  |       |             |       |                               |
| District,  Beijing                                                          |       | Office                |       | Leased           |       | 225                                |
| Qingshanwan  Rest House, Wuxi, Jiangsu                                      |       | Office                |       | Leased           |       | 45                                 |
| F2,  Gao’na Building, No. 107 Gao’an Road,                   |       |                  |       |             |       |                               |
| Shanghai                                                                    |       | Office                |       | Leased           |       | 30                                 |
| R303,  No. 1 Suite, No. 2 Building,                               |       |                  |       |             |       |                               |
| Shangdijiayuan,  Beijing                                                    |       | Office                |       | Leased           |       | 126                                |
| R0107, Tower 2, Songzhuang Town, Songjiazhuang,  Fengtai  District, Beijing |       | Office                |       | Owned            |       | 136                                |
| R  809, Tower C, No. 9, Shangdi Sanjie,                                |       |                  |       |             |       |                               |
| Haidian  District, Beijing                                                  |       | Office                |       | Leased           |       | 90                                 |
| R201,  No. 10, Xinghuo Road, Science Town,                             |       |                  |       |             |       |                               |
| Fengtai  District, Beijing                                                  |       | Office                |       | Leased           |       | 11                                 |

 

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| No.5,  Jinnan Road, Jinzhou District,,Jingzhou, Hubei                                                  |   | Office    |   | Leased |   | 400     |
|--------------------------------------------------------------------------------------------------------|--------|-----------|--------|--------|--------|---------|
| F2,  F4, No. 83, Shabei Street, Technology Square, Chongqing                                      |   | Office    |   | Leased |   | 630     |
| Northeast corner, Cross of Qingyuan Road and  Qianjiang Road,  Anqing, Anhui                           |   | School    |   | Owned  |   | 159,119 |
| No. 22,  Guanyuemiao Street, Anqing, Anhui(1)                                                     |   | School    |   | Leased |   | 8,864   |
| Northwest corner, Cross of Nanhuan Road and Yingdu  Road,  Jingzhou, Hubei                             |   | School    |   | Owned  |   | 191,865 |
| C809, C810, C811, C812, Tower C, No. 9,  Shangdi Sanjie, Haidian  District, Beijing               |   | Office    |   | Owned  |   | 1,349   |
| R3, F2, No.2-3, Qixianling Xuezijie, Gaoxinyuan  District, Dalian,  Liaoning                           |   | Office    |   | Owned  |   | 413     |
| Headquarters—4th Floor-A, GeHua Building,  No. 1 QinglongHutong, Dongcheng District, Beijing |   | Office    |   | Owned  |   | 3,450   |
| R630, Tower 1, No.1,  Furong South Road, Tianxin District,  Changsha, Hunan                            |   | Office    |   | Owned  |   | 167     |
| R307, F3, Tower A,  No.1, Zhuzhai North Road, Jinshui District,  Zhengzhou, Henan                      |   | Office    |   | Owned  |   | 73      |
| R402, Tower 10, Guanting Square, Huilongguan Town,  Changping  District, Beijing                       |   | Office    |   | Owned  |   | 122     |
| No.2000,  Huashan Road, Xuhui District, Shanghai                                                       |   | Office    |   | Leased |   | 328     |
| F1,  F7, Ximatai building, No.193, Jiefang Road, Xuzhou, Jiangsu                                       |   | Office    |   | Leased |   | 430     |
| F6, Jinluan Building, No.101, Zhongshan South Road,  Nanjing,  Jiangsu                                 |   | Office    |   | Leased |   | 470     |
| F3, Tower D, Lantian Building, No.18, Mogan Road,  Hangzhou,  Zhejiang                                 |   | Office    |   | Leased |   | 413     |
| R601,  602, 603, No.66, Gongyuan Road, Changzhou, Jiangsu                                              |   | Office    |   | Leased |   | 300     |
| F11,  Longshi Center, No.2, Guangzhou Road, Nanjing, Jiangsu                                           |   | Office    |   | Leased |   | 433     |
| R609,  R610, No.151, Yangyu Alley, Suzhou, Jiangsu                                                     |   | Office    |   | Leased |   | 170     |
| R1303, No.6, Dasha East Road, Huangpu District,  Guangzhou,  Guangdong                                 |   | Office    |   | Leased |   | 45      |
| R310, Tower A, Zhongao Business Building, No.124,  Hongzehu Road, Suqian, Jiangsu                      |   | Office    |   | Leased |   | 90      |
| R2, F1, Greatwall Building, No.62, Zhongguancun  East Road,  Haidian District, Beijing                 |   | Office    |   | Leased |   | 333     |
| No.7, South Business Room, Cangwu Community, Jinpu  District,  Lianyungang, Jiangsu                    |   | Office    |   | Leased |   | 85      |
| F4,  No.285, Qiannan Middle Road, Nantong, Jiangsu                                                     |   | Office    |   | Leased |   | 600     |
| No.150,  Renmin Road, Jiangbei District, Ningbo, Zhejiang                                              |   | Office    |   | Leased |   | 110     |
| G8, G9, F1, Xinfuxiong Building, Yuexiu District,  Guangzhou,  Guangdong                               |   | Office    |   | Leased |   | 51      |
| No.1596,  Ziyou Road, Changchun, Jilin                                                                 |   | Office    |   | Leased |   | 40      |
| No653, Suofeiya Warehouse, Wanziying, Heizhuanghu  Village,  Chaoyang District, Beijing                |   | Warehouse |   | Leased |   | 104     |
| R1608,  No.11, Maliandao Road, Xuanwu District, Beijing                                                |   | Office    |   | Leased |   | 35      |
| R6088, Tower 1, No.2, Hengfu Middle Road, Science  City, Fengtai  District, Beijing                    |   | Office    |   | Leased |   | 34      |
| Zhanhe  South Road, Pingdingshan, Henan                                                                |   | School    |   | Owned  |   | 7848    |
| Zhanhe  South Road, Pingdingshan, Henan                                                                |   | School    |   | Leased |   | 1129    |
| 7F, Lawyer Building, No.392, Nanmenwai Road, Nankai  District,  Tianjin                                |   | Office    |   | Leased |   | 528     |

 

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(1) Inaddition to the owned property, the Anqing School pays user fees to the FourthMiddle School of Anqing for certain state-owned campus facilities it uses.

 

**Item4A.  Unresolved Staff Comments**

 

Not applicable.

 

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**Item5.  Operating and Financial Review andProspects**

 

A.           Operating Results

 

*Youshould read the following discussion and analysis of our financial conditionand results of operations in conjunction with our consolidated financialstatements and related notes included elsewhere in this annual report on Form 20-F.This discussion contains forward-looking statements that involve risks anduncertainties. Actual results could differ materially from those projected inthe forward-looking statements as a result of various factors, including thoseset forth under “Item 3. Key Information—D. Risk Factors” and elsewhere in thisannual report on Form 20-F.*

 

**Overview**

 

We are a leadingeducational services provider in China, incorporated as an exempted limitedliability company in the Cayman Islands. Established in 1999, our primarybusiness is to provide comprehensive services to the online degree programs ofleading Chinese universities. These services include academic programdevelopment, technology services, enrollment marketing, student supportservices and finance operations.  Ourother lines of businesses include the operation of private primary andsecondary schools, online interactive tutoring services, and marketing andsupport for international curriculum programs. We believe we are the largestservice provider to online degree programs in China in terms of the number ofhigher education institutions that are served and the number of studentenrollments supported. ** **We currently have 13 long-term,exclusive contracts that generally vary from 15 to 50 years in length.  We also perform recruiting services for 15universities through our nationwide learning center network.

 

We currently havestrategic relationships with 22 universities, 13 of which are under long-term,exclusive****contracts that generallyvary from 15 to 50 years in length. Ten of our university partners currentlyoperate their own online degree programs and three universities are awaitingregulatory approval to begin their online degree programs. As of December 31,2008, approximately 243,000****studentswere registered in the online degree programs that we service through theserelationships. These online degree programs are marketed under the brand namesof leading Chinese universities, which allow us to benefit from the significantbrand equity that these higher education institutions have established.

 

Our business hasexperienced significant growth since its inception in 1999. This growth hasbeen driven by the increased number of universities that we serve, theincreased enrollment of the online degree programs of our university partners,and our expansion into other education-related lines of business. We generateour revenue from service fees and tuition payments derived from students whoare enrolled in, or served by, our businesses. As of December 31, 2008, weprovided services to online degree programs that had an aggregate ofapproximately 243,000 registered students, and we served approximately 44,410****students in our other businesses. Our netrevenue increased from RMB213.5 million in 2006 to RMB265.0 million in 2007,and RMB317.7 million ($46.6 million) in 2008, representing a compound annualgrowth rate, or CAGR, of 22.0%. Net revenue from our online degree programscontributed 73.5%, 76.3% and 80.4% of our total net revenue for the years endedDecember 31, 2006, 2007 and 2008, respectively.

 

Our income fromoperations decreased by 29.6% from RMB57.2 million in the year ended December 31,2006 to RMB40.3 million for the year ended December 31, 2007. Our incomefrom operations decreased from RMB40.3 million in the year ended December 31,2007 to a loss from operations of RMB13.1 million ($1.9 million) for the yearended December 31, 2008. Our net income attributable to ordinaryshareholders declined from RMB25.5 million for the year ended December 31,2006 to RMB2.5 million for the year ended December 31, 2007. Our netincome attributable to ordinary shareholders also declined from RMB2.5 millionfor the year ended December 31, 2007 to a net loss attributable toordinary shareholders of RMB43.0 million ($6.3 million) for the year ended December 31,2008.

 

The decline in bothincome from operations and net income attributable to ordinary shareholdersfrom 2006 to 2007 and from 2007 to 2008 was primarily due to goodwillimpairment losses of RMB16.2 million for the year ended December 31, 2007compared to RMB41.0 million ($6 million) for the year ended December 31,2008 and intangible assets impairment losses of RMB nil for the year ended December 31,2007 compared to RMB29.1million ($4.3 million) for the year ended December 31,2008.

 

***General Factors Affecting Our Results of Operations***

 

We have benefited greatlyfrom the rapid growth of the Chinese education market. This growth has beendriven by several factors, including favorable demographic trends, overalleconomic growth and the increase in per capita income, the imbalance betweensupply and demand for traditional post-secondary education, the emphasis thatChinese culture places on higher education and the growing number of Internetusers, especially those with broadband access. China’s accelerating integrationinto the global economy is providing increasing career opportunities for thosewith post-secondary qualifications, particularly those with Englishproficiency. These factors have led to significant increases in educationspending in China and in the number of people interested in obtainingpost-secondary education, including through online degree programs and otherforms of private education services. We anticipate that the Chinese educationmarket will continue to grow, including the demand for post-secondary degreeprograms that can be delivered online. However, any adverse changes in theeconomic conditions in China may adversely affect the demand for post-secondarydegree programs, and regulatory changes could adversely affect the ability ofcompanies such as ours to service this market.

 

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***Specific Factors Affecting Our Results of Operations***

 

While the general factorsaffecting the Chinese education market influence us, we believe that companyspecific and regulatory factors more directly affect our business. Companyspecific factors include the number of online degree programs we service, thenumber of registered students and the number of revenue students in theprograms that we service, the amount of tuition fees these programs can charge,the amount of fees that we can derive from tuition fees collected by theseprograms, the amount of expenses paid by our university partners for theironline degree programs, particularly fees they pay to learning centers, and ourcost of revenue and operating expenses. Because the online degree programs thatwe service, which constitute our largest business segment, are operated by ouruniversity partners to whom we provide services, the number of studentenrollments, the number of revenue students and tuition fees, are largelydriven by the demand for the course offerings and recruitment efforts of ourpartners. We do, however, provide a technology and service platform that helpsdrive enrollment through the quality of the course offerings and we assist inenrollment marketing for the university programs.

 

Regulatory factorsinclude the number of additional universities that may be authorized by the MOEto offer online degree programs, the timing of any such approvals by the MOE,regulations related to student recruiting activities, whether our establishmentof particular learning centers, which have been approved by the MOE, may bedelayed or restricted by local authorities, and whether the MOE will approveand facilitate future cooperative arrangements between Chinese and foreigneducational institutions. In addition, the tuition fees for all the programs weprovide services to, as well as the tuition fees for our private schools, aresubject to direct regulation by China’s price control authorities. Furthermore,any increase in the tax rates applicable to, or the loss of preferential taxtreatments enjoyed by, our Chinese subsidiaries and Chinese affiliated entitiesas a result of changes in Chinese tax laws will adversely affect our results ofoperations. See “—Taxation.”

 

We expect to expand thepenetration of our online degree program services by increasing the number ofuniversities that use our online degree program services. We believe that ourability to attract additional partners will be driven principally by thecontinued strengthening of our brand name and reputation and our development ofnew services. We are actively targeting other universities to become ourpartners for their online education programs. The targeted universities includeboth those already offering online degree programs and those planning to offeronline degree programs.

 

We also plan to increasetotal student enrollment and revenue student numbers in the online degreeprograms we service by assisting our partners in recruiting more students andexpanding their course offerings, as well as through expansion of our learningcenter network, which is currently comprised of 52 learning centers.

 

A significant factoraffecting the results of our online degree program segment is the fees that ouruniversity partners are required to pay to independent learning centers. Thelearning centers play an important role in the recruitment of students andprovide other student guidance and testing services for online degree programs.The share of tuition revenue that we receive, through the collaborativealliances with our university partners, is after the payment of fees tolearning center. As a result, an increase in the portion of tuition fees paidto the learning centers will result in a decrease in the portion of tuitionfees that we receive as revenue.  In2007, our university partners paid fees to independent learning centers inamounts ranging from 23% to 56% of the gross tuition revenues received by theironline degree programs. In 2008, these same fees ranged in amounts from 23% to54% of the gross tuition revenues received by their online degreeprograms.  For fiscal years ended December 31,2006, 2007 and 2008, the portion of gross tuition fees that our universitypartners in aggregate paid to independent learning centers was approximately39%, 40% and 39%, respectively. There can be no assurance that the amountspayable to independent learning centers, as a portion of gross tuition fees,will not increase.

 

To strengthen our abilityto assist our university partners to recruit students and improve studentservice quality, we are building a network of learning centers, initially inkey cities and, if regulatory approval is obtained, across China. We believebuilding a national network of learning centers will enable us to significantlyenhance our brand recognition and increase access to potential students foronline degree programs. In February 2007, we received provisional approvalfrom the MOE to operate 10 learning centers in the provinces of Beijing,Shanghai, Jiangsu and Zhejiang for a trial period of up to 18 months.  Although this provisional approval has sinceexpired, the MOE has not ordered us to terminate operations at these 10learning centers, although no assurance can be given that the MOE will not.

 

We have also obtainedprovincial licenses from the Beijing, Shanghai and Jiangsu provinces, as wellas informal approval from the Zhejiang province, to operate a total of 17learning centers, including the 10 that received provisional approval from theMOE in February 2007. We have also entered into agreements to establishthree cooperative learning centers in the provinces of Jilin, Hainan, andGuangdong.  Although these learningcenters are not branded under the ChinaEdu name, we derive revenue from them bycontributing significantly to their operations.

 

In addition to the 20learning centers discussed above, we have also entered into agreements with 32third party learning centers pursuant to which we provide assistance applyingfor approval from provincial level education authorities as well as securingadditional university online degree programs. In return, we receive a percentage of the tuition earned by these thirdparty learning centers.

 

The results of operationsof our international curriculum programs will depend significantly on thenumber of schools and students enrolled in these programs and the amount perstudent that we receive. Due to recent developments, discussed below, we expectthe future results for our international curriculum programs to be adverselyaffected. Our net revenue from our FEC program has been below our previousexpectations as a result of lower student numbers and lower per student amountspayable to us under our contractual arrangements with participating schools. Inaddition, the MOE issued a circular in April 2007 directing provincialgovernments generally to suspend the approval of any new Chinese-foreigncooperative polytechnic educational programs until the end of 2008. As aresult, our BCIT program has not been able to contract new schools for theprogram, and we cannot assure you that our BCIT program will be able tocontract new schools in 2009 or at

 

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any time after that.Because of these factors, we expect the future financial results for ourinternational curriculum programs to be adversely affected.

 

The results of operationsof our private primary and secondary schools will depend significantly upon ourability to timely complete the construction of our Anqing School and JingzhouSchool (Southern Campus). We completed Phase I construction of the new campusat Anqing School in 2008 and are in the process of completing Phase II construction,which we expect will occur by the fall of 2009. We had initially planned tocomplete construction of a new campus for Jingzhou School, however, we haveencountered delays in obtaining the land-use rights for the new campus site, aswell as delays due to inclement weather in early 2008, thereby causing anincrease in construction costs.  As aresult, we cannot assure you that we will begin construction in time forenrollment in the fall of 2009, or at all.

 

The future results ofoperations of our online tutoring services will depend significantly upon ourability to increase awareness of our online tutoring program, to improveeffectiveness and efficiency of our sales channel and to develop new productsand services to further enhance the learning experience of existing studentsand attract new students.

 

Our cost of revenue andoperating costs principally consist of the salaries, academic programdevelopment costs, rent, marketing expenses, administrative costs and, to alesser extent, depreciation and amortization costs relating to our growingbusiness.

 

**Revenue**

 

In the fiscal years endedDecember 31, 2006, 2007 and 2008, we generated net revenue of  RMB213.5 million, RMB265.0 million andRMB317.7.0 million ($46.6 million), respectively, representing a CAGR of 22.0%.Our revenue is net of Chinese business taxes and related surcharges. Our netrevenue from servicing the online degree programs is net of certain expensespaid by our university partners relating to their online degree programs,including fees they pay to learning centers, and any tuition refunds paid byour university partners to students. For the years ended December 31,2006, 2007 and 2008, the percentage of gross tuition fees paid by ouruniversity partners to learning centers was 39%, 40% and 39%, respectively.

 

Until 2005, we derivedall of our revenue from the provision of services to online degree programs ofuniversities in China. In 2005, we added three new lines of business (onlinetutoring, private primary and secondary schools and our FEC program), and in2006 we added our BCIT program. The revenue from these programs is driven bythe number of participating universities or schools, the number of revenuestudents and the fees charged for each student.

 

A significant portion ofour revenue is derived from a small number of customers. For the yearsended December 31, 2006, 2007 and 2008, 67.3%, 68.2% and 67.3%,respectively, of our net revenue was derived from services to our five largestcustomers. Our three largest customers, Renmin University of China, ChinaAgricultural University and Dongbei University of Finance and Economics,accounted for 21.1%, 17.3% and 14.0%, respectively, of our net revenue forthe year ended December 31, 2007 and 22.1%, 15.2% and 13.3%, respectively,of our net revenue for the year ended December 31, 2008.

 

***Segment Information***

 

We operate through fourreporting segments that offer distinct educational services: online degreeprograms, international curriculum programs, online tutoring and privateprimary and secondary schools. The international curriculum program segmentincludes both English language programs and international polytechniccurriculum programs.

 

The following table setsforth the net revenue for each segment and as a percentage of net revenue forthe periods indicated.

 
| ** **                            | ** ** | **Years  ended December 31,**      | ** ** |
|---------------------------------------|------------|-----------------------------------------|------------|
| ** **                            | ** ** | **2006**                                | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                            | ** ** | **RMB**                                 | ** ** | **% of net  revenue** | ** ** | **RMB** | ** ** | **% of net  revenue** | ** ** | ******RMB** | ** ** | **$** | ** ** | **% of net  revenue** | ** ** |
| ** **                            | ** ** | **(In  thousands, except percentages)** | ** ** |
| Net revenue:                          |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Online degree programs                |       | 156,845                                 |       | 73.5 | % | 202,185 |   | 76.3 | % | 255,388 |   | 37,433 |   | 80.4 | % |
| International curriculum program      |       | 28,428                                  |       | 13.3 | % | 31,434 |   | 11.9 | % | 27,607 |   | 4,046 |   | 8.7 | % |
| Online tutoring programs              |       | 17,384                                  |       | 8.1 | % | 18,013 |   | 6.8 | % | 15,436 |   | 2,263 |   | 4.8 | % |
| Private primary and secondary schools |       | 10,874                                  |       | 5.1 | % | 13,356 |   | 5.0 | % | 19,289 |   | 2,827 |   | 6.1 | % |
| Total                                 |       | 213,531                                 |       | 100.0 | % | 264,988 |   | 100.0 | % | 317,720 |   | 46,569 |   | 100.0 | % |

 

*Onlinedegree program revenue.    *We generate our online degree program revenue throughvarious collaborative alliances and contractual arrangements with universitiesin China. We expect that we will continue to earn the substantial majority ofour revenue and profits from this segment. Through collaborative alliances andother revenue-sharing arrangements, we provide a comprehensive service platformto our university customers, including academic program development, technologyservices, enrollment marketing, student support services and financeoperations. We currently provide services to 22 universities, nine of which arestructured as collaborative alliances (including three additional universitiesawaiting regulatory approval) and four of which are structured as contractualservice arrangements.****Ourcollaborative alliances and service arrangements are based on long-termcontracts that generally vary from 15 years to 50 years.

 

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As of December 31,2008, our university partners had, in the aggregate, approximately 243,000revenue students.  Our service fees aredetermined by the agreements we have with each university, as well as the termsof the agreements that each university negotiates annually with the learningcenters that provide certain essential services to students for their onlinedegree programs. University online degree programs generally require studentsto prepay tuition fees for a set number of courses at the outset of theirenrollment. The prepaid tuition fees may cover courses to be taken by thestudents beyond the particular six-month semester in which the fees are paidand may cover courses to be taken over a period of one year or longer. Underour service contracts with the universities, our service fees for each semesterare calculated based upon on a share of actual cash tuition received by theuniversity for such semester, including tuition pre-payments for courses to betaken in the future, after deducting certain expenses of the university forsuch semester, which consist of service fees paid to learning centers as wellas any tuition refunds due to students and administrative expenses. We providetechnology and support services to our university partners’ online degreeprograms rather than directly to students. We are not responsible for academicinstructional support and its associated costs. As a result, we recognize theseservice fees as revenue over the course of the relevant six-month academicsemester for which we provide services to our university customers rather thanover the period the universities provide services and support to theirstudents.

 

*Internationalcurriculum programs revenue.    *We combine our English language, or FECprogram, and our international polytechnic education, or BCIT program, businesslines into our international curriculum segment.  Historically, we generated our revenue inthis segment through a contractual arrangement with WITT, to provide the FECprogram that we offer to secondary schools in China, and a contractualarrangement with BCIT, to provide the BCIT program that we offer to polytechniccolleges in China. We acquired our interest in the FEC program in September 2005and our interest in the BCIT program in February 2006. We are theexclusive supplier to BCIT for the BCIT programs of selected polytechniccolleges in China approved by BCIT from time to time until January 2020.Our revenue in this segment depends upon the number of schools participating inthe international curriculum programs, the fees charged for the programs andthe number of students enrolled in the programs During the 2007-2008 academicyear, approximately 5,000 students were enrolled, and for the 2008-2009academic year, approximately 4,000 students were enrolled in the internationalcurriculum programs.******Ourservice fees from the FEC and BCIT programs are received from schools in thefall of each year on the basis of the number of students enrolled in theprogram at each school for the upcoming academic year and are recognizedratably over the twelve-month period as our services are delivered.

 

We have significantlyreduced our profitability forecast with respect to the international curriculumprogram due to adverse changes in the government regulatory environment and theresulting early mutual termination of our agreement with WITT.  As a result of these developments, weincurred an impairment charge during the year ended December 31, 2008 ofRMB68.2 million ($10.0 million) related to the international curriculumprogram, of which RMB39.1 million was related to goodwill impairment andRMB29.1 million was related to intangible assets impairment. However, in February 2009we entered into a partnership agreement with Howe Sound Secondary School,located in School District No. 48 in British Columbia, Canada, which werefer to as the SCC program and, notwithstanding the goodwill and intangibleassets impairment charges incurred during the year ended December 31,2008, management continues to believe in the long-term prospect of theinternational curriculum program given our belief that we are well positionedto continue distributing and supporting curriculum from established foreigneducational institutions and that our English language program has historicallybeen well-received by parents and students due to the high quality of the Englishlanguage instruction.** **We also believe that there is avast market of students throughout China whose needs for high quality Englishlanguage instruction are not currently being met by the Chinese public schools.

 

*Onlinetutoring revenue.    *We generate our online tutoring and test preparationservices revenue from the sale to students and their parents, most of which aremade through distributors, of a tutoring and test preparation program known asthe 101 Online School. After paying a subscription fee based on the desired useperiod, a student has direct access to online tutoring materials. Our servicefees from this business line depend upon the number of students enrolled in theonline tutoring and test preparation programs and the level of fees charged.Our service fees from the online tutoring and test preparation programs arecollected in advance of the student receiving services and are typically paidfor a minimum initial period of three months. We recognize this revenue ratablyover the applicable period that we provide services.

 

*Privateprimary and secondary schools revenue.*    In 2005, we acquired threeprivate primary and secondary schools in medium-sized cities in China: theAnqing Foreign Language School in Anqing, Anhui province, or Anqing School; theJingzhou School (Southern Campus) in Jingzhou, Hubei province; and thePingdingshan Bilingual School in Pingdingshan, Henan province, or PingdingshanSchool. Two of our schools, Anqing School and Pingdingshan School, areoperational. Our revenue from these schools is based on the number of studentsenrolled and tuition fees charged. The Anqing School had approximately 1,600students enrolled in the 2007-2008 academic year and approximately 2,500students for 2008-2009 academic year. The Pingdingshan School had an enrollmentof approximately 1,250 students in the 2007-2008 academic year andapproximately 1,150 students in the 2008-2009 academic year.

 

Our operation of theJingzhou School (Southern Campus) will begin only after we complete the buildingof a new Southern Campus (we do not own or operate the Northern campus).  As disclosed above,construction of Jingzhou School’sSouthern Campus has been delayed, and as a result there is no definite expectedenrollment period.  Because of thesedelays, the total goodwill amount of RMB1.9 million ($0.3 million) for theprivate primary and secondary school program was impaired in 2008.

 

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The tuition payments foreach of our private primary and secondary schools are received in advance on asemester basis, and revenue is recognized ratably over the applicable period aseducation services are delivered. As is the case with most private schools inChina, our tuition rates are subject to review and approval by the pricingauthority and education authority is set for a particular entering class ofstudents and remain the same through completion of the students’ studies.

 

***Net Revenue***

 

Our revenue is reportednet of business taxes and related surcharges that are levied on our totalrevenue. Most of our revenue, except from primary and secondary schools, issubject to Chinese business tax at rates of up to 5.5%. Our primary andsecondary schools are exempted from business tax. A small percentage of revenuefrom our online degree program services is subject to value-added taxes. Suchvalue-added tax rebates are granted to us as part of the PRC government’sstrategy to encourage high technology development in the PRC and are recordedas a component of revenue when the relevant compliance requirements are met andthere are no further obligations or future refunds or reimbursements. Weincurred business taxes of RMB6.2 million, RMB7.4 million and RMB11.0****million ($1.6****million) in the years ended December 31, 2006, 2007 and2008, respectively.

 

**Cost ofRevenue**

 

We record cost of revenueseparately for each of our operating segments. The following table sets forthour cost of revenue for each segment and as a percentage of our net revenue forthe periods indicated.

 
| ** **                            | ** ** | **Years  ended December 31,**      | ** ** |
|---------------------------------------|------------|-----------------------------------------|------------|
| ** **                            | ** ** | **2006**                                | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                            | ** ** | **RMB**                                 | ** ** | **% of net  revenue** | ** ** | **RMB** | ** ** | **% of net  revenue** | ** ** | **RMB** | ** ** | **$** | ** ** | **% of net  revenue** | ** ** |
| ** **                            | ** ** | **(In  thousands, except percentages)** | ** ** |
| Cost of revenue:                      |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Online degree programs                |       | 51,215                                  |       | 24.0 | % | 58,027 |   | 21.9 | % | 76,224 |   | 11,172 |   | 24.0 | % |
| International curriculum programs     |       | 17,212                                  |       | 8.1 | % | 23,503 |   | 8.9 | % | 19,920 |   | 2,920 |   | 6.3 | % |
| Online tutoring programs              |       | 3,452                                   |       | 1.6 | % | 3,875 |   | 1.5 | % | 4,017 |   | 589 |   | 1.3 | % |
| Private primary and secondary schools |       | 8,429                                   |       | 3.9 | % | 10,944 |   | 4.1 | % | 17,572 |   | 2,576 |   | 5.5 | % |
| Total                                 |       | 80,308                                  |       | 37.6 | % | 96,349 |   | 36.4 | % | 117,733 |   | 17,257 |   | 37.1 | % |

 

The share-basedcompensation cost for employees directly engaged in revenue generation isincluded in our cost of revenue. Those costs were RMB0.5 million in 2006,RMB0.35 million in 2007 and RMB0.5 million ($0.07 million) in 2008,representing 0.6%, 0.4% and 0.4% of our total cost of revenue in each of theseperiods, respectively.

 

The amortization of intangibleassets acquired through business combinations directly used in revenuegeneration is included in our cost of revenue. Those costs from theamortization of intangible assets were RMB4.2 million in 2006, RMB4.0 millionin 2007, and RMB4.0 million ($0.58 million) in 2008, representing 5.2%, 4.1%and 3.4% of our total cost of revenue in each of these periods, respectively.

 

*Onlinedegree programs*.    Costof revenue for our online degree services consists primarily of employeecompensation and benefits, including performance-based compensation, for ourproject management teams and technical personnel that directly support ouruniversity partners’ programs. The performance-based compensation is payable bythe collaborative alliance to its management annually if certain annualperformance targets set by the board of the collaborative alliance are met. Ourcost of revenue also includes rent, academic program development and otherdirect costs associated with maintaining our service offerings. Depreciation offacilities and equipment and amortization of intangible assets acquired throughbusiness combination are also included in cost of revenue for this segment.

 

*Internationalcurriculum programs.    *Cost of revenue for international curriculum programservices consists primarily of compensation and benefits for the nativeEnglish-speaking teachers contracted for the program and licensing andregistration fees payable to WITT and BCIT. The licensing fees payable to WITTare generally determined on the basis of a fixed fee for each participatingstudent. The registration fees that we pay to BCIT are determined on the basisof the number of students enrolled in the program, and the licensing fees wepay to BCIT are based on the number and selection of subjects provided to thepolytechnic schools. We also incur travel and lodging costs of studentsparticipating in the summer and winter programs abroad and travel and lodgingrelated to training for senior employees in our BCIT program and our FECprogram, as well as costs associated with the amortization of intangible assetsacquired through business combination.

 

*Onlinetutoring.    *Cost of revenue for our online tutoring and testpreparation services consists primarily of employee compensation and benefitsfor our employees working in this line of business (including these involved incourseware development and maintenance) and outsourcing fees we pay tonon-employee contract teachers developing courseware and related materials, aswell as costs associated with the amortization of intangible assets acquiredthrough business combination.

 

*Privateprimary and secondary schools.    *Cost of revenue for our private primaryand secondary schools consists primarily of employee compensation and benefitsfor the teachers and administrative staff employed at the schools, depreciationfor the facilities and equipment and lease payments for premises and paymentsof user fees for the use by our Anqing School of certain facilities of theFourth Middle School of Anqing.

 

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***Operating Expenses***

 

Our operating expensesconsist of general and administrative expenses, selling and marketing expenses,research and development expenses, and share-based compensation is allocated toeach item based on the nature of the service rendered by the employees whoreceived the benefit. The following table sets forth our operating expenses foreach item and as a percentage of net revenue for the periods indicated.

 
| ** **                   | ** ** | **Years  ended December 31,**      | ** ** |
|------------------------------|------------|-----------------------------------------|------------|
| ** **                   | ** ** | **2006**                                | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                   | ** ** | **RMB**                                 | ** ** | **% of net  revenue** | ** ** | **RMB** | ** ** | **% of net  revenue** | ** ** | **RMB** | ** ** | **$** | ** ** | **% of net  revenue** | ** ** |
| ** **                   | ** ** | **(In  thousands, except percentages)** | ** ** |
| Operating expenses           |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| General and administrative   |       | 48,846                                  |       | 22.9 | % | 76,893 |   | 29.0 | % | 86,908 |   | 12,738 |   | 27.4 | % |
| Selling and marketing        |       | 12,893                                  |       | 6.0 | % | 14,277 |   | 5.4 | % | 29,851 |   | 4,375 |   | 9.4 | % |
| Research and development     |       | 14,263                                  |       | 6.7 | % | 21,021 |   | 7.9 | % | 26,185 |   | 3,838 |   | 8.2 | % |
| Goodwill impairment          |       | —                                  |       | — |   | 16,192 |   | 6.1 | % | 41,036 |   | 6,015 |   | 12.9 | % |
| Intangible assets impairment |       | —                                  |       | — |   | — |   | — |   | 29,057 |   | 4,259 |   | 9.2 | % |
| Total                        |       | 76,002                                  |       | 35.6 | % | 128,383 |   | 48.4 | % | 213,037 |   | 31,225 |   | 67.1 | % |

 

*Generaland administrative*

 

Our general andadministrative expenses consist primarily of employee compensation andbenefits, rent, administrative office expenses and depreciation. Our generaland administrative expenses also include deferred share-based compensationexpense for employees not directly engaged in revenue generation. Our share-basedcompensation expense included in general and administrative expenses wasRMB1.9 million in 2006, RMB3.0 million in 2007 and RMB4.1 million ($0.60****million) in 2008, representing 4.0%, 3.8%and****4.7% of our total general andadministrative expenses in these periods, respectively.  We expect that our overall general andadministrative expenses will increase due to the continued expansion of ourbusiness and the various additional legal, accounting and other requirements thatare applicable to us as a public company listed in the United States.

 

*Sellingand marketing*

 

Our selling and marketingexpenses consist primarily of employee compensation and benefits, advertising,industry conferences and travel. Other significant components include marketingactivities and research, consulting fees and costs of maintaining sales anddistribution offices.

 

Our selling and marketingexpenses include the share-based compensation expense for employees working insales and marketing. Our share-based compensation expense included in sellingand marketing expenses was RMB0.2 million, RMB0.2 million and RMB0.5million ($0.07 million) in each of the years ended December 31, 2006, 2007and 2008, respectively, representing 1.6%, 1.6% and 1.7% of our total sellingand marketing expenses in these periods, respectively.

 

Our selling and marketingexpenses also include the amortization of intangible assets acquired throughbusiness combinations, which benefited our sales and marketing efforts. Thosecosts were RMB3.3 million in 2006, RMB3.3 million in 2007, and RMB3.3 million($0.48 million) in 2008, representing 25.4%, 23.0% and 10.9% of our totalselling and marketing expenses in each of these periods, respectively.

 

*Researchand development*

 

Our research anddevelopment expenses consist primarily of employee compensation and benefitsand other personnel-related costs associated with development of new orenhanced technologies, products and services. Our research and developmentexpenses also include share-based compensation expense for employees working inresearch and development. In 2006, 2007 and 2008, our research and developmentexpenses largely have related to our online degree programs. We expense allresearch and development costs when incurred.

 

Our share-basedcompensation expenses included in research and development wereRMB0.1 million, RMB0.1 million, and RMB0.2 million ($0.03 million) in theyears ended December 31, 2006, 2007 and 2008, respectively. These amountsrepresent less than****1% of ourtotal research and development expenses in each of these periods.

 

*Goodwillimpairment and intangible assets impairment*

 

In fiscal year 2008, werecorded total goodwill and intangible assets impairment charges of RMB70.1million ($10.3 million) compared to RMB nil in 2006 and RMB16.2 million relatedto goodwill impairment in 2007.  Of theRMB70.1 million ($10.3 million) impairment recorded in 2008, RMB41.0 million($6.0 million) related to goodwill impairment and RMB29.1 million ($4.3million) related to intangible assets impairment.

 

*Goodwill impairment.   *We did notrecord any goodwill impairment losses in the year ended December 31,2006.  Based on annual goodwillimpairment assessments performed by management as of December 31, 2007 and2008, we recorded goodwill impairment losses of RMB16.2 million and RMB41.0million for the years ended December 31, 2007 and 2008, respectively. Thegoodwill impairment charge for the year ended December 31, 2007 was due tomanagement’s significantly reduced profit forecast for our FEC program, which isa component of our international curriculum program.  Of the RMB41.0 goodwill impairment loss forthe year ended December 31, 2008, RMB39.1 was related to our

 

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international curriculumprogram, for which management significantly reduced its profitability forecastdue to adverse changes in the PRC government regulatory environment and theresulting early mutual termination of our agreement with WITT. The remaininggoodwill impairment charge of RMB1.9 million ($0.3 million) for the year ended December 31, 2008, which wastaken in the fourth quarter, related to a goodwill impairment charge for ourprivate primary and secondary school program, primarily due to management’sassessment that construction of Jingzhou School’s South campus would be furtherdelayed, and as a result there is no definite expected enrollment period.

 

*Intangible assets impairment.  *No impairment of intangible assets was recorded infiscal years 2006 or 2007. For fiscal year 2008, we recorded an impairment lossof intangible assets of RMB29.1 ($4.3 million). The intangible assets impairment loss for the year ended December 31,2008 was also related to our international curriculum program, for which wehave significantly reduced our profitability forecast due to the adversechanges in the PRC government regulatory environment and the resulting mutualtermination of our agreement with WITT.

 

Despitethe goodwill and intangible assets impairment charges related to ourinternational curriculum program, management continues to believe in thelong-term prospects of the program, given our belief that we are wellpositioned to continue distributing and supporting curriculum from establishedforeign educational institutions and that our English language program hashistorically been well-received by parents and students due to the high qualityof the English language instruction.** **We also believe that there is avast market of students throughout China whose needs for high quality Englishlanguage instruction are not currently being met by the Chinese public schools.

 

**Share-BasedCompensation Expenses**

 

We grant share options toour employees, officers and directors. Prior to January 1, 2006, weaccounted for employee share-based compensation in accordance with AccountingPrinciples Board Opinion No. 25, *Accountingfor Stock Issued to Employees*, or APB Opinion 25, and its relatedinterpretations which required us to record a compensation charge for theexcess of the fair value for the share at the grant date over the amount anemployee must pay to acquire the share. The compensation expense is recognizedon a straight-line basis over the applicable service period, which is usuallythe vesting period.

 

In December 2004,the Financial Accounting Standards Board, or FASB, issued Statements ofFinancial Accounting Standard No. 123R, or SFAS No. 123R, which is arevision of SFAS No. 123, *Accountingfor Stock-Based Compensation*, and supersedes APB Opinion No. 25.Effective January 1, 2006, we adopted SFAS No. 123R and recognizedcompensation cost on a straight-line basis over the requisite service periodwhich is the vesting period. We used the prospective method. Under this method,share-based compensation expense recognized includes: compensation expense forall share-based compensation awards granted prior to, but not yet vested as of January 1,2006 based on the intrinsic value as of the grant date, and compensationexpense for all share-based compensation awards granted on or subsequent to January 1,2006, based on grant-date fair value.

 

For share-basedcompensation awards that were granted prior to January 1, 2006 that arenot yet vested and continue to be reported under APB Opinion 25, the followingis our pro forma net income that would have been reported if such awards wereaccounted for under SFAS No. 123R:

 
| ** **                                                            | ** ** | **Years  ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                            | ** ** | **2006**                           | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                                                            | ** ** | **RMB**                            | ** ** | **RMB** | ** ** | **RMB** | ** ** | **$** | ** ** |
| ** **                                                            | ** ** | **(In  thousands)**                | ** ** |
| Net income (loss), as reported                                        |       | 25,539                             |       | 2,487 |   | (43,019 | ) | (6,306 | ) |
| Add: Share-based compensation as reported                             |       | 2,711                              |       | 3,643 |   | 5,231 |   | 767 |   |
| Less: Share-based compensation determined usingthe fair value  method |       | 7,355                              |       | 7,108 |   | 5,686 |   | 833 |   |
| Pro forma net income (loss) attributable toordinary  shareholders     |       | 20,895                             |       | (978 | ) | (43,474 | ) | (6,372 | ) |

 

We had share-basedcompensation expenses of RMB2.7 million, RMB3.6 million and RMB5.2 million($0.8 million) for the years ended December 31, 2006, 2007 and 2008,respectively. At December 31, 2008, our unrecognized share-basedcompensation costs totaled RMB9.1 million ($1.33 million), which is expected tobe recognized over a weighted average vesting period of 1.87 years.

 

Our share-basedcompensation charges have been allocated to cost of revenue, general andadministrative, selling and marketing and research and development expenses inline with the nature of the service rendered by the employee who received thebenefit.

 

The allocation ofshare-based compensation expenses is listed in the table below:

 

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| ** **                         | ** ** | **Years ended December 31,**      | ** ** |
|------------------------------------|------------|----------------------------------------|------------|
| ** **                         | ** ** | **2006**                               | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                         | ** ** | **RMB**                                | ** ** | **% of net  revenue** | ** ** | **RMB** | ** ** | **% of net  revenue** | ** ** | **RMB** | ** ** | **$** | ** ** | **% of net  revenue** | ** ** |
| ** **                         | ** ** | **(In thousands, except percentages)** | ** ** |
| Share-based compensation expenses: |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenue                    |       | 468                                    |       | 0.2 | % | 346 |   | 0.1 | % | 474 |   | 70 |   | 0.15 | % |
| General and administrative         |       | 1,942                                  |       | 0.9 | % | 2,960 |   | 1.1 | % | 4,073 |   | 597 |   | 1.28 | % |
| Selling and marketing              |       | 205                                    |       | 0.2 | % | 222 |   | 0.08 | % | 506 |   | 74 |   | 0.16 | % |
| Research and development           |       | 96                                     |       | — |   | 115 |   | 0.04 | % | 178 |   | 26 |   | 0.06 | % |
| Total                              |       | 2,711                                  |       | 1.3 | % | 3,643 |   | 1.3 | % | 5,231 |   | 767 |   | 1.65 | % |

 

**Taxation**

 

***Cayman Islands***

 

We are incorporated inthe Cayman Islands. Under the current laws of the Cayman Islands, we are notsubject to tax on income or capital gain. In addition, upon payments ofdividends by us to our shareholders, no Cayman Islands withholding tax will beimposed.

 

***PRC***

 

Our subsidiaries andvariable interest entities incorporated in the PRC are governed by the EIT Law,which went into effect on January 1, 2008. Prior to January 1, 2008, the statutory income tax rate was 33%.Effective January 1, 2008, the EIT Law now imposes a unified income taxrate of 25% on all domestic enterprises and FIEs, except for entities thatenjoy a tax holiday or preferential tax treatment.

 

The EIT Law permitscompanies to continue to enjoy their existing preferential tax treatment untilthose treatments expire in accordance with their current terms. Under the EITLaw, “high and new technology enterprises” specially supported by the Chinesegovernment continue to enjoy a reduced national enterprise tax rate of15%.  Pursuant to Circular 172, which wasissued on April 14, 2008, in order for applicant enterprises to beclassified as “high and new technology enterprises strongly supported by theState” certain requirements must be met, such as ownership of the coreintellectual property, products or services within “State-Encouraged HighTechnology Areas.”

 

From January 1,2008, seven of our Chinese subsidiaries and variable interest entities havebeen re-approved and classified as “high and new technology enterprises” and,therefore, enjoy a preferential income tax rate of 15%. Each approval is validfor three years, meaning that each classified entity will enjoy thepreferential income tax rate of 15% through 2010. As described in the tablebelow, four of these subsidiaries, Hongcheng Liye, Hongcheng Education, GotopHongcheng and Beiyuda, will continue to enjoy full exemptions for 3 yearsstarting from the commencement of their respective tax holidays, followed by a50% reduction for the next 3 years, according to the previous treatment andtransition rules.  The remaining threesubsidiaries, CMR WEB, Zhongcai and ZhongNongda Network, are also subject to apreferential income tax rate of 15%.

 
| ** **          | ** ** | **PRC**               | ** ** | **Concession from**                        | ** ** | **Year of**         |
|---------------------|------------|-----------------------|------------|--------------------------------------------|------------|---------------------|
| ** **          | ** ** | **statutory  income** | ** ** | **Chinese  statutory**                     |       | **commencement**    |
| **PRC  entity**     | ** ** | **tax  rate (%)**     | ** ** | **income  tax**                            | ** ** | **of  tax holiday** |
|                |       |                  |       |                                       |       |                |
| Hongcheng Liye      |       | 15                    |       | Full exemption  for 3 years                |       | 2003                |
|                |       |                  |       | starting from the  commencement            |       |                |
|                |       |                  |       | of tax holiday  followed by a 50%          |       |                |
|                |       |                  |       | reduction for  the next 3 years thereafter |       |                |
|                |       |                  |       |                                       |       |                |
| Hongcheng Education |       | 15                    |       | Full exemption  for 3 years                |       | 2005                |
|                |       |                  |       | starting from  the commencement            |       |                |
|                |       |                  |       | of tax holiday  followed by a 50%          |       |                |
|                |       |                  |       | reduction for  the next 3 years thereafter |       |                |
|                |       |                  |       |                                       |       |                |
| Gotop Hongcheng     |       | 15                    |       | Full exemption  for 3 years                |       | 2006                |
|                |       |                  |       | starting from  the commencement            |       |                |
|                |       |                  |       | of tax holiday  followed by a 50%          |       |                |
|                |       |                  |       | reduction for  the next 3 years thereafter |       |                |
|                |       |                  |       |                                       |       |                |
| Beiyuda             |       | 15                    |       | Full exemption  for 3 years                |       | 2006                |
|                |       |                  |       | starting from  the commencement            |       |                |
|                |       |                  |       | of tax holiday  followed by a 50%          |       |                |
|                |       |                  |       | reduction for  the next 3 years thereafter |       |                |

 

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These seven subsidiarieshave used the reduced applicable tax rate in calculations of deferred taxbalances related to the acquired intangible assets for the foreseeable future.While the certificates granted to these entities are valid for three years, webelieve we will be able to successfully reapply for renewal of them as webelieve these entities continue to meet the published criteria.

 

In addition, one of thecompany’s majority owned subsidiaries, Chongda, qualified as a “softwareenterprise” and was granted a two-year income tax exemption by the relevant taxauthorities for 2006 and 2007, followed by a 50% reduction in tax rates for2008, 2009 and 2010.

 

The procedures forobtaining classification as “high and new technology enterprises” are verycomplicated and time consuming, and the standards for classification as a “highand new technology enterprise” are not easy to achieve.  We cannot assure you that any more of ourother subsidiaries or affiliated entities that previously enjoyed preferentialtax rates will be approved as “high and new technology enterprises” entitled topreferential tax treatment. We also cannot assure you that our entitiescurrently classified as “high and new technology enterprises” will continue tobe classified as such after the expiration of the initial three year period.Preferential tax treatments granted to our Chinese entities by Chinesegovernmental authorities are subject to review and may be adjusted or revokedat any time. If our subsidiaries and affiliated entities fail to maintain theirpreferential tax treatments, they will be subject to the 25% unified enterpriseincome tax rate.

 

The amount of income taxpayable by our Chinese subsidiaries in the future will depend on variousfactors, including, among other things, their results of operations and taxableincome, and the statutory tax rate. Our effective tax rate depends in part onthe extent of each of our subsidiaries’ relative contribution to our consolidatedtaxable income. As our business expands, we may establish new entities fromtime to time that, depending on applicable law, may be entitled to certain taxincentives, including reduced tax rates. We intend to continue to exploreopportunities to take advantage of available tax incentives. In addition, theexpiration of our remaining tax exemptions and recognition of more share-basedcompensation expense in the future will cause our effective tax rate toincrease, since share-based compensation is not deductible for Chinese taxpurposes.

 

We have net operatingloss carryforwards of RMB12.5 million from our PRC subsidiaries for the yearended December 31, 2008 that will expire on various dates between December 31,2009 and December 31, 2013. As of December 31, 2008, a valuationallowance of RMB2.5 million was provided against deferred tax assets arisingfrom net operating loss carryforwards of certain of our PRC subsidiaries andvariable interest entities due to our determination that it is more likely thannot that these deferred tax assets related to the respective entities will notbe realized.  Adjustments will be made tothe valuation allowance if events occur in the future that indicate changes inthe amount of deferred tax assets that may be realized. We operate throughmultiple subsidiaries and variable interest entities and the valuationallowances are considered separately for each subsidiary and variable interestentity.  We do not file consolidated taxreturns, and, therefore, losses and deferred taxes from one subsidiary orvariable interest entity may not be used to offset another subsidiary’s orvariable interest entity’s earnings or deferred taxes. To the extent permittedby Chinese tax rules, we will seek to undertake further reorganizations ortransactions among our subsidiaries and Chinese affiliated entities or withthird parties to utilize some or all of these tax loss carryforwards beforethey expire, or qualify for additional tax benefits, but there is no assurancewe will be able to do so.

 

In addition, under PRCtax laws in effect prior to January 1, 2008, dividends paid to foreigninvestors by FIEs, such as dividends paid to overseas holding companies by PRCsubsidiaries, were exempt from PRC withholding tax.  Under the EIT Law, which became effective on January 1,2008, and its implementation rules, dividends declared on earnings generatedafter January 1, 2008 and payable by a FIE in China to its foreigninvestors who are non-resident enterprises are subject to a 10% withholdingtax, unless any such foreign investor’s jurisdiction of incorporation has a taxtreaty with China that provides for a different withholding arrangement. TheCayman Islands, where we are incorporated, does not have a tax treaty withChina.  Pursuant to additional guidancereleased by the Chinese government on April 22, 2009, we do not believethat our legal entities organized outside China should be characterized asChina tax residents for EIT Law purposes. If we are required to pay a 10%withholding tax for dividends we receive from our subsidiaries, it willmaterially and adversely affect our financial condition and results ofoperations.

 

Furthermore, the EIT Lawincludes a provision specifying that legal entities organized outside of Chinawill be considered residents for Chinese income tax purposes if their place ofeffective management or control is within China.  If legal entities organized outside of Chinawere considered residents for Chinese income tax purpose, they would becomesubject to the EIT Law on their worldwide income.  Thiswould cause income earned by such legal entitiesorganized outside of China to be subject to China’s 25% EIT.  The EIT Law’s implementation rules providethat non-resident legal entities will be considered China residents if substantialand overall management and control over the manufacturing and businessoperations, personnel, accounting, properties, etc. reside within China.  Pursuant to additional guidance released bythe Chinese government on April 22, 2009, management does not believe thatthe legal entities organized outside of China should be characterized as Chinatax residents for EIT Law purposes. It remains unclear, however, how taxauthorities will determine tax residency based on the facts of each case. Forthe year ended December 31, 2008, our calculation of income taxesgenerally reflects our status as a non-China tax resident company. If theChinese tax authorities determine that we are a Chinese “resident enterprise”after the effective date of the new tax law, we will be subject to Chineseincome tax at the rate of 25% on our worldwide income,****and****ourresults of operations would be adversely affected.

 

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**CriticalAccounting Policies**

 

We prepare financialstatements in conformity with U.S. GAAP, which requires us to make estimatesand assumptions that affect the reported amounts of assets and liabilities,disclosure of contingent assets and liabilities on the date of the financialstatements, and the reported amounts of revenue and expenses during thefinancial reporting period. We continually evaluate these estimates andassumptions based on the most recently available information, our ownhistorical experience and various other assumptions that we believe arereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Since the use of estimates is anintegral component of the financial reporting process, actual results coulddiffer from those estimates. Some of our accounting policies require higherdegrees of judgment than others in their application. We believe the followingaccounting policies involve the most significant judgments and estimates usedin the preparation of our financial statements.

 

Since we generate all ofour revenue from customers in China, we do not account for our results ofoperations on a geographical basis.

 

***Revenue Recognition***

 

Our revenue isprincipally derived from four primary sources: (i) the provision ofbundled online education technical and consulting services; (ii) theprovision of traditional classroom education services; (iii) the provisionof online tutoring services; and (iv) the licensing of online educationtechnology platform and courseware for online education purposes. Revenue isrecognized when earned and is reported net of business taxes which totaledRMB6.2 million, RMB7.4 million and RMB11.0 million ($1.6 million) for the yearsended December 31, 2006, 2007 and 2008, respectively.

 

*Onlineeducation technical and consulting services*

 

Our primary business isto provide online education technical and consulting services to the onlinedegree programs of leading Chinese universities. These services includeacademic program development, technology services, enrollment marketing,student support services, and finance operations. Since each of the services doesnot have a stand-alone value to the universities, these services are accountedfor as one unit of accounting and the related revenue is recognized ratablyover the service period. We primarily host the online education technology onour system and provide access to the universities to whom we provide servicesand their students. Any universities that prefer hosting the online educationplatform or courseware on their own systems must enter into separatearrangements with us.

 

We receive service feesfrom the universities each semester covering services to be provided to theuniversities during that semester. The amount of service fees to be received byus is derived from tuition fees the universities collect from their students atthe beginning of each semester adjusted for the universities’ costs andexpenses such as refunds to students, fees to other service providers, andother operating costs and expenses.

 

Fees received areinitially recorded as deferred revenue and are recognized as revenue ratablyover the six-month school semester during which we provide the services. Thesemesters generally begin in April and October of each calendar year.We do not provide services directly to the students and do not have obligationsto the students.

 

*Traditionalclassroom education services*

 

We operate a number ofprivate primary and secondary schools, market and support internationalpost-secondary and English language curriculum programs to established learninginstitutions. Fees from private primary and secondary schools operations areinitially recorded as deferred revenue at the time the students register fortheir classes and we receive payments. Students must register and pay for theirclasses at the beginning of each semester. Revenue is recognized ratably overthe service period, which is six months for each school semester, as theeducation services are delivered. If a student withdraws from a class, anycollected but unearned portion of the fee is recognized at that time unless thestudent is entitled to a refund under limited circumstances.

 

For the internationalpost-secondary and English language curriculum programs, students must registerand pay for their classes at the beginning of each semester. Fees collectedfrom the provision of teaching and other support services to the learninginstitutions are recognized when such services are provided, or recognized on astraight-line basis over the service period, which is typically the six-monthschool semester.

 

*Onlinetutoring services*

 

We offer online interactivetutoring services to primary and secondary students. These services allow thecustomers access to the online education services over a fixed period of time,generally ranging from one month to three years, through the use of prepaidcards. The prepaid cards are sold to distributors, from whom we collectpayments when the prepaid cards are delivered to the distributors. Thedistributors then resell the cards to end users. All prepaid fees received fromdistributors are initially recognized as deferred revenue and revenue isrecognized ratably over the applicable period that we provide services.

 

*Licensingof online education technology platform and courseware*

 

We license our onlineeducation technology platform and courseware to universities and othereducation companies and also provide post contract customer support, or PCS,which includes telephone support and unspecified upgrades on a when-

 

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and-if available basis.We recognize revenue from licensing of online education technology platform andcourseware when persuasive evidence of an agreement exists, delivery of theservices has occurred, the fee is fixed or determinable, and collectability isprobable. As we do not have vendor-specific objective evidence to establish thefair values of the undelivered elements, we recognize revenue from thelicensing of online education technology platform and courseware over the PCSperiod, which is typically 12 months.

 

Revenue from the onlineeducation technical and consulting services and the licensing of onlineeducation technology network platform and courseware also includes the rebateof value-added taxes.  Such value-addedtax rebates are granted to us as part of the PRC government’s strategy toencourage high technology development in the PRC and are recorded as acomponent of revenue when the relevant compliance requirements are met, andthere are no further obligations or future refunds or reimbursements. Rebatesgranted to us during 2006, 2007 and 2008 were RMB1.7 million, RMB2.4 millionand RMB9.9 million, respectively.

 

***Net Revenue from Related Parties***

 

A majority of our revenueis revenue from related parties. Our revenue from related parties is derivedprimarily from providing services to the online degree programs of universitiesin China. We currently have service contracts with four universities whereby wehave formed a subsidiary with a minority interest held by the universities,which in turn provides services to the universities’ online degree programs.Because these universities are the minority shareholders of our subsidiaries,these universities are considered related parties to us, and we record therevenue received by the subsidiaries that provide services to such universities’online degree programs as revenue from related parties.

 

***Income Taxes***

 

We account for incometaxes under the provisions of SFAS No. 109, *Accounting for Income Taxes*, with the required disclosuresas described in Note 14 to our consolidated financial statements. Accordingly,our deferred income taxes are recognized for temporary differences between thetax basis of assets and liabilities and their reported amounts in the consolidatedfinancial statements, net operating loss carryforwards, and credits by applyingenacted statutory tax rates applicable to future years. Deferred tax assets arereduced by a valuation allowance when, in the opinion of management, it is morelikely than not that some portion or all of the deferred tax assets will not berealized. Current income taxes are provided for in accordance with the laws ofthe relevant taxing authorities. As of December 31, 2006, 2007 and 2008,valuation allowances recognized were RMB0.7 million, RMB0.4 million and RMB2.5million, respectively. Valuation allowances were provided for because it wasmore likely than not that we would not be able to utilize certain tax losscarryforwards generated by our subsidiaries and consolidated variable interestentities before expiration. As of December 31, 2006, 2007 and 2008, wehave recorded deferred tax assets, net of valuation allowances, of RMB7.4million, RMB10.9 million and RMB6.1 million, respectively.  We do not believe any further valuationallowances to reduce our net deferred tax assets are necessary as we currentlyanticipate future taxable profits that will allow us to fully utilize our netdeferred tax assets in the foreseeable future. If a future event not currentlycontemplated were to occur and prevent us from realizing all or part of our netdeferred tax assets in the future, an adjustment to the valuation allowancewill decrease our net income when those events occur.

 

In June 2006, theFASB issued Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes - an interpretation of FASB Statement No. 109” (“FIN 48”), whichprescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return.  As a result ofour adoption of FIN 48 on January 1, 2007, the accumulated unrecognizedtax benefits were RMB4.3 million and RMB5.5 million as of December 31,2007 and 2008, respectively.  Werecognized RMB3.7 million accumulated impact of unrecognized tax benefit toaccumulated deficits as of January 1, 2007. We has adopted the accountingpolicy that interest recognized in accordance with paragraph 15 of FIN48 andpenalties recognized in accordance with paragraph 16 of FIN 48 are classifiedas part of its income taxes.  RMB269interest and RMB nil penalties were recognized in the consolidated financialstatements for the year the ended December 31, 2008.

 

Under applicableaccounting principles, a deferred tax liability should be recorded for taxabletemporary differences attributable to the excess of carrying amount over taxbasis, including those differences attributable to a more than 50% interest ina domestic subsidiary.  However,recognition is not required in situations where the tax law provides a means bywhich reported amounts of such interest investment can be recovered tax-freeand the enterprise expects that it will ultimately use that means.  We have not recorded any such deferred taxliability attributable to the financial interest in its variable interestentities because the variable interest entities were in an accumulated lossposition as of December 31, 2008.

 

***Share-Based Compensation***

 

Effective January 1,2006, we adopted the fair value recognition provisions of SFAS No. 123R,using the prospective transition method. Under this method, share-basedcompensation expense recognized beginning January 1, 2006 includes:compensation expense for all share-based compensation awards granted prior to,but not yet vested as of, January 1, 2006 based on the intrinsic value asof the grant date under APB 25, and compensation expense for all share-basedcompensation awards granted on or subsequent to January 1, 2006 based ongrant-date fair value under SFAS No. 123R. We recognize share-basedcompensation costs on a straight-line basis over the requisite service periodwhich is generally the vesting period. For share-based compensation awards thatwere granted before we became a public company and are not yet vested, the fairvalue is measured using the minimum value method and we continue to reportthese options under APB 25. We accounted for share options granted and vestedprior to January 1, 2006 in accordance with APB 25.

 

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The fair value of theoption award was estimated on the date of grant or the date of modificationusing the Black-Scholes option pricing model that uses assumptions, includingfair value of the ordinary shares underlying to the options, risk free interestrate, expected life, expected dividend yield and expected volatility. TheBlack-Scholes model is one of the most commonly used models that meet thecriteria required by SFAS No. 123R in estimating fair value of employee shareoptions.

 

We have historically usedthe following assumptions:

 
| ** **                                     | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                           |       |     |       |     |       |     |       |
| Option  granted to employees:                  |       |     |       |     |       |     |       |
| Weighted  average risk-free interest rate      |       | 4.68     | %          | 4.45     | %          | 2.62     | %          |
| Weighted  average expected option life (years) |       | 4.8      |       | 5.0      |       | 6        |       |
| Weighted  average volatility rate              |       | 47.6     | %          | 44.1     | %          | 46.6     | %          |
| Weighted  average dividend yield               |       | —   |       | —   |       | —   |       |

 

(a)  Volatility

 

The volatility of theunderlying ordinary shares during the life of the options was estimated basedon the historical stock price volatility of our ordinary shares and listedshares of comparable companies over a period similar to the expected term ofthe options. Most of the options were granted prior to our IPO or during theyear ended December 31, 2007 when we had limited historical data on theprice of our publicly traded shares. Therefore we did not have sufficientcompany specific information regarding the volatility of our share price onwhich to base an estimate of expected volatility. As such, we based ourestimate of expected volatility on the historical volatility of comparableentities whose share prices are publicly available.

 

Since our IPO in December 2007,we have had slightly less than one and a half years of historical market pricedata for our ADSs, the historical share price data of our ADSs was limited. Theaverage historical volatility of the market price of our ADSs over the periodfrom December 2007 to May 31, 2009 was 58.5%. For future grants, wewill consider all relevant information in determining an appropriate volatilityassumption.

 

(b) Risk-freeinterest rate

 

Risk-free interest ratewas estimated based on the yield, as of the grant date, to maturity of treasurybonds of the United States with a maturity period close to the expected term ofthe options.

 

(c) Expected term

 

As we did not havesufficient historical data on the exercise of share options, we estimated theexpected term with reference to the average between the weighted averagevesting period of the options and the contractual term. Of the 9,892,800options outstanding as of December 31, 2008, 8,660,500 options weregranted prior to the IPO, representing 87.5% of the total. We did not believewe had sufficient historical information as at grant date of the options tomake a refined estimate of expected term. Therefore, we used the simplifiedmethod explained in Staff Accounting Bulletin No.107 to estimate the expectedlife as the simple average of the vesting term and the contractual term. In thefuture, should more detailed information be available to us, we would consideradoption a different method of estimating expected term.

 

(d) Dividend yield

 

We assumed a zerodividend yield based on our expected dividend policy over the expected term ofthe options.  We anticipate growing ourbusiness with internally generated cash and do not expect to pay dividends inthe foreseeable future, nor have we paid any dividends to date.

 

(e) Exercise price

 

The exercise price of theoptions was determined by our board of directors.

 

(f) Fair value ofunderlying ordinary shares

 

When estimating the fairvalue of the ordinary shares on the grant dates before the IPO, we considered anumber of factors, including the results of our equity transactions, while takinginto account standard valuation methods and the achievement of certainevents.  After the IPO, we used theclosing market price of our ADSs as of the grant date as the fair value of theunderlying ordinary shares on that date.

 

As of December 31,2008, there were options outstanding for the purchase of 9,892,800 ordinaryshares and options for the purchase of 565,685 ordinary shares available forfuture grant under our equity incentive plan. The share-based compensationexpenses arising from the options we have granted is being recognized over theapplicable vesting period, which typically is three years.

 

Our share-basedcompensation expenses have been allocated to cost of revenue, general andadministrative, selling and marketing and research and development expenses inline with the nature of the services rendered by the employee who received thebenefit.

 

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***Basis for Consolidation and Our Relationships with OurChinese Affiliated Entities***

 

Substantially all of ouroperations are conducted in China through our three principal Chinesesubsidiaries and through contractual arrangements with our Chinese affiliated entities.Our corporate structure is designed to comply with current Chinese limitationson foreign ownership of, and participation in, companies engaging in theeducation and telecommunication sectors in China. We consolidate 100% of theinterests of our subsidiaries and Chinese affiliated entities.

 

We conduct some of ouroperations through two Chinese affiliated entities, Xiandai Technology andHongcheng Education, in which we do not directly hold any equity interest. Weentered into contractual arrangements with these entities and theirshareholders pursuant to which we maintain effective control over theseentities, bear all of their economic risk and receive substantially all oftheir economic rewards. In our consolidated financial statements, we have consolidatedall of the interests of Xiandai Technology and Hongcheng Education under FASBInterpretation No. 46 (Revised), *Consolidationof Variable Interest Entities, an Interpretation of ARB No. 51*,or FIN 46R.

 

FIN 46R requires a “variableinterest entity” to be consolidated by the primary beneficiary of such entity.An entity is considered to be a variable interest entity if certain conditionsare present, including where the equity investors in the entity do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties. As a result of our variousagreements with Xiandai Technology and Hongcheng Education and their respectiveshareholders and our ability to assume substantially all of their net incomethrough the technical service and consulting agreements and our ability tocontrol the declaration and receive dividends, we are considered the primary beneficiaryof these two entities and all of their interests, including their subsidiaries,have been consolidated in our financial statements. All significanttransactions and balances between us, our subsidiaries, Xiandai Technology andHongcheng Education have been eliminated upon consolidation.

 

For additionalinformation with respect to our relationships with Xiandai Technology andHongcheng Education, see “Item 4. Information on the Company—C. OrganizationalStructure.”

 

***Long-lived Assets***

 

Our accounting forlong-lived assets, including property and equipment, is described in Note 2 toour consolidated financial statements included in this annual report. Therecorded value of long-lived assets is affected by a number of managementestimates, including estimated useful lives, residual values and impairmentcharges. We assess impairment for long-lived assets whenever the net book valuefor these assets is more than the estimated future undiscounted cash flowsattributable to them.

 

***Business Combinations, Goodwill and Intangible Assets***

 

We account for businesscombinations in accordance with SFAS No. 141, *Business Combinations*, which requires that the purchasemethod of accounting be used for all business combinations. SFAS 141requires intangible assets acquired in a business combination to be recognizedand reported separately from goodwill.

 

Goodwill represents thecost of the acquired businesses in excess of the fair value of identifiabletangible and intangible net assets purchased. We generally seek the assistanceof independent valuation experts in determining the fair value of theidentifiable tangible and intangible net assets of the acquired business. Weassign all the assets and liabilities of the acquired business, includinggoodwill, to reporting units in accordance with SFAS No. 142, *Goodwill and Other Intangible Assets*.

 

We test goodwill forimpairment on an annual basis. In this process, we rely on a number of factorsincluding operating results, business plans and future cash flows. Recoverabilityof goodwill is evaluated using a two-step process. The first step involves acomparison of the fair value of a reporting unit with its carrying value. Ifthe carrying amount of the reporting unit exceeds its fair value, the secondstep of the process involves a comparison of the fair value and carrying valueof the goodwill of that reporting unit. If the carrying value of the goodwillof a reporting unit exceeds the fair value of that goodwill, an impairment lossis recognized in an amount equal to the excess. Goodwill of a reporting unitwill be tested for impairment between annual tests if an event occurs orcircumstances change that would more likely than not reduce the fair value ofthe reporting unit below its carrying amount.

 

The fair values of thereporting units were established using a combination of market approach andincome approach valuation methodologies. The discounted cash flows for each reporting unit were based on discretefive year financial forecasts developed by management for planningpurposes.  Cash flows beyond the discretefive year forecast were estimated using a terminal value calculation, whichincorporated historical and forecasted financial trends for each reporting unitand considered long-term earnings growth rates for publicly traded peercompanies.  Specifically, the incomeapproach valuations included reporting unit cash flow discount rate atapproximately 24%, 20% and 23.5%, and a terminal value growth rate at 3% forthe international curriculum program, online degree and online tutoring,respectively.  Publicly availableinformation regarding the our market capitalization was also considered inassessing the reasonableness of the cumulative fair values of the reportingunits estimated using the discounted cash flow methodology.

 

We amortize intangibleassets (other than trade names, which are discussed below) over theirrespective individual estimated useful lives in proportion to the economicbenefits consumed in each period. Our estimates of the useful lives of identifiedintangible assets are based on a number of factors, including the effects ofobsolescence, demand, competition, and other economic factors (such as thestability of the industry, and known technological advances), and the level ofmaintenance expenditures required to obtain the expected future undiscountedcash flows from the asset. We determined that our trade

 

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names do not havedeterminable useful lives. Consequently, the carrying amounts of trade namesare not amortized but are tested for impairment annually or more frequently ifevents or circumstances indicate that the asset may be impaired.

 

We evaluate intangibleassets for recoverability whenever events or changes in circumstances indicatethat their carrying amounts may not be recoverable. Recoverability of assets tobe held and used is measured by a comparison of the carrying amount of an assetto the future undiscounted net cash flows expected to be generated by theasset. If these assets are considered to be impaired, the impairment to berecognized is measured by the amount by which the carrying value of the assetsexceeds the fair value of the assets.

 

In evaluating goodwilland intangible assets for impairment, we may seek the assistance of independentvaluation experts, perform internal valuation analyses and consider otherinformation that is publicly available. The results of our evaluation may be dependenton a number of factors, including estimates of future market growth and trends,forecasted revenue and costs, discount rates and other variables. While we useassumptions that we believe are fair and reasonable, actual future results maydiffer from the estimates arrived at using the assumptions.

 

In the fiscal year 2008,we recognized total goodwill and intangible assets impairment charges ofRMB70.1 million ($10.3 million).  Of thisamount, RMB68.2 million ($10.0 million) of impairment loss was related to theinternational curriculum program, which management has significantly reducedprofitability forecast due to adverse change in government regulatoryenvironment.  Despite the goodwill andintangible assets impairment charges, management continues to believe in thelong-term prospects of the program.  Thetotal goodwill impairment charge of RMB1.9 million ($0.3 million) for theprivate primary and secondary school program was taken in the fourth quarter of2008, and is primarily due to management’s assessment that construction ofJingzhou School’s South campus will be further delayed, and as a result thereis no definite expected enrollment period.

 

**RoyaltyFees**

 

Royalty fees payable to amiddle school increases each year from the 2005 calendar year to the 2024calendar year. Royalty fees during this period were aggregated and recognizedas royalty expense on a straight-line basis. The difference between royaltyfees paid and the amount reported as expenses was included as a component ofaccrued expenses and other current liabilities in the consolidated financialstatements.

 

**Resultsof Operations**

 

The following table setsforth selected data from our consolidated statements of operations for theperiods indicated.

 
| ** **                                                        | ** ** | **Years ended December 31,**          | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                                                        | ** ** | **RMB**                                    | ** ** | **% of net********revenue** | ** ** | **RMB** | ** ** | **% of net********revenue** | ** ** | **RMB** | ** ** | **$** | ** ** | **% of net********revenue** | ** ** |
| ** **                                                        | ** ** | **(In thousands, except for percentages)** | ** ** |
| Net revenue:                                                      |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Online degree programs                                            |       | 156,845                                    |       | 73.5 | % | 202,185 |   | 76.3 | % | 255,388 |   | 37,433 |   | 80.4 | % |
| International curriculum programs                                 |       | 28,428                                     |       | 13.3 | % | 31,434 |   | 11.9 | % | 27,607 |   | 4,046 |   | 8.7 | % |
| Online tutoring programs                                          |       | 17,384                                     |       | 8.1 | % | 18,013 |   | 6.8 | % | 15,436 |   | 2,263 |   | 4.8 | % |
| Private primary and secondary schools                             |       | 10,874                                     |       | 5.1 | % | 13,356 |   | 5.0 | % | 19,289 |   | 2,827 |   | 6.1 | % |
| Total net revenue                                                 |       | 213,531                                    |       | 100.0 | % | 264,988 |   | 100.0 | % | 317,720 |   | 46,569 |   | 100 | % |
| Cost of revenue:                                                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Online degree programs                                            |       | 51,215                                     |       | 24.0 | % | 58,027 |   | 21.9 | % | 76,224 |   | 11,172 |   | 24.0 | % |
| International curriculum programs                                 |       | 17,212                                     |       | 8.1 | % | 23,503 |   | 8.9 | % | 19,920 |   | 2,920 |   | 6.3 | % |
| Online tutoring programs                                          |       | 3,452                                      |       | 1.6 | % | 3,875 |   | 1.5 | % | 4,017 |   | 589 |   | 1.3 | % |
| Private primary and secondary schools                             |       | 8,429                                      |       | 3.9 | % | 10,944 |   | 4.1 | % | 17,572 |   | 2,576 |   | 5.5 | % |
| Total cost of revenue                                             |       | 80,308                                     |       | 37.6 | % | 96,349 |   | 36.4 | % | 117,733 |   | 17,257 |   | 37.1 | % |
| Gross profit:                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Online degree programs                                            |       | 105,630                                    |       | 49.5 | % | 144,158 |   | 54.4 | % | 179,164 |   | 26,261 |   | 56.4 | % |
| International curriculum programs                                 |       | 11,216                                     |       | 5.3 | % | 7,931 |   | 3.0 | % | 7,687 |   | 1,126 |   | 2.4 | % |
| Online tutoring programs                                          |       | 13,932                                     |       | 6.5 | % | 14,138 |   | 5.3 | % | 11,419 |   | 1,674 |   | 3.6 | % |
| Private primary and secondary schools                             |       | 2,445                                      |       | 1.1 | % | 2,412 |   | 0.9 | % | 1,717 |   | 251 |   | 0.5 | % |
| Total gross profit                                                |       | 133,223                                    |       | 62.4 | % | 168,639 |   | 63.6 | % | 199,987 |   | 29,312 |   | 62.9 | % |
| Gross profit margin:                                              |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Online degree programs                                            |       | 67.3                                       | %          | — |   | 71.3 | % | — |   | 70.2 | % | 70.2 | % | — |   |
| International curriculum programs                                 |       | 39.5                                       | %          | — |   | 25.2 | % | — |   | 27.8 | % | 27.8 | % | — |   |
| Online tutoring programs                                          |       | 80.1                                       | %          | — |   | 78.5 | % | — |   | 74 | % | 74 | % | — |   |
| Private primary and secondary schools                             |       | 22.5                                       | %          | — |   | 18.1 | % | — |   | 8.9 | % | 8.9 | % | — |   |
| Total gross profit margin                                         |       | 62.4                                       | %          | — |   | 63.6 | % | — |   | 62.9 | % | 62.9 | % | — |   |
| Operating expenses:                                               |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| General and administrative                                        |       | 48,846                                     |       | 22.9 | % | 76,893 |   | 29.0 | % | 86,908 |   | 12,738 |   | 27.4 | % |
| Selling and marketing                                             |       | 12,893                                     |       | 6.0 | % | 14,277 |   | 5.4 | % | 29,851 |   | 4,375 |   | 9.4 | % |
| Research and development                                          |       | 14,263                                     |       | 6.7 | % | 21,021 |   | 7.9 | % | 26,185 |   | 3,838 |   | 8.2 | % |
| Goodwill impairment                                               |       | —                                     |       | — |   | 16,192 |   | 6.1 | % | 41,036 |   | 6,015 |   | 12.9 | % |
| Intangible assets impairment                                      |       | —                                     |       | — |   | — |   | — |   | 29,057 |   | 4,259 |   | 9.2 | % |
| Total operating expenses                                          |       | 76,002                                     |       | 35.6 | % | 128,383 |   | 48.4 | % | 213,037 |   | 31,225 |   | 67.1 | % |
| Income (loss) from operations                                     |       | 57,221                                     |       | 26.8 | % | 40,256 |   | 15.2 | % | (13,050 | ) | (1,913 | ) | (4.2 | )% |
| Operating margin                                                  |       | 26.8                                       | %          | — |   | 15.2 | % | — |   | (4.1 | )% | (4.1 | )% |   |   |
| Other income                                                      |       | —                                     |       | — |   | 394 |   | 0.1 | % | 562 |   | 82 |   | 0.2 | % |
| Interest income                                                   |       | 1,172                                      |       | 0.5 | % | 4,118 |   | 1.6 | % | 10,652 |   | 1,561 |   | 3.4 | % |
| Interest expense                                                  |       | (2,279                                     | )          | (1.1 | )% | (2,130 | ) | (0.8 | )% | (1,298 | ) | (190 | ) | (0.4 | )% |
| Income (loss) before income tax provisions and  minority interest |       | 56,114                                     |       | 26.2 | % | 42,638 |   | 16.1 | % | (3,134 | ) | (460 | ) | (1.0 | )% |
| Income tax provisions                                             |       | 6,994                                      |       | 3.3 | % | 15,003 |   | 5.7 | % | 3,473 |   | 509 |   | 1.1 | % |
| Minority interest, net of taxes                                   |       | (23,581                                    | )          | (11.0 | )% | (25,148 | ) | (9.5 | )% | (36,412 | ) | (5,337 | ) | (11.5 | )% |
| Net income (loss)                                                 |       | 25,539                                     |       | 12.0 | % | 2,487 |   | 0.9 | % | (43,019 | ) | (6,306 | ) | (13.4 | )% |

 

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**Yearended December 31, 2008 compared to the year ended December 31, 2007**

 

*NetRevenue.* Ourtotal net revenue for the fiscal year ended December 31, 2008 was RMB317.7million ($46.6 million), representing a 19.9% increase, compared to RMB265.0million for the fiscal year ended December 31, 2007.

 

*Onlinedegree programs.*Net revenue from online degree programs for the fiscal year 2008 was RMB255.4million ($37.4 million), representing a 26.3% increase from RMB202.2 millionfor the fiscal year 2007.  This increasewas attributable primarily to the solid enrollment growth at our universitypartners’ online degree programs in fiscal year 2008 as compared to fiscal year2007.  In the aggregate, our universitypartners had approximately 243,000 revenue students during fiscal year 2008,representing a 27% increase from approximately 192,000 revenue students infiscal year 2007.

 

*International curriculum programs*.    Netrevenue from our international curriculum programs decreased approximately12.2% from RMB31.4 million for the year ended December 31, 2007 to RMB27.6million ($4.0 million) for the same period in 2008. This decrease was mainlyattributable to the decrease in student enrollment resulting from the shrinkageof our operations in this business line in fiscal year 2008 as compared tofiscal year 2007 dueto adverse changes in the governmental regulatory environment and the relatedtermination of our agreement with WITT.Students participating in the BCIT program decreased slightly from 1,026 forthe year ended December 31, 2007 to 1,022 for the year ended December 31,2008, while students participating in our FEC program decreased from 4,014 forthe year ended December 31, 2007 to 2,941 for the same period in 2008.

 

*Private primary and secondary schools.*    Netrevenue for this business line increased approximately 44.4% from RMB13.4million for the year ended December 31, 2007 to RMB19.3 million ($2.8million) for the same period in 2008. This was primarily due to a 14.3% increase in enrollments at our AnqingSchool for the 2007-2008 academic year and a 56.2% increase in enrollments atour Anqing School for the 2008-2009 academic year.

 

*Online tutoring.    *Net revenue fromour online tutoring business decreased approximately 14.3% from RMB18.0 millionfor the year ended December 31, 2007 to RMB15.4 million ($2.3 million) forthe year ended December 31, 2008. The decrease was mostly attributable toa change in distribution channels, which resulted in short-term negative impacton net revenue.

 

*Costof Revenue.*Totalcost of revenue for fiscal year 2008 was RMB117.7 million ($17.3 million),representing a 22.2% increase from RMB96.3 million for fiscal year 2007. Costof revenue as a percentage of net revenue increased to 37.1% in 2008 from 36.4%in 2007, primarily due to an increase in cost of revenue for the expansion ofour learning centers, new coursewaredevelopment and hardware upgrades in 2008 as compared to 2007. Theincrease in cost of revenue is discussed below.

 

*Onlinedegree programs.*Thecost of revenue from our online degree programs for fiscal year 2008 wasRMB76.2 million ($11.2 million), representing a 31.4% increase from RMB58.0million in fiscal year 2007.  Theincrease was attributable primarily to the following factors:

 

·                      *Enrollment growth:* In fiscal year 2008, the number ofrevenue students enrolled in our university partners’ online degree programsincreased by 27% to approximately 243,000 from approximately 192,000 revenuestudents in fiscal year 2007, which resulted in an increase inrecruiting-related expenses.

 

·                      *Learning centeroperation:*In2008, we significantly expanded our learning center network, increasing thenumber of learning centers from one operational learning center at the end of2007 to 37 as of fiscal year end 2008. As a result of this significant expansion, cost of revenue related tolearning centers operations was approximately RMB3.5 million for fiscal year2008, while cost of revenue related to our learning centers operations wasinsignificant in 2007.

 

·                      *Courseware developmentand technology upgrade:* We invested in new courseware development and hardware upgrades at ourcollaborative alliances in the fourth quarter of 2008 and in connectiontherewith recorded approximately RMB3.2 million in increased cost of revenue.

 

·                      *Non-degree onlineeducation:* In thesecond half of 2008, one of our university collaborative alliances incurredapproximately RMB1.0 million in cost of revenue related to developing postsecondary online education opportunities in the non-degree education market.

 

*International curriculum programs*.    Ourcost of revenue for our international curriculum programs decreasedapproximately 15.2% from RMB23.5 million in the year ended December 31,2007 to RMB19.9 million ($2.9****million)for the same period in 2008. This decrease was primarily attributable to thedecrease in the related operational costs associated with the decrease instudent enrollment.

 

*Online tutoring programs.    *Our cost ofrevenue for our online tutoring program increased approximately 3.7% fromRMB3.9 million in the year ended December 31, 2007 to RMB4.0 million ($0.6million) in the year ended December 31, 2008. This slight increase was theresult of new product development costs incurred during the year ended December 31,2008.

 

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*Private primary and secondary schools*.    Ourcost of revenue for our private primary and secondary schools increasedapproximately 60.6% from RMB10.9 million for the year ended December 31,2007 to RMB17.6 million ($2.6 million) for the same period in 2008. This wasmostly attributable to the completion Phase I construction at the Anqing School’snew campus, which resulted in increased faculty and facility costs, anddepreciation of property and equipment as we commenced enrollment at the AnqingSchool’s new campus.

 

*Gross Profit and Gross Margin.* Gross profitincreased by 18.6% to RMB200.0 million ($29.3 million) in 2008 from RMB168.6million in 2007. Our gross margin decreased slightly to 62.9% in 2008 from63.6% in 2007.

 

*OperatingExpenses.*Totaloperating expenses for the fiscal year 2008 were RMB213.0 million ($31.2million), representing a 65.9% increase from RMB128.4 million for fiscal year2007. Operating expenses, as a percentageof net revenue, increased to 67.1% in 2008 from 48.4% in 2007. Thisincrease was attributable primarily to the factors discussed below:

 

*Generaland administrative expenses.*General and administrative expenses for the fiscalyear 2008 were RMB86.9 million ($12.7 million), representing a 13.0% increasefrom RMB76.9 million for fiscal year 2007. Our general and administrativeexpenses, as a percentage of net revenue, decreased to 27.4% in 2008 from 29.0%in 2007. The overall increase was primarily due to expenses associatedwith being a new U.S. publicly listed company. In particular, in 2008 we incurred an increase of approximately RMB6.0million in professional fees paid to auditors, lawyers, consultants assisting in compliance with the Sarbanes-Oxley Act,and other third-party service providers that provide advice and guidanceregarding compliance with the regulatory requirements of a publicly listedcompany.

 

*Sellingand marketing expenses. *Selling and marketing expenses for the fiscal year2008 were RMB29.9 million ($4.4 million) as compared to RMB14.3 million for thefiscal year 2007.  Our selling and marketing expenses, as apercentage of net revenue, increased to 9.4% in 2008 from 5.4% in 2007.  The increase is attributable primarilyto the following factors:

 

·                  *Learning center networkexpansion:* Werecorded approximately RMB8.4 million in selling and marketing expenses inconnection with the expansion of, and related marketing expenses related to,our learning center network in fiscal year 2008.  Selling and marketing expenses related to ourlearning centers were insignificant in 2007.

 

·                  *Online tutoringprogram:* Weincurred an additional RMB3.6 million in selling and marketing expenses for ouronline tutoring program during fiscal year 2008.

 

·                  *Non-degree onlineeducation:* One ofour university collaborative alliances incurred approximately RMB1.1 million inselling and marketing related expenses during fiscal year 2008 due to promotingpost secondary online education opportunities in the non-degree educationmarket.

 

*Researchand development.*Researchand development expenses for the fiscal year 2008 were RMB26.2 million ($3.8million), representing a 24.6% increase from RMB21.0 million for the fiscalyear 2007. Our research and developmentexpenses, as a percentage of net revenue, increased to 8.2% in 2008 from 7.9%in 2007. This increase was attributable primarily to technology platformupgrade and reconfiguration activities in some of our collaborative alliancesin order to further enhance and support our online degree programs.

 

*Goodwillimpairment and intangible assets impairment.* In fiscal year 2008, we recorded total goodwill andintangible assets impairment charges of RMB70.1 million ($10.3 million)compared to RMB16.2 million related solely to goodwill impairment in 2007.  Of the RMB70.1 million ($10.3 million)impairment recorded in 2008, RMB41.0 million ($6.0 million) related to goodwillimpairment and RMB29.1 million ($4.3 million) related to intangible assetsimpairment. Goodwill and intangible assetsimpairment, as a percentage of net revenue, increased to 22.1% in 2008 from6.1% in 2007.

 

*Goodwillimpairment.   *Based on management’s annual goodwillimpairment assessments performed as of December 31, 2007 and 2008, werecorded goodwill impairment losses of RMB16.2 million and RMB41.0 million forthe years ended December 31, 2007 and 2008, respectively. The goodwillimpairment charge for the year ended December 31, 2007 was due tomanagement’s significantly reduced profit forecast for our FEC program, whichis a component of our international curriculum program.  Of the RMB41.0 goodwill impairment loss forthe year ended December 31, 2008, RMB39.1 was related to our internationalcurriculum program, for which management significantly reduced itsprofitability forecast due to adverse changes in the PRC government regulatoryenvironment and the resulting early mutual termination of our agreement withWITT. The remaining goodwill impairment charge of RMB1.9 million ($0.3 million)for the year ended December 31, 2008, which was taken in the fourthquarter, related to a total goodwill impairment charge for our private primaryand secondary school program, primarily due to management’s assessment thatconstruction of Jingzhou School’s South campus would be further delayed, and asa result there is no definite expected enrollment period.

 

*Intangibleassets impairment.  *No impairment of intangible assets wasrecorded in fiscal years 2006 or 2007. For fiscal year 2008, we recorded animpairment loss of intangible assets of RMB29.1 ($4.3 million).  The intangible assets impairment loss for theyear ended December 31, 2008 was also related to our internationalcurriculum

 

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program, for which wehave significantly reduced our profitability forecast due to the adversechanges in the PRC government regulatory environment and the resulting mutualtermination of our agreement with WITT.

 

Despite the goodwill andintangible assets impairment charges related to our international curriculumprogram, management continues to believe in the long-term prospects of theprogram.

 

*Income(loss) from operations.*Loss from operations for fiscal year 2008 was RMB13.1 million ($1.9million) as compared to income from operations of RMB40.3 million for thefiscal year 2007. The resulting loss from operations during fiscal the yearended 2008 versus 2007 is attributable to the factors discussed above regardingthe overall increases in our cost of revenue and operating expenses, inparticular the impairment losses recorded.

 

*Interestincome.  *Interest income increased by 158.7% to RMB10.7 million($1.6 million) in the fiscal year 2008, as compared to RMB4.1 million in thefiscal year 2007. This increase was attributable primarily to the interestincome earned on the net proceeds from our IPO completed in December 2007.

 

*Incometax provision* Income tax expense for the fiscal year 2008was RMB3.5 million ($0.5 million), representing a significant decrease fromRMB15.0 million for the fiscal year 2007. This was attributable primarily tothe fact that, in the fourth quarter of 2008, seven of our subsidiaries andaffiliate companies applied and qualified for the “high and new technologyenterprise” status under the EIT Law, which came into effect on January 1,2008.  Under the new tax regulation, thestatutory tax rate for all enterprises in China is 25%, except for enterpriseswho have obtained the newly implemented “new and high technology enterprise”status. As a result of their qualification as “high and new technologyenterprises”, these seven subsidiaries received certain tax exemptions and apreferential statutory tax rate of 15%, which resulted in a decrease in ourdeferred tax liabilities. In addition, as a result of the intangible assetsimpairment loss from our international curriculum programs, the related deferredtax liabilities recorded were reversed, which reduced our income tax expensefor the fiscal year ended 2008.

 

*Minorityinterest, net of taxes. *Minority interest was RMB36.4 million($5.3 million) in the fiscal year 2008, representing a 44.8% increase, ascompared to RMB25.1 million in the corresponding period in 2007, which wasprimarily attributable to the increased profitability of our collaborativealliances.

 

*Netincome (loss).   * As a result of the above factors, most notablythe goodwill and intangible assets impairment charges, we had a net loss ofRMB43.0 million ($6.3 million) in 2008 compared to net income of RMB2.5 millionin 2007.

 

***Year ended December 31, 2007 compared to the year endedDecember 31, 2006***

 

*NetRevenue.    *Our net revenue increased 24.1% from RMB213.5 millionfor the year ended December 31, 2006 to RMB265.0 million for the yearended December 31, 2007.

 

*Onlinedegree programs.*    Ournet revenue from online degree programs increased 28.9% from RMB156.8 millionfor the year ended December 31, 2006 to RMB202.2 million for the yearended December 31, 2007. This increase was mainly attributable tofollowing factors:

 

·                  Our university partners’ online degreeprograms experienced significant growth in revenue students in the year ended December 31,2007 as compared to the year ended December 31, 2006. In aggregate, ouruniversity customers had approximately 51,000 more paying students during theyear ended December 31, 2007 than during the same period in 2006,representing a 36% increase over such period. This growth was primarilyattributable to more extensive marketing and recruiting efforts by ouruniversity partners to recruit new students and to encourage inactive studentsto renew their studies. This growth in revenue students was partially offset byincreased payments to independent learning centers by our university partners.The aggregate payment to third-party learning centers by our universitypartners in 2007 increased to 40% of gross tuition receipts in 2007, from 39% in2006. This increase was attributable mainly to increases in demand byuniversities for services provided by a limited number of learning centers.

 

·                  A non-recurring RMB8.4 million compensation by ouruniversity partners during the fourth quarter for the over spending by theonline education colleges, which in turn reduced the tuition fees payable to usduring the previous years.

 

*Internationalcurriculum programs*.    Netrevenue from our international curriculum programs increased approximately10.6% from RMB28.4 million for the year ended December 31, 2006 to RMB31.4million for the same period in 2007. This increase was mainly attributable tothe increase in student enrollment due to an expansion of our operations inthis business line and an increase in the number of overseas student academictours in fiscal year 2007 as compared to fiscal year 2006. Studentsparticipating in the BCIT program increased from 633 for the year ended December 31,2006 to 1,026 for the year ended December 31, 2007, while studentsparticipating in our FEC program decreased slightly from 4,069 for the yearended December 31, 2006 to 4,014 for the same period in 2007.

 

*Privateprimary and secondary schools.*    Net revenue for this businessline increased approximately 22.8% from RMB10.9 million for the year ended December 31,2006 to RMB13.4 million for the same period in 2007. This was primarily due toan increase in enrollments at our Anqing School as a result of including anadditional grade 9 to the school for the 2006-2007 academic year.

 

*Onlinetutoring*.    Netrevenue from our online tutoring business increased approximately 3.6% fromRMB17.4 million for the year ended December 31, 2006 to RMB18.0 millionfor the year ended December 31, 2007. The increase was mostly

 

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attributableto the development of a sales channel for our online tutoring services throughLenovo Group Limited, a personal computer manufacturer in China, whereby Lenovowill distribute these services through various lines of Lenovo personalcomputers.

 

*Costof Revenue.    *Our total cost of revenue increased approximately 20%from RMB80.3 million for the year ended December 31, 2006 to RMB96.3million for the year ended December 31, 2007. This increase was primarilydue to increased costs associated with our international curriculum programs,private primary and secondary schools and online tutoring program.

 

*Onlinedegree programs.*    Thecost of revenue for our online degree programs increased approximately 13.3%from RMB51.2 million for the year ended December 31, 2006 to RMB58.0million for the same period in December 31, 2007. The increase wasattributable primarily to an increase in the number of students enrolled in ouruniversity partners’ online degree programs and increased studentrecruiting-related expenses.  Our cost ofrevenue, which primarily comprises personnel related expenses, did not increaseto the same extent as our revenues did because our cost of revenue is moreclosely related to the number of online degree programs we service and thenumber of courses those online degree programs offer than the number ofstudents who are enrolled in those online degree programs. In contrast to ourcost of revenue, our service fees and revenue for online degree programs aredirectly associated with the number of students in our customers’ online degreeprograms.

 

*Internationalcurriculum programs*.    Ourcost of revenue for our English curriculum programs increased approximately36.6% from RMB17.2 million in the year ended December 31, 2006 to RMB23.5million for the same period in 2007. This increase was primarily attributableto the following: (i) we organized overseas training tours for theteachers and the senior management of the participating schools in the yearended December 31, 2007, while no such tours were conducted in the yearended December 31, 2006; (ii) we paid higher registration fees toBCIT in response to the higher number of participating students; and (iii) inresponse to more students enrolled in the programs, we hired additional nativeEnglish speaking teachers.

 

*Onlinetutoring programs.    *Our cost of revenue for our online tutoring programincreased approximately 12.3% from RMB3.5 million in the year ended December 31,2006 to RMB3.9 million in the year ended December 31, 2007. This increase wasthe result of our hiring of additional personnel and the payment of higheremployee benefits during the year ended December 31, 2007 than during thesame period in 2006.

 

*Privateprimary and secondary schools*.    Our cost of revenue for ourprivate primary and secondary schools increased approximately 29.8% from RMB8.4million for the year ended December 31, 2006 to RMB10.9 million for thesame period in 2007. This was mostly attributable to the growth in headcount ofteachers in our Anqing School.

 

*OperatingExpenses*.    Ouroperating expenses consist of general and administrative expenses, selling andmarketing expenses, and research and development expenses. Our operatingexpenses increased approximately 68.9% from RMB76.0 million for the year ended December 31,2006 to RMB128.4 million for the year ended December 31, 2007.

 

*Generaland administrative expenses*.    Our general andadministrative expenses increased approximately 57.4% from RMB48.8 million forthe year ended December 31, 2006 to RMB76.9 million for the year ended December 31,2007. The increase was mainly attributable to our hiring of additionalpersonnel due to expansion of our business and the demands imposed by theannual audit of our financial statements.****Tobetter manage and control our diversified and geographically dispersed businesslines, we significantly increased the size of our accounting staff and hiredmore senior management in accounting.

 

*Sellingand marketing expenses*.    Our selling and marketing expenses increasedapproximately 10.7% from RMB12.9 million for the year ended December 31,2006 to RMB14.3 million for the year ended December 31, 2007. The increasewas mainly attributable to an increase in the number of sales and marketingpersonnel in fiscal year 2007 in response to the continuous expansion of ourbusiness. The average headcount grew from 54 personnel in 2006 to 75 in 2007.

 

*Researchand development.    *Our research and development expenses increasedapproximately 47.4% from RMB14.3 million for the year ended December 31,2006 to RMB21.0 million for the year ended December 31, 2007. The growthwas driven primarily by increased research and development activities in someof the Company’s collaborative alliances, and increased bonus and compensationpaid to research and development personnel.

 

*Goodwillimpairment.* During the year ended December 31, 2007,we incurred a goodwill impairment charge of RMB16.2 million.****This impairment charge related to our FECprogram, as our management significantly adjusted downward our profitabilityforecast for this portion of our business. We expect future net revenue fromour FEC program to be lower than previously forecast as a result of lowerstudent enrollment and lower per student amounts payable to us under ourcontractual arrangements with participating schools. These developments are theresult of increased competition, increased bargaining power of the schoolsparticipating in the program and our expansion of the program into lessaffluent areas of China, where tuition fees tend to be lower. In addition tothese charges, we expect that these developments will adversely affect thefuture financial results for our FEC program.

 

*Interestincome*.    Werecorded RMB4.1 million****ininterest income in the year ended December 31, 2007****as compared to****RMB1.2 million for the year ended December 31, 2006.

 

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*Incometax provision.*    Ourincome tax provision increased by approximately 114.5% from RMB7.0 million forthe year ended December 31, 2006 to RMB15.0 million for the same period in2007. This increase was mainly attributable to following:

 

·                  Change in permanent tax rate used tocalculate long-term tax liabilities. On March 16, 2007, China adopted theEIT Law, which became effective on January 1, 2008, pursuant to which thestatutory tax rate for all enterprises in China is 25% except for “high and newtechnology enterprises strongly supported by the State,” which enjoy afavorable tax rate of 15%. Most of our subsidiaries and affiliate companieswere qualified under prior tax laws and regulations as “high and new technologyenterprises,” and therefore were subject to only a 15% rate.****However, as the procedures for obtainingclassification as “high and new technology enterprises strongly supported bythe State” have not yet been finalized, we cannot assure you that any of oursubsidiaries or affiliated companies currently enjoying preferential tax rateswill be approved as “high and new technology enterprises strongly supported bythe State” entitled to preferential tax treatments. We expect that ourapplicable subsidiaries and affiliated companies will re-apply for the “high andnew technology enterprises strongly supported by the State” status once theapproval procedure is promulgated. Under applicable accounting rules, however,until these subsidiaries and affiliated companies receive official approval forthis status, they must use the statutory 25% tax rate in their calculation oftheir deferred tax balances.

 

·                  The adoption of FIN48 resulted in a totaltax provision of RMB0.6 million for the year ended December 31, 2007.

 

*Decreasein income.*   Ourincome from operations decreased by approximately 29.6%from RMB57.2 million inthe year ended December 31, 2006 to RMB40.3 million in the year ended December 31,2007. This decrease was primarily attributable to a goodwill impairment loss ofRMB16.2****million****and an accounts receivable write-off ofRMB7.0 million in the year ended 2007.

 

*Minorityinterest*.    Ourminority interest increased by 6.6% from RMB23.6 million in the year ended December 31,2006 to RMB25.1 million in the year ended December 31, 2007.  This increase was primarily due to improvedperformance of our majority owned subsidiaries.

 

B.             Liquidity and Capital Resources

 

To date, we have financedour operations primarily through cash flows from operations, convertible debtand equity contributions by our shareholders. As of December 31, 2008, wehad RMB353.9 million ($51.9 million) in cash and cash equivalents,respectively, and no borrowings. Our cash and cash equivalents primarilyconsist of cash on hand, demand deposits and term deposits with remainingmaturities of three months or less at the time of purchase that are placed withbanks and other financial institutions. A portion of the cash balances of ourtwo Chinese affiliated entities and their subsidiaries may be paid to us pursuantto our contractual arrangements with these two entities and their subsidiariesfor our technical and teaching support, enrollment system and other services.We may fund the cash needs of our Chinese affiliated entities from time to timethrough loan arrangements with intermediary banks, which provide loans to theChinese affiliated entities in amounts equal to corresponding cash depositsthat we make with the banks.

 

We anticipate that ourfuture capital expenditures will be approximately RMB91.4 million and will beprimarily for the construction of new campuses and related improvements at ourAnqing School, Pingdingshan School and Jinzhou School (Southern Campus).  We have not encountered any difficultiesmeeting our cash obligations to date. Since we do not expect making additional significant capitalexpenditures through the end of 2010, we believe that our current cash and cashequivalents and anticipated future cash flows from operations, includingrevenue from increased student enrollment at our Anqing School beginning in thefall of 2009, will be sufficient to meet our presently anticipated cash needs. ** **Wemay, however, require additional cash due to changing business conditions orother future developments, including any investments or acquisitions we maydecide to pursue. If our existing cash is insufficient to meet ourrequirements, we may seek to sell additional equity securities or debtsecurities or borrow from lending institutions.

 

We had capitalcommitments related to the acquisition and further expansion at our AnqingSchool (approximately RMB38.2 million) and Jinzhou School (Southern Campus)(approximately RMB64.8 million) as of December 31, 2008.   We anticipate funding the outstandingcapital commitment related to our Anqing School over the next 36 months.  However, due to the ongoing delays that haveprevented construction at our Jinzhou School (Southern Campus), we arecurrently unable to estimate when the outstanding RMB64.8 million capitalcommitment will be paid.

 

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The following table setsforth a summary of our cash flows for the periods indicated:

 
| ** **                                          | ** ** | **Years  ended December 31,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------|------------|
| ** **                                          | ** ** | **2006**                           | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                                          | ** ** | **RMB**                            | ** ** | **RMB** | ** ** | **RMB** | ** ** | **$** | ** ** |
| ** **                                          | ** ** | **(In  thousands)**                | ** ** |
| Net cash (used in) provided by operating activities |       | 82,798                             |       | 83,127 |   | 54,707 |   | 8,020 |   |
| Net cash (used in) investing activities             |       | (82,776                            | )          | (95,899 | ) | (110,485 | ) | (16,194 | ) |
| Net cash (used in) provided by financing activities |       | (6,808                             | )          | 366,501 |   | (68,221 | ) | (9,998 | ) |
| Effect of exchange rate changes                     |       | (811                               | )          | (4,930 | ) | (19,182 | ) | (2,815 | ) |
| Net changes in cash and cash equivalents            |       | (7,597                             | )          | 348,799 |   | (143,181 | ) | (20,987 | ) |
| Cash and cash equivalents at beginning of period    |       | 155,912                            |       | 148,315 |   | 497,114 |   | 72,864 |   |
| Cash and cash equivalents at end of period          |       | 148,315                            |       | 497,114 |   | 353,933 |   | 51,877 |   |

 

***Operating Activities***

 

In the year ended December 31,2008, we generated positive cash flow from operating activities of RMB54.7million ($8.0 million), which was primarily due to our net loss of RMB43.0million, adjusted by the add-back of non-cash items RMB127.8 million from anumber of factors, including minority interest of RMB36.4 million, share-basedcompensation expenses of RMB5.2 million, depreciation of RMB12.2 million,goodwill and intangible assets impairment of RMB70.1 million, and amortizationof acquired intangible assets of RMB8.7 million. These positive cash flows werealso offset by aggregate changes in our current assets and liabilities ofRMB30.1 million, which included a RMB10.0 million increase in accrued expensesand other current liabilities due to the growth of our business and increasedaccrued employee payroll and welfare benefits, a RMB10.8 million increase inincome tax and other taxes payable due to increased profitability of several ofour subsidiaries, such as CMR Web and Dongcai, and a RMB15.2 million increasein deferred revenue due to an increase in revenue. Those positive factors werepartially offset by changes in growth in amounts due from related parties ofRMB45.0 million and a RMB14.7 increase in accounts receivable.** **Theincrease in amounts due from related parties reflected higher service feespayable to us by our university partners in the year ended December 31,2008 than those paid to us in the same period in 2007.

 

In the year ended December 31,2007, we generated positive cash flow from operating activities of RMB83.1million, which was primarily derived from our net income of RMB2.5 million,plus additional positive cash flow of RMB70.5 million from a number of factors,including minority interest of RMB25.1 million, share-based compensationexpenses of RMB3.6 million, depreciation of RMB8.2 million, goodwill impairmentof RMB16.2 million, and amortization of acquired intangible assets of RMB8.5million. These positive cash flows were also derived from aggregate changes inour current assets and liabilities of RMB10.1 million, which included a RMB20.9million increase in accrued expenses and other current liabilities, a RMB25.0million increase in amounts due to related parties, a RMB7.9 million increasein deferred revenue and a RMB11.3 decrease in accounts receivable. Thosepositive factors were partially offset by changes in growth in amounts due fromrelated parties of RMB52.5 million**. **The increase in amounts due fromrelated parties reflected higher service fees payable to us by our universitypartners in the year ended December 31, 2007 than those paid to us in thesame period in 2006.

 

In the year ended December 31,2006, we generated positive cash flow from operating activities ofRMB82.8 million. This increase in net cash provided by operatingactivities was attributable to our net income of RMB25.5 million, adjustedpositively by RMB43.0 million for a number of factors, including primarilyshare-based compensation of RMB2.7 million, depreciation of RMB8.2 millionand amortization of RMB8.8 million. Cash provided by operating activities wasfurther increased by aggregate changes in our current assets and liabilities ofRMB14.3 million, including primarily increases in our deferred revenue due tohigher service fees we received from our university partners in 2006 ascompared to 2005 and increases in our income tax payables and accountspayables, which were offset in part by other factors including decreases in ouraccounts receivables and deferred tax liabilities. Our amortization anddepreciation expenses were higher than in the previous year, primarily becauseof our increased amortizable and depreciable assets following the acquisitionof our interest in the collaborative alliance with China AgriculturalUniversity online degree program in November 2005, our acquisitions of theFEC program in September 2006 and our acquisition of the BCIT program in February 2006.

 

***Investing Activities***

 

In the year ended December 31,2008, net cash used in investing activities was RMB110.5 million ($16.2million), which is primarily related to our purchase of additional term depositproducts in the total amount of RMB57.5 million, our acquisition of additionalequity interests in our subsidiaries in the amount of RMB6.7 million, ourdeposits paid for acquisition of property and equipment in amount of RMB8.7million, and our investment in purchase of property and equipment in the amountof RMB36.3 million.

 

In the year ended December 31,2007, net cash used in investing activities was RMB95.9 million, which isprimarily related to our purchase of office space for our new headquarters inthe amount of RMB31 million, to our acquisition of additional equity interestsin our subsidiaries in the amount of RMB22.5 million and to our investment inthe construction of our Anqing School in the amount of RMB27.1 million.

 

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Net cash used ininvesting activities was RMB82.8 million for the year ended December 31,2006.  Net cash used in investingactivities in 2006 related primarily to our purchase of business, net of cashacquired of RMB30.7 million, which related to our acquisition of interests inthe China Agricultural University online degree program and our FEC program aswell as our purchase of land use rights and property and equipment ofRMB37.6 million, primarily in connection with our private primary andsecondary schools.

 

***Financing Activities***

 

Net cash used byfinancing activities was RMB68.2 million ($10.0 million) for the year ended December 31,2008. This is attributable primarily to the repurchase of ordinary shares inthe amount of RMB34.2 million and repayment of a long term loan in the amountof RMB25.7 million and cash dividends paid to minority shareholders RMB11.3million during this period. Net cash provided by financing activities wasRMB366.5 million for the year ended December 31, 2007. This isattributable primarily to the RMB348.8 million in net proceeds that we receivedfrom our initial public offering, which was completed in this period. Net cashused in financing activities was RMB6.8 million for the year ended December 31,2006.  Net cash used in financingactivities in 2006 was primarily attributable to cash dividends of RMB12.9million paid to some of our shareholders, which was partially offset by capitalcontributions of RMB6.0 million by other shareholders.

 

**CapitalExpenditures**

 

We made capitalexpenditures of RMB37.6 million, RMB71.9million and RMB36.5 million ($5.3million) for the years ended December 31, 2006, 2007 and 2008,respectively. These capital expenditures were primarily for the acquisition ofland and buildings at our Pingdingshan School, Anqing School and JingzhouSchool (Southern Campus), for additional office space relating to our onlinedegree programs and for a new office building to house our corporateheadquarters. Each of our three private schools (Pingdingshan School, AnqingSchool and Jingzhou School (Southern Campus)) has associated properties that weeither own or lease. We estimate that capital expenditures for the remainder offiscal year 2009 will be approximately RMB41.0 million for new campuses andimprovements at our Anqing School (RMB37.3million) and Pingdingshan School(RMB3.7million).  As discussed above,because of the ongoing delays that have prevented construction at our JinzhouSchool (Southern Campus), we do not currently anticipate incurring any capitalexpenditures during the remainder of fiscal year 2009 at the Jinzhou School(Southern Campus).

 

C.             Research and Development, Patents andLicenses, etc.

 

**IntellectualProperty and Proprietary Rights**

 

We regard our copyrights,trademarks, trade secrets and other intellectual property rights as critical toour business. We rely on trademark and copyright law, trade secret protection,non-competition and confidentiality and/or licensing agreements with ourexecutive officers, clients, contractors and others to protect our intellectualproperty rights. We have registered our *chinaedu.com*,*prcedu.com* and *chinaedu.net* Internet domain names, someof which are held by our Chinese affiliated entities.

 

We have directly, orindirectly through our Chinese affiliated entities, registered for trademarkprotection for certain intellectual property relating to our brand and ourwebsites with the Trademark Office of the Chinese State Administrationfor Industry and Commerce. We have also registered some of the computersoftware that we have developed for copyright protection with the ChineseNational Copyright Office.

 

We, together with ouruniversity customers, have developed courseware for our university partners’online degree programs. All of this courseware is proprietary to us or thecollaborative alliances we form with these universities.

 

Our intellectual propertyis subject to risks of theft and other unauthorized use, and our ability to protectour intellectual property from unauthorized use is limited. In addition, we maybe subject to claims that we have infringed the intellectual property rights ofothers. See “Item 3. Key Information—D. Risk Factors—Risks Related to OurBusiness—If we are unable to prevent others from using our intellectualproperty, our business may be materially and adversely affected” and “—We maybe exposed to infringement or misappropriation claims by third parties, which,if successful, could cause us to pay significant damage awards.”

 

**Technology**

 

We provide end-to-endtechnology solutions to our customers providing online degree programs. Ourtechnology consists of a series of systems and tools, including our LearningManagement System, which enables the online universities to manage the entirestudent lifecycle from student application to graduation by providing systemsupport to the student’s learning process and the university staff’s dailymanagement process. We also provide a learning content creation and managementsystem, which enables the team working on courseware development to bring thecourseware from the concept and design stage to production and implementation,as well as manage courseware content, and various delivery and managementsystems and tools. Our strategy is to develop, integrate and deliver the mostsuitable, stable, efficient and cost-effective systems to our customers in theonline education market in China. Our in-depth understanding of the onlineeducation market and the operational model of online education programs helpsus develop technology solutions suited to the needs of our current and futurecustomers. Our accumulated experience and proprietary technology have furtherstrengthened our leading position in the online education service market.

 

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Our technology is basedon a Microsoft platform. Microsoft technologies are utilized and deployed accordingto architecture and usage models. Application software and databases arefurther supported by storage and back-up technologies. In addition to providingsoftware solutions, along with maintenance support and customized development,we provide centralized system and network management services to our onlinedegree program customers. Our production servers are hosted at a data centeroperated by China Telecom. In addition to the services provided by the datacenter (such as uninterrupted power supply), the servers are supported byadvanced technologies to ensure security, scalability, reliability andexpandability. Additionally, our bandwidth is scalable to accommodate spikes inuser activity.

 

Using advancedtechnologies, our system can identify errors and isolate failed serversautomatically to minimize the interruption of our customers’ access to ourservices. Our websites are hosted at a third party facility in Beijing. Thisfacility provides redundant utility systems, a back-up electric generator and24-hour server support. All our servers have redundant power supplies tomaximize system and date availability. We regularly back-up our database on aserver hosted at an Internet data center to minimize the impact of data lossdue to system failures and we maintain back-up files offsite to facilitatedisaster recovery.

 

D.            Trend Information

 

Other than as disclosedelsewhere in this annual report, we are not aware of any trends, uncertainties,demands, commitments or events that are reasonably likely to have a materialadverse effect on our net revenues, income, profitability, liquidity or capitalresources, or that caused the disclosed financial information to be notnecessarily indicative of future operating results or financial conditions.

 

E.              Off-Balance Sheet Arrangements

 

We have not entered intoany financial guarantees or other commitments to guarantee the paymentobligations of any third parties. Other than the warrants, we have not enteredinto any other derivative contracts that are indexed to our own shares andclassified as shareholders’ equity, or that are not reflected in ourconsolidated financial statements. In addition, we do not have any retained orcontingent interest in assets transferred to an unconsolidated entity thatserves as credit, liquidity or market risk support to such entity. Furthermore,we do not have any variable interest in any unconsolidated entity that providesfinancing, liquidity, market risk or credit support to us or engages inleasing, hedging or research and development services with us.

 

FIN 46R requires avariable interest entity to be consolidated by the primary beneficiary of suchentity. An entity is considered to be a variable interest entity if certainconditions are present, including where the equity investors in the entity donot have the characteristics of a controlling financial interest or do not havesufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties. As a result of ourvarious agreements with Xiandai Technology and Hongcheng Education and theirrespective shareholders, we are considered the primary beneficiary of XiandaiTechnology and Hongcheng Education, and these companies and all theirsubsidiaries have been consolidated in our financial statements. Allsignificant transactions and balances between us, our subsidiaries, XiandaiTechnology and Hongcheng Education have been eliminated upon consolidation.

 

F.              Tabular Disclosure of ContractualObligations

 

**ContractualObligations**

 

The following table setsforth our contractual obligations and commercial commitments as of December 31,2008.

 
|                                                              |   | **Payment  Due by December 31** |       |
|-------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                              |   | **Total**                            | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **Thereafter** |   |
|                                                              |   | **(In  RMB thousands)**              |       |
| Operating lease obligations                                       |   | 12,295                               |       | 6,408 |   | 3,719 |   | 1,422 |   | 746 |   | — |   | — |   |
| Funding obligations to university partners(1)                     |   | 5,000                                |       | 5,000 |   | — |   | — |   | — |   | — |   | — |   |
| Facility fees to a middle school(2)                               |   | 18,800                               |       | 1,000 |   | 1,000 |   | 1,200 |   | 1,200 |   | 1,200 |   | 13,200 |   |
| Capital obligations for private primary and secondary  schools(3) |   | 102,926                              |       | 37,252 |   | 923 |   | — |   | — |   | — |   | — |   |
| Unrecognized tax benefits(4)                                      |   | 5,473                                |       | — |   | — |   | — |   | — |   | — |   | — |   |

 

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(1) We estimate that this amount will be required to fund the operating cost forour collaborative alliances with university partners. We are not obligated tomake any payments at specific times, so we are unable to estimate when we willbe required to make these contributions.

(2) These amounts represent the user fees that our Anqing School will pay to theFourth Middle School of Anqing for the use of certain facilities of the FourthMiddle School of Anqing over the period set out in the related agreement.

(3) These amounts represent the remaining portion of our capital commitments to theAnqing government and the Jingzhou government for the expansion of the AnqingSchool (approximately RMB38.2 million) and the Jingzhou School (SouthernCampus) (approximately RMB64.8 million), respectively, of which RMB7.7 millionhas been contracted for with third-party contractors in 2008. Since we do not knowwhen construction will begin at the Jingzhou School, we are unable toreasonably estimate the timing of the capital commitment for the JingzhouSchool.

(4) This amount represents unrecognized tax benefits pursuant to FIN 48. Sincethere is a high degree of uncertainty regarding the timing of future cashoutflows, we are unable to make reasonable estimates regarding the timing ofsettlement with the respective tax authority.

 

Other than thecontractual obligations set forth above, we do not have any other long-termdebt obligations, operating lease obligations, purchase obligations or otherlong-term liabilities.

 

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G.             Safe Harbor

 

This annual reportcontains forward-looking statements that involve risks and uncertainties. Allstatements other than statements of historical facts are forward-lookingstatements. These statements involve known and unknown risks, uncertainties andother factors that may cause our actual results, performance or achievements tobe materially different from those expressed or implied by the forward-lookingstatements.

 

You can identify theseforward-looking statements by words or phrases such as “may,” “will,” “expect,”“is expected to,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,”“is/are likely to” or other similar expressions. We have based theseforward-looking statements largely on our current expectations and projectionsabout future events and financial trends that we believe may affect ourfinancial condition, results of operations, business strategy and financialneeds. These forward-looking statements include:

 

·                  our anticipated growth strategies;

 

·                  our future business development, results of operationsand financial condition;

 

·                  expected changes in our revenues and certain cost andexpense items;

 

·                  our ability to increase student enrollments and coursefees and expand program, service and product offerings;

 

·                  competition in the language training, testpreparation, primary and secondary education, educational content, software andother technology development and online education markets;

 

·                  risks associated with our offering of new educationalprograms, services and products and the expansion of our geographic reach;

 

·                  the expected increase in expenditures on education inChina; and

 

·                  PRC laws, regulations and policies relating to privateeducation and providers of private educational services, including recentchanges in the government regulatory environment related to our internationalcurriculum program; and

 

·                  general economic, business and other market conditionsin the PRC and worldwide, including the ability of the general global economyto recover timely from the current economic downturn..

 

You should readthoroughly this annual report and the documents that we refer to herein withthe understanding that our actual future results may be materially differentfrom and/or worse than what we expect. We qualify all of our forward-lookingstatements by these cautionary statements. Other sections of this annual reportinclude additional factors which could adversely impact our business andfinancial performance. Moreover, we operate in an evolving environment. Newrisk factors emerge from time to time and it is not possible for our managementto predict all risk factors, nor can we assess the impact of all factors on ourbusiness or the extent to which any factor, or combination of factors, maycause actual results to differ materially from those contained in anyforward-looking statements.

 

This annual report alsocontains third-party data relating to the education market in China thatincludes projections based on a number of assumptions. The education market maynot grow at the rates projected by market data, or at all. The failure of thismarket to grow at the projected rates may have a material adverse effect on ourbusiness and the market price of our ADSs. Furthermore, if any one or more ofthe assumptions underlying the market data turns out to be incorrect, actualresults may differ from the projections based on these assumptions. You shouldnot place undue reliance on these forward-looking statements.

 

You should not rely uponforward-looking statements as predictions of future events. The forward-lookingstatements made in this annual report relate only to events or information asof the date on which the statements are made in this annual report. Weundertake no obligation to update or revise any forward-looking statements,whether as a result of new information, future events or otherwise.

 

## **Item 6.  Directors, Senior Management and Employees**

##  

A.  Directors and Senior Management

 

**Directorsand Executive Officers**

 

Members of our board ofdirectors are elected by our shareholders. Our executive officers are appointedby, and serve at the discretion of, our board of directors.

 

The following table setsforth information concerning our directors and executive officers. The businessaddress of each of our directors and executive officers listed below is 4th Floor-A, GeHuaBuilding, No. 1 QinglongHutong, Dongcheng District, Beijing, 100007,People’s Republic of China.

 

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| **Name**      | ** ** | **Age** | ** ** | **Positions**                                    |
|---------------|------------|---------|------------|--------------------------------------------------|
| Julia Huang   |       | 40      |       | Chairman, Chief  Executive Officer               |
| Shawn Ding    |       | 44      |       | Director, President and  Chief Operating Officer |
| Zonglian Gu   |       | 53      |       | Director                                         |
| Samuel Yen    |       | 37      |       | Director                                         |
| Min Fan       |       | 43      |       | Director                                         |
| Amol Shah     |       | 34      |       | Director                                         |
| Tianwen Liu   |       | 46      |       | Director                                         |
| Lily Liu      |       | 33      |       | Chief Financial Officer                          |
| Changqing Xie |       | 45      |       | Vice President                                   |

 

***Julia Huang***has served as our chairman since September 2007and as our chief executive officer since June 2000. Prior to joining us,she was a senior manager at Ernst & Young Management Consulting (NewYork) Group from 1996 to 1999. Ms. Huang also served as a project managerat Merck & Co. from 1993 to 1995. Ms. Huang holds an MBA fromColumbia Business School with concentrations in finance and internationalbusiness and a master’s degree in chemical engineering and microbiology fromUniversity of Tennessee, Knoxville.

 

***Shawn Ding***has served as our director, president and chiefoperating officer since December 2004. Mr. Ding joined us in July 2001as our chief technology officer. From 2000 to 2001, Mr. Ding was the chieftechnology officer of Infostream Technologies Inc., a U.S. company specializingin the development and implementation of packaged and customized enterprise resourceplanning software. He also served as a director of Internet applicationdevelopment at Automatic Data Processing, Inc. from 1999 to 2000 and was adirector of system architecture at Prudential Insurance Company of America from1992 to 1998. Mr. Ding received a bachelor’s degree in environmentalscience from Peking University, a bachelor’s degree in computer science fromRutgers University, and a master’s degree in computer science from New JerseyInstitute of Technology.

 

***Zonglian Gu***has served as one of our directors since March 2005.Mr. Gu joined CMR Web as general manager in November 2001. Mr. Gualso currently serves as the dean of Renmin University of China’s OnlineEducation College, and was previously a professor at Renmin University of Chinaand served as the vice dean of Renmin University of China Online EducationCollege and vice dean of the Adult Education College Department of RenminUniversity of China. Mr. Gu holds a bachelor’s degree in internationalpolitics from Renmin University of China and has over 19 years of experience inthe public education sector.

 

***Samuel Yen*** was elected as a director of our company in October 2007.Mr. Yen is the vice president of finance at Alibaba Group, a leadinge-commerce company operating online marketplaces for businesses and consumers.From 2004 to 2005, Mr. Yen served as financial controller and companysecretary of Dynasty Fine Wines Group Limited and prior to that Mr. Yenserved in various positions at PricewaterhouseCoopers and Arthur Andersen &Co., lastly as a senior manager. Mr. Yen received a bachelor’s degree incommerce from the University of Toronto and is a member of the AmericanInstitute of Certified Public Accountants, the Hong Kong Institute of CertifiedPublic Accountants, the Institute of Certified Management Accountants and theCFA Institute.

 

***Min Fan***was elected as a director of our company in October 2007.Mr. Fan is one of the co-founders and the current chief executive officerof Ctrip.com International Ltd., a leading travel services firm in China. From2000 to 2004, Mr. Fan served as Ctrip’s chief operating officer andexecutive vice president. Prior to founding Ctrip in 1999, Mr. Fan was thechief executive officer of Shanghai Travel Service Company, a leading domestictravel agency in China, and from 1990 to 1997 served in a number of seniormanagement positions at Shanghai New Asia Hotel Management Company. Mr. Fanholds a master’s and a bachelor’s degree from Shanghai Jiao Tong University andhas studied at the Lausanne Hotel Management School of Switzerland.

 

***Amol Shah***is Senior Vice President of Global Strategy for theMcGraw-Hill Companies. He oversees strategy development for the McGraw-HillCompanies and its business units. Mr. Shah also serves as Vice Presidentof McGraw-Hill Ventures, which makes equity investments in innovative, highgrowth companies that are complementary to McGraw-Hill’s traditional businesslines. Prior to joining the McGraw-Hill Companies, he served as a ManagingDirector at Novantas LLC, a strategy consulting firm, where he served as aleading advisor on growth strategies. Earlier in his career, Mr. Shahworked as a consultant specializing in financial services strategy for FirstManhattan Consulting Group. Mr. Shah earned his bachelor’s degree from theUniversity of Pennsylvania and The Wharton School with a dual degree inengineering and economics through the Jerome Fisher Program in Management &Technology. Mr. Shah also earned a MBA in finance from the ColumbiaBusiness School.

 

***Tianwen Liu***was elected as a director of our company in September 2008.Mr. Liu is the Chairman and Chief Executive Officer of iSoftStoneInformation Service Corporation. Mr. Liu founded iSoftStone, one of thefastest growing IT outsourcing companies in China. He has over 20 years ofexperience in the IT sector. Prior to iSoftStone, Mr. Liu co-foundedAsiaEC.com in 1999, and led the effort to build the company from the ground upand grow it to become China’s largest on-line office supply and servicesprovider. Prior to AsiaEC.com, Mr. Liu served as the General Manager ofSiemens Business Services and Siemens Nixdorf Information Technologies from1996-1999, where he was responsible for IT consulting, system integration, andoutsourcing businesses in China. Before that, Mr. Liu worked for severalconsulting and IT companies in the U.S.,

 

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including Bechtel andDEC. Mr. Liu holds a MBA from Massachusetts Institute of Technology, aswell as a Masters degree in Electrical Engineering from the University ofMassachusetts.

 

***Lily Liu***joined our company as Chief Financial Officer in October 2008.Prior to joining, she served as the Chief Financial Officer of MainOne Inc., aVice President at Lehman Brothers in Hong Kong, and an Associate at LehmanBrothers in New York and Hong Kong. From 2000 to 2001, Ms. Liu was VicePresident and Founder of Trulycustom Construction Inc. in Boston,Massachusetts. Ms. Liu received a bachelor’s degree in Mathematics andEconomics from Dartmouth College, and a MBA from Sloan School of Management atthe Massachusetts Institute of Technology.

 

***Changqing Xie*** has served as a vice president of our company since February 2005.Prior to joining us, Mr. Xie was the chief executive officer of WellentInstitute of Education International (Asia) Limited from January 2001 to January 2005.He served as a manager of Oriental Patron Financial Services Group from August 1997to December 2000. From January 1988 to August 1993, Mr. Xiewas a lecturer at Peking University. Mr. Xie received a master’s degree ingeography from Peking University and a MBA degree from the University ofGeorgia.

 

**EmploymentAgreements**

 

We have entered into employmentagreements with each of our executive officers. The terms of these agreementsare substantially similar to each other. Under these agreements, we have agreedto employ each of our executive officers for a period of three years, providedthat their respective employment relationship with our company may beterminated by us or the executive officer under certain circumstances. Theseagreements do not provide for any special termination or severance benefitsbeyond what is required under the relevant laws of China, nor do we have otherarrangements with these executive officers regarding such matters. Under theseagreements, each executive officer has agreed not to disclose our confidentialinformation and to abide by certain non-competition restrictions during his orher tenure with our company and for a period of two years thereafter.

 

B.  Compensation

 

**Compensationof Directors and Executive Officers**

 

For the year ended December 31,2008, we paid aggregate cash compensation of approximately RMB3.2 million($0.46 million) to our executive officers as a group, which includes allsalary, cash bonuses, and housing allowances paid by us. Other than the grantof options to purchase an aggregate of 8,922,560 of our ordinary shares, we didnot provide any other non-cash compensation to our executive officers as agroup. See “—Share-Based Compensation Plans” for additional information withrespect to these option grants. For the year ended December 31, 2008, wepaid aggregate cash compensation of approximately RMB0.2 million to our threeindependent directors for serving as directors. Other than the grant of options to purchase an aggregate of 60,000 ofour ordinary shares, we did not provide any other non-cash compensation to ournon-executive or independent directors.

 

**Stock-BasedCompensation Plans**

 

We amended our EquityIncentive Plan (as amended, the “Amended Equity Incentive Plan”) by holding anExtraordinary General Meeting on March 6, 2009. Our Amended EquityIncentive Plan  replaced the equityincentive plan adopted by us in November 2007, which had amended andrestated our original stock option plan adopted in March 2007. The AmendedEquity Incentive Plan provides for the grant of options as well as restrictedshares and restricted stock units, referred to as “awards.” The purpose of theplan is to attract and retain the best available personnel for positions ofsubstantial responsibility, provide additional incentive to employees,directors and consultants, and promote the success of our business.

 

*Administration.*    According to theamendments to our Amended Equity Incentive Plan, which were approved by ourshareholders at the Extraordinary General Meeting on March 6, 2009, thecompensation committee of our board of directors will administer the plan.  Subject to the provisions of the AmendedEquity Incentive Plan, the compensation committee has the authority, in itssole discretion to, among other things, amend or modify outstanding awardsunder the plan, only in ways that will not be adverse to the award/optionholder, including, without limitation, the repricing of “underwater” options(i.e., options with an exercise price that is higher than the current tradingprice of our common shares) or the replacement of an option with cash or otheraward type that would be treated as a repricing under the rules of thestock exchange on which the shares are listed. In addition, our shareholders also approved an amendment to the planthat eliminated the requirement that subsequent amendments to the AmendedEquity Incentive Plan be submitted for shareholder approval (to the extent suchshareholder approval would have been required under the stock exchange on whichour securities are listed).

 

*OptionTerms.*    Shareoptions granted under our Amended Equity Incentive Plan may be incentive shareoptions, or ISOs, which are intended to qualify for favorable U.S. federalincome tax treatment under the provisions of Section 422 of theU.S. Internal Revenue Code of 1986, as amended, or non-qualified shareoptions, or NSOs, which do not so qualify. Under our Amended Equity IncentivePlan, the exercise price of ISOs cannot be less than the fair market value ofour ordinary shares on the date of grant. However, in the case of an ISOgranted to a grantee who at the time of grant owned shares possessing more than10.0% of the combined voting power of all classes of our share capital(including any equity of any of our Chinese subsidiaries), the option price maynot be less than 110.0% of the fair market value of our ordinary shares on thedate of grant of such ISO and the option period may not be greater than fiveyears from the date of grant. The exercise price for NSOs is determined by theboard of directors but may not be less than the fair market value of ordinaryshares on the date of grant.

 

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*Eligibility.    *Under our Amended Equity Incentive Plan,awards may be issued to employees, non-employee directors or consultants of ourcompany or our Chinese subsidiaries, although ISOs may only be issued to ouremployees or the employees of our Chinese subsidiaries.

 

*OptionExercise and Termination of Awards.*    Share options granted underthe plan may be exercised within the option period specified by our board ofdirectors or the compensation committee (after it is established), which shallnot be more than ten years from the date of option grant. If an option holder’sservice terminates due to the option holder’s death or disability, the unvestedportion of a share option is forfeited and the vested portion is stillexercisable for a period of one year following the option holder’s death ordisability or until the expiration of the option period (if sooner). If anoption holder’s service ends for reasons other than death or disability, theunvested portion of a share option will be forfeited and the vested portionwill be exercisable for a period of ninety days following the option holder’stermination or until the expiration of the option period (if sooner). Awards ofrestricted stock or restricted stock units that are unvested will be forfeitedat the time of termination of service.

 

*ThirdParty Acquisition.    *If a third party acquires us through a merger orconsolidation transaction in which we are not the surviving corporation, alloutstanding share options will be substituted by the surviving or resultingcorporation. We are authorized to cancel any outstanding options upon theeffective date of any such transaction, provided that we notify each optionholder of our intention to do so at least 30 days prior to the effective dateof the transaction and permit the optionees to exercise their options in fullduring this period. We are also authorized to cancel any outstanding awards andpay or deliver to the holder an amount in cash or securities having a valueequal to the formula or fixed price per share paid to shareholders in the caseof restricted stock or restricted stock units. In the case of options, theholder will receive an amount equal to the product of the number of sharessubject to the option multiplied by the amount, if any, by which the formula orfixed price per share paid to shareholders in the transaction exceeds theoption exercise price applicable to such award.

 

*Amendmentand Termination of Plan.*    Our board of directors may at any time amend,suspend or terminate the Amended Equity Incentive Plan without shareholderapproval. However, any amendment, suspension or termination of the plan may notadversely affect awards already granted without consent of the recipient ofsuch awards. Unless terminated earlier, the Amended Equity Incentive Plan shallcontinue in effect for a term of ten years from the date of adoption.

 

As of the date of thisannual report, our board of directors has authorized the issuance of up to15,116,083 ordinary shares upon exercise of awards granted under our equityincentive plan, with an increase each year equal to two percent of theoutstanding number of shares as of the immediately preceding year ended December 31.As of the date of this annual report, options to purchase****10,142,537 ordinary shares wereoutstanding and options to purchase 1,283,698 ordinary shares remainedavailable for future option grants.****Thefollowing table summarizes, as of the date of this annual report, the optiongrants made to our directors and executive officers pursuant to our March 2007,November 2007 and March 2009 option plans:

 
| **Name**      | ** ** | **Ordinary  Shares Underlying Option********Grant** | ** ** | **Exercise  Price********($/share)** | ** ** | **Grant  Date** | ** **             | **Expiration  Date** | ** **             |
|---------------|------------|-----------------------------------------------------|------------|--------------------------------------|------------|-----------------|------------------------|----------------------|------------------------|
| Julia Huang   |       | 250,000(1)                                          |       | 1.80                                 | (4)        |            | April 23, 2007    |                 | April 23, 2017    |   |
|          |       | 180,000(1)                                          |       | 1.80                                 | (4)        |            | March 19, 2008    |                 | March 19, 2018    |   |
|          |       | 60,000(1)                                           |       | 1.80                                 |       |            | May 18, 2009      |                 | May 18, 2019      |   |
| Shawn Ding    |       | 250,000(2)                                          |       | 1.80                                 | (4)        |            | April 23, 2007    |                 | April 23, 2017    |   |
|          |       | 180,000(2)                                          |       | 1.80                                 | (4)        |            | March 19, 2008    |                 | March 19, 2018    |   |
|          |       | 60,000(2)                                           |       | 1.80                                 |       |            | May 18, 2009      |                 | May 18, 2019      |   |
| Zonglian Gu   |       | *                                                   |       | 1.80                                 | (4)        |            | April 23, 2007    |                 | April 23, 2017    |   |
| Changqing Xie |       | *                                                   |       | 1.80                                 | (4)        |            | March 19, 2008    |                 | March 19, 2018    |   |
| Samuel Yen    |       | *                                                   |       | 1.80                                 | (4)        |            | December 14, 2007 |                 | December 14, 2017 |   |
| Min Fan       |       | *                                                   |       | 1.80                                 | (4)        |            | December 14, 2007 |                 | December 14, 2017 |   |
| Lily Liu      |       | *                                                   |       | 1.27                                 |       |            | August 15, 2008   |                 | August 15, 2018   |   |
|          |       | *(3)                                                |       | 1.80                                 |       |            | May 18, 2009      |                 | May 18, 2019      |   |
| Tianwen Liu   |       | *                                                   |       | 1.56                                 |       |            | September 9 2008  |                 | September 9, 2018 |   |

 

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*  Director or officer beneficially owns lessthan 1% of our ordinary shares outstanding as of the date of this annualreport, including ordinary shares convertible from our preferred shares, aswell as the ordinary shares underlying options exercisable by such personwithin 60 days.

(1) Ms. Huang designated the stock options that she beneficially owns to SouthLead Technology Limited, a British Virgin Islands company.

(2) Mr. Ding designated the stock options that he beneficially owns to MoralKnown Industrial Limited, a British Virgin Islands company.

(3) Ms. Liu designated the stock options that she beneficially owns toMeritlink Group Limited, a British Virgin Islands company.

(4) Exercise price was re-priced to $1.8 per share at the fair market value on May 18,2009.

 

**Pensionand Similar Benefits**

 

Full time employees ofour company in the PRC participate in a government-mandated multi-employerdefined contribution plan pursuant to which certain pension benefits, medicalcare, unemployment insurance, employee housing fund and other welfare benefitsare provided to employees. Chinese labor regulations require the Group toaccrue for these benefits based on certain percentages of the employees’salaries. The total amount we have accrued under such employee benefits plansas of December 31, 2008 was approximately RMB20.2 million ($3.0 million).

 

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C.  Board Practices

 

**BoardComposition**

 

Our board of directorsconsists of seven directors, three of whom satisfy the “independence”requirements of the NASDAQcorporate governance rules and the SECregulations. We will rely on a NASDAQrule that permits a foreign private issuer to beexempted from the requirement that a majority of its board of directors must be“independent.” We intend to comply, however, with the other NASDAQcorporate governance rules, inparticular, the independence requirements for the relevant board committeesdiscussed below.  There are no familyrelationships between any of our directors and executive officers.

 

**Committeesof the Board of Directors**

 

To enhance our corporategovernance, we have established three committees under the board of directors:the audit committee, the compensation committee and the nominating committee.We adopted charters for each of these committees. The committees have thefollowing functions and members:

 

***Audit Committee***

 

Our audit committeecharter requires that the members of the audit committee satisfy applicableNASDAQcorporategovernance rules on independence. Our audit committee consists of SamuelYen, Min Fan and Tianwen Liu, each of whom is considered independent.  Mr. Yen serves as chairman of thecommittee.

 

Our audit committee isresponsible for, among other things:

 

·                  the appointment, evaluation,compensation, oversight and termination of the work of our independentregistered public accounting firm (including the resolution of disagreementsbetween our management and the independent registered public accounting firmregarding financial reporting);

 

·                  ensuring that it receives from our independentregistered public accounting firm a formal written statement attesting to theregistered public accounting firm’s independence and describing allrelationships between our independent registered public accounting firm and us;

 

·                  pre-approving both audit and non-audit services,including tax services, to be provided by our independent registered publicaccounting firm in accordance with NASDAQ rules;

 

·                  reviewing our annual audited financial statements and,if deemed appropriate by the audit committee, other publicly disclosedfinancial information;

 

·                  reviewing with our independent registered publicaccounting firm all critical accounting policies and practices to be used by usin preparing our financial statements, all alternative treatments of financialinformation within U.S. GAAP, and other material communications betweenour independent registered public accounting firm and management;

 

·                  reviewing our policies with respect to risk assessmentand risk management;

 

·                  reviewing, with management and counsel, any legalmatters that may have a material impact on us and any material reports orinquiries from regulatory or governmental agencies; and

 

·                  ensuring that we have established procedures for thereceipt, retention and treatment of complaints regarding accounting, internalaccounting controls, auditing matters or potential violations of law, and theconfidential, anonymous submission by our employees of concerns regardingquestionable accounting or auditing matters or potential violations of law.

 

***Compensation Committee***

 

Our compensationcommittee charter requires that the members of the compensation committeesatisfy applicable NASDAQcorporate governance rules on independence. Ourcompensation committee consists of Samuel Yen, Min Fan and Tianwen Liu, each ofwhom is considered independent.  TianwenLiu serves as chairman of the committee.** **Our compensation committee assiststhe board in reviewing and approving the compensation structure of ourdirectors and executive officers, including all forms of compensation to beprovided to our directors and executive officers. In addition, the compensationcommittee reviews stock compensation arrangements for all of our otheremployees. Members of the compensation committee will not be prohibited fromdirect involvement in determining their own compensation. Our chief executiveofficer is not permitted to be present at any committee meeting during whichhis or her compensation is deliberated. Our compensation committee isresponsible for, among other things:

 

·                  approving and overseeing the totalcompensation package for our executives;

 

·                  reviewing and making recommendations to the board withrespect to the compensation of our directors;

 

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·                  reviewing and approving corporate goals and objectivesrelevant to the compensation of our chief executive officer, evaluating theperformance of our chief executive officer in light of those goals andobjectives, and setting the compensation level of our chief executive officerbased on this evaluation;

 

·                  reviewing the results of, and procedures for, theevaluation of the performance of other executive officers;

 

·                  reviewing periodically and making recommendations tothe board regarding any long-term incentive compensation or equity plans,programs or similar arrangements, and administering these plans;

 

·                  reviewing and making recommendations to the boardregarding all new employment, consulting, retirement and severance agreementsand arrangements proposed for our executives; and

 

·                  selecting peer groups of companies to be used forpurposes of determining competitive compensation packages.

 

***Nominating Committee***

 

Our nominating committeecharter requires that the members of the nominating and corporate governancecommittee satisfy applicable NASDAQ corporate governance rules onindependence. Our nominating and corporate governance committee consists ofSamuel Yen, Min Fan and Tianwen Liu, each of whom is consideredindependent.  Min Fan serves as chairmanof the committee.****The nominatingcommittee assists the board in selecting individuals qualified to become ourdirectors and in determining the composition of the board and its committees.Our nominating committee is responsible for, among other things:

 

·                  selecting and recommending to the boardnominees for election or re-election to the board; and

 

·                  reviewing annually with the board the currentcomposition of the board with regards to characteristics such as independence,skills, experience, age and availability of service to us.

 

***Code of Business Conduct and Ethics***

 

Our board of directorshas adopted a code of business conduct and ethics, which will be applicable toall of our directors, officers and employees. We have made our code of businessconduct and ethics publicly available on our website at *www.chinaedu.net*.

 

**Dutiesof Directors**

 

Under Cayman Islands law,our directors have a duty to act honestly, in good faith and with a view to ourbest interests. Our directors also have a duty to exercise the care, diligenceand skills that a reasonably prudent person would exercise in comparablecircumstances. In fulfilling their duty of care to us, our directors mustensure compliance with our memorandum and articles of association. We have theright to seek damages if a duty owed by our directors is breached.

 

The functions and powersof our board of directors include, among others:

 

·                  supervising and directing the businessand affairs of our company in the interest, and for the benefit, of ourshareholders in order to enhance shareholder value over the long term;

 

·                  exercising its business judgment to act in a mannerwhich it reasonably believes to be in the best interests of our company andshareholders consistent with its fiduciary duties;

 

·                  reviewing and, where appropriate, approving our majorstrategic, financial and business objectives, plans and actions;

 

·                  establishing policies and principles for theselection, and possible succession planning, of directors, the chief executiveofficer and other senior management officers;

 

·                  convening shareholders’ annual general meetings andreporting its work to shareholders at such meetings;

 

·                  declaring dividends and distributions;

 

·                  appointing officers and determining the term of officeof the officers;

 

·                  exercising the borrowing powers of our company andmortgaging the property of our company; and

 

·                  approving the transfer of shares in our company,including the registering of such shares in our share register.

 

**InterestedTransactions**

 

A director may vote inrespect of any contract or transaction in which he is interested, provided thatthe nature and extent of the interest of any director in any such contract ortransaction shall be disclosed by him at or prior to the consideration and anyvote on that matter. A general notice or disclosure to the directors orotherwise contained in the minutes of a meeting or a written resolution of thedirectors or any committee of directors that a director is a shareholder of any

 

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specified firm or companyand is to be regarded as interested in any transaction with such firm orcompany will be sufficient disclosure, and, after such general notice, it willnot be necessary to give special notice relating to any particular transaction.

 

**Remunerationand Borrowing**

 

The directors maydetermine remuneration to be paid to the directors. The compensation committeewill assist the directors in reviewing and approving the compensation structurefor the directors. Subject to certain restrictions, the directors may exerciseall the powers of our company to borrow money and to mortgage or charge ourundertaking, property and uncalled capital or any part thereof and to issuedebentures, debenture stock and other securities whether outright or assecurity for any debt, liability or obligation of our company or of any thirdparty.

 

**Qualification**

 

A director is notrequired to hold any shares in our company in order to serve as a director.

 

**Terms ofDirectors and Executive Officers**

 

At each annual generalmeeting of the shareholders of our company, one-third of our directors at suchtime are required to retire from office and are eligible for re-election. Allof these directors will retain office until the close of such general meeting.

 

D.  Employees

 

We had 813 employees,1,078 employees and 1,434 employees as of December 31, 2006, 2007 and2008, respectively. ** **The increase in the number of ouremployees from 2006 to 2008 was primarily due to our acquisition of newbusinesses, establishment of collaborative alliances with new universitypartners, the increase in learning centers and the increase in general andadministrative employees as a result of becoming a public reportingcompany.  The following table sets forththe number of our employees categorized by function and the percentage of eachcategory of our total employees as of December 31, 2008.

 
| ** **                     | ** ** | **Employees** | ** ** | **Percentage** | ** ** |
|--------------------------------|------------|---------------|------------|----------------|------------|
| Operations and program support |       | 853           |       | 59.48          | %          |
| Management and administration  |       | 322           |       | 22.45          | %          |
| Research and development       |       | 168           |       | 11.72          | %          |
| Selling and marketing          |       | 91            |       | 6.35           | %          |
| **Total number of employees**  |       | 1,434         | ** ** | **100.0**      | **%**      |

 

We believe that ourrelations with our employees are good, and we have not experienced anysignificant labor disputes. Our employees are not represented by any collectivebargaining agreements or labor unions.

 

We are required by PRClaw to participate in various government sponsored benefit and pension programsfor our employees. We are required to accrue a portion of the salaries, bonusesand certain other payments to our employees for these benefits. The totalamount we have accrued under our employee benefits plans for the twelve monthsended December 31, 2008 was approximately RMB20.2 million ($3.0 million).

 

Under our equityincentive plan, we granted certain employees options to purchase our ordinaryshares. For a description of our equity incentive plan, see “—B.Compensation—Share-Based Compensation Plans.”

 

E.  Share Ownership

 

The following table setsforth information, as of June 25, 2009, with respect to the beneficialownership of our ordinary shares held by:

 

·                  each person known to us to ownbeneficially more than 5% of our ordinary shares; and

 

·                  each of our directors and executive officers.

 

Beneficial ownership isdetermined in accordance with the rules of the SEC and includes voting orinvestment power with respect to securities. Except as indicated below, andsubject to applicable community property laws, the persons named in the tablebelow have sole voting and investment power with respect to all ordinary sharesbeneficially owned by them. A shareholder is also deemed to be, as of any date,the beneficial owner of all securities that such shareholder has the right toacquire within 60 days after that date through (a) the exercise of anyoption, warrant or right, (b) the conversion of a security, (c) thepower to revoke a trust, discretionary account or similar arrangement, or (d) theautomatic termination of a trust, discretionary account or similar arrangement.

 

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| ** **                                                   |   | **Ordinary  Shares Beneficially Owned** |   |
|--------------------------------------------------------------|--------|-----------------------------------------|--------|
| ** **                                                   |   | **Number(1)**                           |   | **%(2)** |   |
| **Directors and Executive Officers**                         |   |                                    |   |   |   |
| Julia Huang(3)                                               |   | 1,944,947                               |   | 3.9 |   |
| Shawn Ding(4)                                                |   | 2,044,947                               |   | 4.1 |   |
| Zonglian Gu(5)                                               |   | 1,958,333                               |   | 4.0 |   |
| Amol Shah(6)                                                 |   | 3,377,336                               |   | 7.0 |   |
| Tianwen Liu                                                  |   | *                                       |   | * |   |
| Samuel Yen                                                   |   | *                                       |   | * |   |
| Min Fan                                                      |   | *                                       |   | * |   |
| Lily Liu                                                     |   | *                                       |   | * |   |
| Changqing Xie                                                |   | *                                       |   | * |   |
| All directors and executive officers as a group (9  persons) |   | 9,760,896                               |   | 18.4 |   |

 

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*  Director or executive officer whobeneficially owns less than 1% of our ordinary shares.

(1) Beneficial ownership of each listed person includes the shares such person hasthe right to acquire within 60 days.

(2) Percentage of beneficial ownership of each listed person is based on 48,325,987****ordinary shares outstanding as of June 25,2009 and the ordinary shares underlying options and warrants exercisable bysuch person within 60 days.

(3) Represents ordinary shares underlying stock options exercisable within 60 daysbeneficially owned by Ms. Huang that have been designated to South LeadTechnology Limited, a British Virgin Islands Company.

(4) Represents ordinary shares underlying stock options exercisable within 60 daysbeneficially owned by Mr. Ding that have been designated to Moral KnownIndustrial Limited, a British Virgin Islands Company.

(5) Represents 1,745,000 ordinary shares held by Rendashiji Technology DevelopmentCo., Ltd. Mr. Gu disclaims beneficial ownership of all of the shares heldby Rendashiji Technology Development Co., Ltd., except to the extent of hispecuniary interest therein.

(6) Represents 3,377,336 ordinary shares held by The McGraw-Hill Companies, Inc.Mr. Shah is senior vice president of the China division of The McGraw-HillCompanies, Inc. Mr. Shah disclaims beneficial ownership of all of ourshares held by The McGraw-Hill Companies, Inc., except to the extent ofhis pecuniary interest therein.

 

As of June 25, 2009,warrants to purchase 486,486 of our ordinary shares that are exercisable within60 days are held by record holders in the United States, which represents 0.85%of our total share capital. We have a total of 14 record holders in the UnitedStates.

 

None of our existingshareholders has voting rights that differ from the voting rights of othershareholders after the closing of our initial public offering.

 

**Item 7.  MajorShareholders and Related Party Transactions**

 

A.  Major Shareholders

 

Please refer to “Item 6.Directors, Senior Management and Employees — E. Share Ownership.”

 

B.  Related Party Transactions

 

**ShareRepurchase Agreement**

 

Pursuant to the November 2008share repurchase agreement with Tiger Global, we agreed to purchase from TigerGlobal an aggregate of 8,364,634 ordinary shares (2,788,211 ADSs) at US$1.3167per ordinary share (US$3.95 per ADS) for an aggregate purchase price of RMB75.3million ($11.0 million).  The agreementalso stipulated that all warrants held by Tiger Global, which represented theright to purchase an aggregate of 1,768,300 ordinary shares, would becancelled.  As of December 31, 2008,we repurchased and cancelled 1,518,949 ordinary shares and 321,109 warrants foran aggregate consideration of RMB13.7 million ($2.0 million).  Subsequent to December 31, 2008, werepurchased and cancelled 6,845,685 ordinary shares and 1,447,191warrants foran aggregate consideration of RMB61.6 million ($9.0 million) in January 2009.

 

**ContractualArrangements Relating to Certain Affiliated Entities**

 

Due to the Chineseregulatory restrictions on foreign investment in the Internet and K-12education sectors, we entered into a series of agreements with HongchengEducation and Xiandai Technology, our Chinese affiliated entities in which wedo not have a direct ownership interest, for us to maintain effective controlover and receive the economic benefits of those entities. For the regulatoryrestrictions, see “Item 4. Information on the Company—B. BusinessOverview—Regulation.”

 

***Contractual Arrangements with Respect to Hongcheng Education***

 

Under the current Chineselegal framework, foreign invested companies are not permitted to invest in K-12schools in China. We operate the three private primary and secondary schoolsthrough Hongcheng Education, and have entered into a series of agreements withHongcheng Education and its shareholders, Mr. Changqing Xie, one of ourofficers, and Mr. Xueshan Yang, one of our directors, to maintaineffective control over and receive the economic benefits of HongchengEducation. Currently, Mr. Xie and Mr. Yang hold 72% and 28% of theequity interest in Hongcheng Education, respectively. The material agreementsthat currently govern the relationship and economic arrangements betweenHongcheng Education and us are described in greater detail below.

 

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*ChinaEduand Changqing Xie Loan Agreement*.    We entered into a loanagreement with Mr. Xie on January 3, 2005 (and amended such agreementon July 12, 2005 and July 18, 2007), pursuant to which we loaned Mr. Xieapproximately $4.8 million to fund the registered capital requirements ofHongcheng Education. The term of the loan is 20 years and may be extended withthe consent of the parties. To the extent permitted by Chinese law, the loanmay only be repaid by Mr. Xie transferring all of his equity interests inHongcheng Education to us (or our designee). Mr. Xie has agreed that wehave the right to appoint all directors to the board of directors of HongchengEducation that Mr. Xie is entitled to appoint in his capacity as ashareholder of the entity.

 

*ChinaEduand Xueshan Yang Loan Agreement*.    We entered into a loanagreement with Mr. Yang on January 3, 2005 (and amended suchagreement in June 2005 and July 18, 2007), pursuant to which weloaned Mr. Yang approximately $1.8 million to fund the registered capitalrequirements of Hongcheng Education. The term of the loan is 20 years and maybe extended with the consent of the parties. To the extent permitted by Chineselaw, the loan may only be repaid by Mr. Yang transferring all of hisequity interests in Hongcheng Education to us (or our designee). Mr. Yanghas agreed that we have the right to appoint all directors to the board ofdirectors of Hongcheng Education that Mr. Yang is entitled to appoint inhis capacity as a shareholder of the entity.

 

*HongchengEducation, Changqing Xie, Xueshan Yang and Hongcheng Technology Shareholder’sVoting Rights Entrustment Agreement.*    Hongcheng Education, Mr. Xieand Mr. Yang and Hongcheng Technology entered into a shareholder’s votingrights entrustment agreement dated on July 12, 2005, pursuant to which Mr. Xieand Mr. Yang irrevocably entrusted Hongcheng Technology with the right toact as their proxies and vote their shares in Hongcheng Education. Mr. Xieentered into a second similar agreement with Hongcheng Education and HongchengTechnology on December 20, 2005. These agreements will remain effective aslong as Mr. Xie or Mr. Yang, respectively, remains a shareholder inHongcheng Education.

 

*ChangqingXie, Xueshan Yang and Hongcheng Technology* *Call OptionAgreement.    *Mr. Xie and Mr. Yangentered into a call option agreement with Hongcheng Technology on July 12,2005 pursuant to which Mr. Xie and Mr. Yang each granted irrevocableoptions to purchase all or, in the case of Mr. Xie, a portion, of theirrespective equity interests in Hongcheng Education to Hongcheng Technology atthe lowest price permitted under applicable Chinese laws. Mr. Xie enteredinto a second similar call option agreement with Hongcheng Technology on December 20,2005 granting similar rights to Hongcheng Technology with respect to shares inHongcheng Education held by Mr. Xie that were not covered under theoriginal call option agreement.

 

*ChangqingXie, Xueshan Yang and Hongcheng Technology Equity Pledge Agreement*.    As security for Mr. Xieand Mr. Yang’s obligations under their Call Option Agreements andShareholder Voting Rights Entrustment Agreements with Hongcheng Technology andHongcheng Education’s obligations under the technical consulting and servicesagreement with Hongcheng Technology, Mr. Xie and Mr. Yang pledged allof their equity interests in Hongcheng Education and all distributions arisingfrom those interests to Hongcheng Technology under equity pledge agreementsdated July 12, 2005 and December 20, 2005, as amended on July 18,2007.

 

*Powerof Attorney by Changqing Xie and Xueshan Yang.    *For purposes of securing theirperformance under the various agreements that they have entered into with usand Hongcheng Technology, both Mr. Xie and Mr. Yang have irrevocablyappointed Hongcheng Technology as their attorneys-in-fact and have authorizedHongcheng Technology to take all actions on their behalf (as shareholders ofHongcheng Education) that are deemed appropriate by Hongcheng Technology.

 

*HongchengTechnology and Hongcheng Education Exclusive Technical Consulting and ServicesAgreement.*    InJuly 2007, we, through our wholly owned subsidiary Hongcheng Technology,entered into an exclusive technical consulting and services agreement withHongcheng Education. Under this agreement Hongcheng Technology providescourseware and product development services, website design services,maintenance and security services, employee training services and any otherservices that may be agreed upon by the parties to Hongcheng Education. Asconsideration for these services Hongcheng Education pays Hongcheng Technologya service fee equal to 80% of its annual gross revenue.

 

***Contractual Arrangements with Respect to Xiandai Technology***

 

On July 12, 2005, weentered into a series of agreements with Xiandai Technology, the ICP licenseholder for operating our website www.chinaedu.net, and its shareholders, ourformer director Mr. Gongquan Wang and current director Mr. XueshanYang, to maintain effective control over and receive the economic benefits ofXiandai Technology and satisfy the Chinese regulatory restrictions on foreigninvestment in the ICP sector. Currently, Mr. Wang and Mr. Yang eachhold 50% of the equity interest in Xiandai Technology. The material agreementsthat currently govern the relationship and economic arrangements betweenHongcheng Technology and Xiandai Technology are described in greater detailbelow.

 

*HongchengTechnology and Gongquan Wang Loan Agreement*.    Hongcheng Technology and Mr. Wangentered into a loan agreement on July 12, 2005 (and amended such agreementon August 30, 2006) under which Hongcheng Technology loaned Mr. WangRMB0.3 million to fund the registered capital requirements of XiandaiTechnology. The term of the loan is 20 years and may be extended with theconsent of the parties. To the extent permitted by Chinese law, the loan may berepaid by Mr. Wang using the proceeds from the transfer all of his equityinterests in Xiandai Technology to Hongcheng Technology or its designee. Theparties have agreed that Hongcheng Technology has the right to appoint alldirectors to the board of directors of Xiandai Technology that Mr. Wang isentitled to appoint in his capacity as a shareholder of the entity.

 

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*HongchengTechnology and Xueshan Yang Loan Agreement*.    Hongcheng Technology and Mr. Yangentered into a loan agreement on July 12, 2005 (and amended such agreementon August 30, 2006) under which Hongcheng Technology loaned Mr. YangRMB0.3 million to fund the registered capital requirements of XiandaiTechnology. The term of the loan is 20 years and may be extended with theconsent of the parties. To the extent permitted by Chinese law, the loan may berepaid by Mr. Yang using the proceeds from the transfer all of his equityinterests in Xiandai Technology to Hongcheng Technology or its designee. Theparties have agreed that Hongcheng Technology has the right to appoint alldirectors to the board of directors of Xiandai Technology that Mr. Yang isentitled to appoint in his capacity as a shareholder of the entity.

 

*XiandaiTechnology, Gongquan Wang, Xueshan Yang and Hongcheng Technology Shareholders’Voting Rights Entrustment Agreement.*    Xiandai Technology, Mr. Wang,Mr. Yang and Hongcheng Technology entered into a shareholder’s votingrights entrustment agreement pursuant to which Mr. Wang and Mr. Yangirrevocably entrusted Hongcheng Technology with the right to act as theirproxies and vote all of their shares in Xiandai Technology. This agreement willremain effective as long as either of Messrs. Wang or Yang remains ashareholder in Xiandai Technology.

 

*GongquanWang, Xueshan Yang and Hongcheng Technology Call Option Agreement.*    Mr. Wang andMr. Yang also entered into call option agreements with HongchengTechnology under which each of them granted to Hongcheng Technology or its designeeirrevocable options to purchase all of their respective equity interests inXiandai Technology at the lowest price permitted under applicable Chinese laws.

 

*GongquanWang, Xueshan Yang and Hongcheng Technology Equity PledgeAgreement.    *Mr. Wang and Mr. Yang also pledged all oftheir equity interests in Xiandai Technology and all distributions arising fromthose interests to Hongcheng Technology under equity pledge agreements dated July 12,2005, as amended on July 18, 2007, to secure their performance under theirCall Option Agreements and Shareholder Voting Rights Entrustment Agreementswith Hongcheng Technology and the performance of Xiandai Technology under theTechnical Consulting and Services Agreement with Hongcheng Technology.

 

*Powerof Attorney by Gongquan Wang and Xueshan Yang.    *Each of Mr. Wang and Mr. Yanghas appointed Hongcheng Technology as his attorney-in-fact with and hasauthorized Hongcheng Technology to take all the actions on his behalf (as ashareholder of Xiandai Technology) that are deemed appropriate by HongchengTechnology.

 

*HongchengTechnology and Xiandai Technology Exclusive Technical Consulting and ServicesAgreement.    *We, through our wholly owned subsidiary HongchengTechnology, entered into an exclusive technical consulting and servicesagreement with Xiandai Technology. Under this agreement Hongcheng Technologyprovides network technology development services, website design services,maintenance and security services, employee training services and any otherservices that may be agreed upon by the parties to Xiandai Technology. Underthe Technical Consulting and Services Agreement, Hongcheng Technology has thesole discretion to charge Xiandai Technology and Hongcheng Education fees thatrepresent substantially all of the variable interest entities’ net income.

 

**StockOption Grants**

 

We have granted optionsto purchase our ordinary shares to certain of our employees, directors andofficers under our equity incentive plan. As of the date of this annual report,there were outstanding options to purchase an aggregate of**** 10,142,537 ordinary shares.** **Fora description of our equity incentive plan and these option grants, see “Item6.  Directors, Senior Management andEmployees Management—B. Compensation—Stock-Based Compensation Plans.”

 

**RegistrationRights**

 

Pursuant to our fourthamended and restated registration rights agreement entered into in March 2007,we have granted certain registration rights to holders of our registrablesecurities, which include our preferred shares and ordinary shares convertedfrom our preferred shares as well as ordinary shares owned by certain of ourearly shareholders, or founders, as of August 18, 2000. Since December 31,2007, the holders of an aggregate of 29,536,862 ordinary shares are entitled tothe registration rights provided under this registration rights agreement. Setforth below is a description of the registration rights granted under theagreement.

 

*DemandRegistration Rights*.    Holdersof at least 25% of registrable securities (excluding for such purposes theshares held by the founders) have the right to demand that we file aregistration statement covering the offer and sale of their securities as longas the securities to be registered have an aggregate offering price of at least$5.0 million. We, however, are not obligated to effect a demand registration (1) ifwe have already effected two demand registrations, (2) during the periodbeginning on the 60th day prior to our good faith estimate of the filing dateof, and ending on the 180th day after the effective date of, a public offeringof our securities initiated by us, or (3) if the securities to beregistered can be immediately registered on Form S-3 or Form F-3, asapplicable. We have the right to defer filing of a registration statement forup to 60 days if our board of directors determine in good faith that filing ofa registration will be detrimental to us, but we cannot exercise the deferralright more than once in any 12 month period.

 

*Form F-3or S-3 Registration Rights*.    When we are eligible toregister our shares using Form F-3 or Form S-3, holders ofregistrable securities then outstanding have the right to request that we filea registration statement under Form F-3 or Form S-3 as long as theaggregate amount of securities to be sold under the registration statementexceeds $1.50 million. We may defer filing of a registration statement on Form F-3or Form S-3 for up to 60 days if our board of directors determine in goodfaith that filing such a registration statement will be detrimental to us andour shareholders, provided that we cannot exercise the deferral right more thanonce in any 12 month period. We are not obligated to file a registrationstatement on Form F-3 or 

 

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Form S-3 if we havealready effected two registrations on Form F-3 or Form S-3 within the18 month period preceding the date of such request.

 

*PiggybackRegistration Rights.*    Ifwe propose to file a registration statement for a public offering of oursecurities other than as required by the agreement granting holders of ourregistrable securities the registration rights or pursuant to a registration statementrelating to the sale or issuance of securities under an employee benefit planor in connection with a corporate reorganization, then we must offer holders ofregistrable securities an opportunity to include in such registration all orany part of their registrable securities. We must use our best effort to causethe underwriters in any underwritten offering to permit these shareholders whoso requested to include their shares on the same terms and conditions as oursecurities to be registered.

 

*Expensesof Registration.    *We will pay all expenses relating to any demand,piggyback or F-3 or S-3 registration other than underwriting commissions anddiscounts, and fees and disbursements for counsel for selling shareholders, ifapplicable.

 

*Indemnification.*    We are requiredto indemnify any selling holders of our registrable securities and anyunderwriters engaged in connection with sales of our ordinary shares pursuantto these registration rights.

 

**EmploymentAgreements**

 

See “Item 6. Directors,Senior Management and Employee—A. Directors and Senior Management” for adescription of the employment agreements we have entered into with our seniorexecutive officers.

 

**ShareIncentives**

 

See “Item 6. Directors,Senior Management and Employee—B. Compensation—Compensation of Directors andExecutive Officers” for a description of share options and stock purchaserights we have granted to our directors, officers and other individuals as agroup.

 

C. Interests ofExperts and Counsel

 

Not applicable.

 

**Item8.  Financial Information**

 

A. ConsolidatedStatements and Other Financial Information

 

Please refer to Item 18for a list of our annual consolidated financial statements filed as part ofthis annual report. The financial statements contained in this annual reportbegin on page F-1.

 

**DividendPolicy**

 

Since the incorporationof our company in 1999, we have not declared or paid any dividends on ourordinary shares or ADSs. We have no present plan to declare or pay anydividends on our ordinary shares or ADSs in the foreseeable future. Wecurrently intend to retain most, if not all, of our available funds and anyfuture earnings to operate and expand our business.

 

We are a holding companyincorporated in the Cayman Islands. Although we have not received any to date,we may in the future rely on dividends from our subsidiaries in China. CurrentChinese regulations permit our subsidiaries to pay dividends to us only out oftheir accumulated profits, if any, determined in accordance with Chineseaccounting standards and regulations. In addition, our subsidiaries in Chinaare required to set aside a certain amount of their accumulated after-taxprofits each year, if any, to fund certain statutory reserves. These reservesmay not be distributed as cash dividends. Further, if our subsidiaries in Chinaincur debt on their own behalf, the instruments governing the debt may restricttheir ability to pay dividends or make other payments to us.

 

Under the previousChinese tax law, dividend payments to foreign investors made by FIEs, such asour Chinese subsidiaries, were exempt from PRC withholding tax. Pursuant to theEIT Law that became effective on January 1, 2008, as well as the relatedimplementation rules and other recently issued regulations, dividendspayable by an FIE to its foreign investors are subject to a 10% withholding tax(unless the foreign investor’s jurisdiction of incorporation has a tax treatywith China that provides for a different withholding arrangement).  Distributions made from pre-January 1,2008 retained earnings will not be subject to the withholding tax.

 

Our board of directorshas complete discretion as to whether to distribute dividends, subject to theapproval of our shareholders. Even if our board of directors decides to paydividends, the form, frequency and amount will depend upon our futureoperations and earnings, capital requirements and surplus, our generalfinancial condition, contractual restrictions and other factors that the boardof directors may deem relevant. If we pay any dividends, we will pay our ADSholders to the same extent as holders of our ordinary shares, subject to theterms of the deposit agreement, including the fees and expenses payablethereunder. Cash dividends on our ADSs and ordinary shares, if any, will bepaid in U.S. dollars.

 

**LegalProceedings**

 

There are no materiallegal proceedings, regulatory inquiries or investigations pending, or to ourknowledge, threatened against us.

 

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**Item9.  The Offer and Listing**

 

A. Offering andListing Details

 

Not applicable.

 

B. Plan ofDistribution

 

Not applicable.

 

C. Markets

 

Our ADSs, eachrepresenting three of our ordinary shares, have been listed on the NASDAQGlobal Market since December 14, 2007. Our ADSs trade under the symbol “CEDU.” For the period from December 14, 2007, the date of our initialpublic offering, to June 25,****2009,the trading price of our ADSs on the NASDAQ Global Market has ranged fromUS$2.97 to US$9.20 per ADS. The following table provides the high and lowtrading prices for our ADSs on the NASDAQ Global Market for each of the monthssince our initial public offering:

 
| ** **                             |   | **Trading Price** |   |
|----------------------------------------|--------|-------------------|--------|
| ** **                             |   | **High**          |   | **Low** |   |
| ** **                             |   | **US$**           |   | **US$** |   |
| **Monthly Highs and Lows**             |   |              |   |   |   |
| **2007**                               |   |              |   |   |   |
| December (from  December 14) |   | 9.20              |   | 7.75 |   |
| **2008**                               |   |              |   |   |   |
| January                                |   | 8.58              |   | 6.32 |   |
| February                               |   | 8.00              |   | 6.20 |   |
| March                                  |   | 7.90              |   | 6.04 |   |
| April                                  |   | 8.05              |   | 6.23 |   |
| May                                    |   | 7.40              |   | 5.46 |   |
| June                                   |   | 5.75              |   | 4.51 |   |
| July                                   |   | 4.80              |   | 3.60 |   |
| August                                 |   | 4.79              |   | 3.50 |   |
| September                              |   | 5.00              |   | 3.89 |   |
| October                                |   | 4.39              |   | 2.97 |   |
| November                               |   | 4.40              |   | 3.40 |   |
| December                               |   | 5.00              |   | 3.71 |   |
| **2009**                               |   |              |   |   |   |
| January                                |   | 5.40              |   | 4.45 |   |
| February                               |   | 6.90              |   | 4.95 |   |
| March                                  |   | 6.05              |   | 4.15 |   |
| April                                  |   | 6.25              |   | 4.49 |   |
| May                                    |   | 5.84              |   | 4.94 |   |
| June (through  June 25)      |   | 7.84              |   | 5.41 |   |

 

D. SellingShareholders

 

Not applicable.

 

E. Dilution

 

Not applicable.

 

F. Expenses of theIssue

 

Not applicable.

 

**Item 10. Additional Information**

 

A. Share Capital

 

Not applicable.

 

B. Memorandumand Articles of Association

 

We have incorporated byreference into this annual report our fifth amended and restated memorandum ofassociation and our fifth amended and restated articles of association, both ofwhich became effective upon the closing of our initial public 

 

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offering, filed asExhibits 3.1 and 3.2, respectively, to our F-1 registration statement (File No. 333-147620),as amended, initially filed with the SEC on November 26, 2007.

 

C. Material Contracts

 

We have not entered intoany material contracts other than in the ordinary course of business and otherthan those described in “Item 4. Information on the Company” and “Item 7.  Major Shareholders and Related PartyTransactions—B. Related Party Transactions” or elsewhere in this annual reporton Form 20-F.

 

D. Exchange Controls

 

See “Item 4. Informationon the Company—B. Business Overview—Regulation—Regulation of Foreign CurrencyExchange and Dividend Distribution.”

 

E. Taxation

 

**CaymanIslands Taxation**

 

The Cayman Islandscurrently levy no taxes on individuals or corporations based upon profits,income, gains or appreciation and there is no taxation in the nature ofinheritance tax or estate duty. There are no other taxes likely to be materialto our company levied by the Government of the Cayman Islands except for stampduties that may be applicable on instruments executed in, or after executionbrought within the jurisdiction of, the Cayman Islands. The Cayman Islands arenot party to any double taxation treaties. There are no exchange controlregulations or currency restrictions in the Cayman Islands.

 

**UnitedStates Federal Income Taxation**

 

The following is adiscussion of material U.S. federal income tax consequences of purchasing,owning and disposing of shares and ADSs. This discussion does not purport to bea comprehensive description of all of the U.S. tax considerations that may berelevant to a particular person’s decision to acquire the shares or ADSs(including any state, local or non-U.S. tax consequences of the ownership ofthe shares or ADSs).

 

**INVESTORSARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL, STATE,LOCAL AND FOREIGN TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OFSHARES AND ADSs IN THEIR PARTICULAR SITUATION.**

 

This discussion appliesto only to those investors that hold shares or ADSs as capital assets for U.S.tax purposes (generally, for investment). This section does not apply toholders that may be subject to special tax rules, including but not limited to:

 

·                  a dealer in securities or currencies;

 

·                  a trader in securities that elects to use amark-to-market method of accounting for your securities holdings;

 

·                  a bank, insurance company or other financialinstitution;

 

·                  a tax-exempt organization;

 

·                  a holder liable for alternative minimum tax;

 

·                  a holder that actually or constructively owns 10% ormore by voting power or value of our stock;

 

·                  a holder that holds equity shares or ADSs as part of astraddle, hedging or conversion transaction; or

 

·                  a U.S. holder whose functional currency is not theU.S. Dollar.

 

This section is based onthe U.S. Internal Revenue Code of 1986, as amended, or the Code, itslegislative history, existing and proposed U.S. Treasury regulations, publishedrulings and other administrative guidance of the U.S. Internal Revenue Serviceand court decisions, all as in effect on the date hereof. These laws aresubject to change or different interpretation by the U.S. Internal RevenueService or a court, possibly on a retroactive basis.

 

You are a “U.S. holder”if you are a beneficial owner of shares or ADSs and you are:

 

·                  a citizen or resident individual of theUnited States;

 

·                  a U.S. domestic corporation, or other entity treatedas a domestic corporation for U.S. federal income tax purposes;

 

·                  an estate whose income is subject to U.S. federalincome tax regardless of its source; or

 

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·                  a trust if a U.S. court can exercise primarysupervision over the trust’s administration and one or more U.S. persons areauthorized to control all substantial decisions of the trust or if the trusthas a valid election in effect under applicable U.S. Treasury regulations to betreated as a United States person.

 

If a partnership(including for this purpose any entity treated as a partnership for U.S. taxpurposes) is a beneficial owner of the shares or ADSs, the U.S. tax treatmentof a partner in the partnership generally will depend on the status of thepartner and the activities of the partnership. A holder of the shares or ADSsthat is a partnership and partners in such a partnership should consult theirown tax advisors about the U.S. federal income tax consequences of holding anddisposing of the shares or ADSs.

 

A “non-U.S. holder” is abeneficial owner of shares or ADSs that is not a U.S. person for U.S. federalincome tax purposes.

 

For U.S. federal incometax purposes, holders of ADSs will be treated as the owners of sharesrepresented by such ADSs.

 

*Taxationof Dividends*

 

*U.S.Holders*.    Subjectto the passive foreign investment company (“PFIC”) rules referred tobelow, under the U.S. federal income tax laws, if you are a U.S. holder, youmust include in your gross income the gross amount of any dividend paid by usout of our current or accumulated earnings and profits (as determined for U.S.Federal income tax purposes). The dividend is ordinary income that you mustinclude in income when you receive the dividend, actually or constructively.Dividends received by a non-corporate taxpayer during taxable years beginningbefore January 1, 2011 will be taxed at a maximum rate of 15%, wherecertain holding period and other requirements are satisfied, if such dividendsconstitute qualified dividend income. Qualified dividend income includes dividendspaid by a “qualified foreign corporation” (as defined in the Code), and webelieve that we are, and will continue to be, a Qualified Foreign Corporation.

 

Dividends will not beeligible for the dividends-received deduction generally allowed to U.S. corporationsin respect of dividends received from other U.S. corporations. If we distributenon-cash property as a dividend (other than pro rata distributions of ourshares), you generally will include in income an amount equal to the fairmarket value of the property, in U.S. Dollars, on the date that it isdistributed.

 

Distributions in excessof current and accumulated earnings and profits, as determined for U.S. federalincome tax purposes, will be treated as a non-taxable return of capital to theextent of your basis in the equity shares and ADSs and thereafter as capitalgain. However, we do not plan on calculating our earnings and profits for U.S.federal income tax purposes, and U.S. holders therefore should generally assumethat any distributions paid by us are paid out of our earnings and profits forthis purpose.

 

*Non-U.S.Holders*.    Dividendspaid to non-U.S. holders generally will not be subject to U.S. income taxunless the dividends are “effectively connected” with your conduct of a tradeor business within the United States, and the dividends are attributable to apermanent establishment (or in the case of an individual, a fixed place ofbusiness) that you maintain in the United States if that is required by anapplicable income tax treaty as a condition for subjecting you to U.S. taxationon a net income basis. In such cases, you generally will be taxed in the samemanner as a U.S. holder, and will not be subject to U.S. Federal withholdingtax. If you are a corporate non-U.S. holder, “effectively connected” dividendsmay, under certain circumstances, be subject to an additional “branch profitstax” at a 30% rate or a lower rate if you are eligible for the benefits of anincome tax treaty that provides for a lower rate.

 

*Taxationof Capital Gains*

 

*U.S.Holders.*    Subjectto the PFIC rules referred to below, if you are a U.S. holder and you sellor otherwise dispose of your shares or ADSs, you will recognize capital gain orloss for U.S. Federal income tax purposes equal to the difference between theU.S. Dollar value of the amount that you realize and your tax basis,determined in U.S. Dollars, in your shares or ADSs. For taxable years beginningbefore January 1, 2011, capital gains of a non-corporate U.S. holder aregenerally taxed at a maximum rate of 15% where the property is held for morethan one year. The gain or loss will generally be income or loss from sourceswithin the United States for foreign tax credit limitation purposes, unless itis attributable to an office or other fixed place of business outside theUnited States and certain other conditions are met. Your ability to deductcapital losses is subject to limitations.

 

*Non-U.S.Holders*.    Ifyou are a non-U.S. holder, you will not be subject to U.S. federal income taxon gain recognized on the sale or other disposition of your shares or ADSsunless:

 

·                  the gain is “effectively connected” withyour conduct of a trade or business in the United States, and the gain isattributable to a permanent establishment (or in the case of an individual, afixed place of business) that you maintain in the United States if that isrequired by an applicable income tax treaty as a condition for subjecting youto U.S. taxation on a net income basis; or

 

·                  you are an individual, you are present in the UnitedStates for 183 or more days in the taxable year of the sale and certain otherconditions are met.

 

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In the first case, thenon-U.S. holder will be taxed in the same manner as a U.S. holder. In thesecond case, the non-U.S. holder will be subject to U.S. Federal income tax ata rate of 30% on the amount by which the non-U.S. holder’s U.S.-source capitalgains exceed such non-U.S. holder’s U.S.-source capital losses.

 

If you are a corporatenon-U.S. holder, “effectively connected” gains that you recognize may also,under certain circumstances, be subject to an additional “branch profits tax”at a 30% rate or at a lower rate if you are eligible for the benefits of anincome tax treaty that provides for a lower rate.

 

*PFICRules*

 

We believe that ourshares and ADSs will not be treated as stock of a PFIC for U.S. federal incometax purposes for the current tax year, and we do not expect to become a PFIC inthe foreseeable future, although we can provide no assurances in this regardfor the reasons discussed below. The determination of whether or not we are aPFIC in respect of any of our taxable years is a factual determination thatcannot be made until the close of the applicable tax year and that is based onthe types of income we earn and the value of our assets (including goodwill),both of which are subject to change. In calculating goodwill for this purpose,we will determine the total value of our assets by reference to the then-currentmarket price of the equity and ADSs, and will make determinations regarding theamount of this total value allocable to goodwill. The value of our goodwill,and the total value of our assets, therefore will change as the market pricesof our shares and ADSs change. Therefore, we can make no assurances that wewill not be a PFIC in respect of our current taxable year or in the future.

 

In general, if you are aU.S. holder, we will be a PFIC with respect to you if for any taxable year inwhich you held the equity shares or ADSs:

 

·                  at least 75% of our gross income for thetaxable year is passive income; or

 

·                  at least 50% of the value, determined on the basis ofa quarterly average, of our assets, is attributable to assets that produce orare held for the production of passive income.

 

Passive income generallyincludes dividends, interest, royalties, rents (other than certain rents androyalties derived in the active conduct of a trade or business), the excess ofgains over losses from certain types of transactions in commodities, annuitiesand gains from assets that produce passive income. If a foreign corporationowns at least 25% by value of the stock of another corporation, the foreigncorporation is treated for purposes of the PFIC tests as owning itsproportionate share of the assets of the other corporation, and as receivingdirectly its proportionate share of the other corporation’s income.

 

If we are treated as aPFIC, and you are a U.S. holder that did not make a mark-to-market election, asdescribed below, you will be subject to special rules with respect to:

 

·                  any gain you realize on the sale or otherdisposition of your shares or ADSs; and

 

·                  any excess distribution that we make to you(generally, any distributions to you during a single taxable year that aregreater than 125% of the average annual distributions received by you inrespect of the shares or ADSs during the three preceding taxable years or, ifshorter, your holding period for the shares or ADSs).

 

Under these rules:

 

·                  the gain or excess distribution will beallocated ratably over your holding period for the shares and ADSs;

 

·                  the amount allocated to the taxable year in which yourealized the gain or excess distribution will be taxed as ordinary income;

 

·                  the amount allocated to each prior year in respect ofwhich we were, or were treated as, a PFIC generally will be taxed at thehighest tax rate in effect for that year; and

 

·                  the interest charge generally applicable tounderpayments of tax will be imposed in respect of the tax attributable to eachsuch year.

 

Special rules applyfor calculating the amount of the foreign tax credit with respect to excessdistributions by a PFIC.

 

If you own shares in aPFIC that are treated as marketable stock, you may make a mark-to-marketelection. If you make this election in a timely fashion, you will not be subjectto the PFIC rules described above. Instead, in general, you will includeas ordinary income each year the excess, if any, of the fair market value ofyour equity shares and ADSs at the end of the taxable year over your adjustedbasis in your shares and ADSs. You will also be allowed to take an ordinaryloss in respect of the excess, if any, of the adjusted basis of your shares andADSs over the fair market value at the end of the taxable year (but only to theextent of the net amount of previously included income as a result of themark-to-market election). Your basis in the shares and ADSs will be adjusted toreflect any such income or loss amounts.

 

We do not intend tofurnish you with the information that you would need in order to make a “qualifiedelecting fund” election to include your share of its income on a current basis.

 

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If you own shares or ADSsduring any year that we are a PFIC, you must file U.S. Internal Revenue ServiceForm 8621 that describes the distribution received on the equity shares orADSs and the gain realized on the disposition of the shares or ADSs. Thereduced tax rate for dividend income, discussed in “Taxation of Dividends,” isnot applicable to dividends paid by a PFIC.

 

*InformationReporting and Backup Withholding*

 

In general, informationreporting requirements will apply to dividends in respect of shares or ADSs orthe proceeds received on the sale, exchange or redemption of shares or ADSspaid within the United States (and, in certain cases, outside the UnitedStates) to U.S. holders other than certain exempt recipients, such ascorporations, and backup withholding tax at the rate of 28% may apply to suchamounts if the U.S. holder fails to provide an accurate taxpayer identificationnumber (or to otherwise establish, in the manner provided by law, an exemptionfrom backup withholding) or to report dividends required to be shown on theU.S. holder’s U.S. federal income tax returns.

 

Backup withholding is notan additional income tax, and the amount of any backup withholding from apayment to a U.S. holder will be allowed as credit against the U.S. holder’sU.S. Federal income tax liability provided that the appropriate returns arefiled.

 

A Non-U.S. holdergenerally may eliminate any requirement for information reporting and backupwithholding by providing certification of its foreign status to the payer, underpenalties of perjury, on IRS Form W-8BEN.

 

F. Dividends andPaying Agents

 

Not applicable.

 

G. Statement byExperts

 

Not applicable.

 

H. Documents onDisplay

 

We have filed with theSEC our registration statement on Form F-1(File No. 333-147620), includingrelevant exhibits, under the Securities Act, with respect to our underlyingordinary shares represented by the ADSs.

 

We are subject to theperiodic reporting and other informational requirements of the Exchange Act.Under the Exchange Act, we are required to file reports and other informationwith the SEC. Specifically, we are required to file annually a Form 20-Fno later than six months after the close of each fiscal year, which is December 31.Copies of reports and other information, when so filed, may be inspectedwithout charge and may be obtained at prescribed rates at the public referencefacilities maintained by the SEC at 100 F Street, N.E., Room 1580,Washington, D.C. 20549. The public may obtain information regarding theWashington, D.C. Public Reference Room by calling the SEC at1-800-SEC-0330. The SEC also maintains a web site at www.sec.gov that containsreports, proxy and information statements, and other information regardingregistrants that make electronic filings with the SEC using its EDGAR system.As a foreign private issuer, we are exempt from the rules under theExchange Act prescribing the furnishing and content of quarterly reports andproxy statements, and officers, directors and principal shareholders are exemptfrom the reporting and short-swing profit recovery provisions contained in Section 16of the Exchange Act.

 

We will furnish The Bankof New York, the depositary of our ADSs, with our annual reports, which willinclude a review of operations and annual audited consolidated financialstatements prepared in conformity with U.S. GAAP, and all notices ofshareholders’ meetings and other reports and communications that are madegenerally available to our shareholders. The depositary will make such notices,reports and communications available to holders of ADSs and, upon our request,will mail to all record holders of ADSs the information contained in any noticeof a shareholders’ meeting received by the depositary from us.

 

I.  Subsidiary Information

 

For a listing of our subsidiaries,see “Item 4. Information on the Company—C. Organizational Structure” and Exhibit 8.1,filed herewith.

 

**Item 11. Quantitative and Qualitative Disclosures about Market Risk**

 

***Interest Rate Risk***

 

Our exposure to interestrate risk for changes in interest rates relates primarily to the interestreceipts of excess cash deposited in banks. As of December 31, 2008, wehad cash and cash equivalents of RMB353.9 million ($51.9 million).  Cash and cash equivalents consist of cash onhand and in banks.

 

We have not been exposedto nor do we anticipate being exposed to material risks due to changes ininterest rates, although our future interest income may fluctuate in line withchanges in interest rates. The risk associated with fluctuating interest rates isprincipally confined to our cash deposits in banks, and, therefore, ourexposure to interest rate risk is minimal. We currently do not use anyderivative financial instruments to hedge interest rate risk.

 

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***Credit Risk***

 

The carrying amounts ofcash and cash equivalents, term deposits, accounts receivable and amount duefrom related parties represent our principal exposure to credit risk inrelation to our financial assets. As of December 31, 2008, substantiallyall of our cash and cash equivalents were held in uninsured accounts at majorfinancial institutions located in China and Hong Kong that we believe are ofacceptable credit quality. We have not used any derivative financialinstruments to hedge interest rate risk.

 

***Foreign Exchange Risk***

 

Substantially all of ourrevenue generating operations are transacted in Renminbi, which is not fullyconvertible into foreign currencies and substantially all of our assets andliabilities are denominated in Renminbi. As a result, the conversion of ourrevenue into foreign currencies is subject to PRC regulatory restrictions oncurrency conversion and we are exposed to risks posed by fluctuations in theforeign exchange market. The value of the RMB against the U.S. dollar and othercurrencies may fluctuate and is affected by, among other things, changes inChina’s political and economic conditions. The conversion of RMB into foreigncurrencies, including U.S. dollars, has been based on rates set by the People’sBank of China. On July 21, 2005, the PRC government changed its decade-oldpolicy of pegging the value of the RMB to the U.S. dollar. Under the newpolicy, the RMB is permitted to fluctuate within a narrow and managed bandagainst a basket of certain foreign currencies. This change in policy hasresulted in an approximately 21% appreciation of the RMB against the U.S.dollar as of December 31, 2008. There remains significant internationalpressure on the PRC government to adopt an even more flexible currency policy,which could result in a further and more significant appreciation of the RMBagainst the U.S. dollar. To the extent we hold assets denominated inU.S. dollars through our PRC entities, any further appreciation of theRenminbi against the U.S. dollar could result in a charge to our incomestatement and a reduction in the RMB value of our U.S. dollar denominatedassets.

 

We have not used anyforward contracts or currency borrowings to hedge our exposure to foreigncurrency risk. See “Item 3. Key Information—D. Risk Factors—Risks Related tothe People’s Republic of China—The fluctuation of the Renminbi may materiallyand adversely affect your investment.”

 

***Inflation and Monetary Risk***

 

Inflation in China hasnot had a material impact on our results of operations in recent years.According to the National Bureau of Statistics of China, the change in ConsumerPrice Index in China was 1.5%, 4.8% and 5.9% in 2006, 2007 and 2008,respectively.

 

***Recent Accounting Pronouncements***

 

In September 2006,FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, “FairValue Measurements” (“SFAS 157”). Effective January 1, 2008, we adopted the measurement anddisclosure other than those requirements related to nonfinancial assets andliabilities in accordance with guidance from FASB Staff Position 157-2, “EffectiveDate of FASB Statement No. 157,” which delayed the effective date of SFAS157 for all nonfinancial assets and nonfinancial liabilities, except for itemsthat are recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually), until the beginning of fiscal year2009.  We do not expect the adoption ofSFAS 157 for nonfinancial assets and liabilities will have a significant effecton our consolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 141, Business Combinations: (Revised 2007) (“SFAS141R”).  SFAS 141R is relevant to alltransactions or events in which one entity obtains control over one or moreother businesses.  SFAS 141R requires anacquirer to recognize any assets and noncontrolling interest acquired andliabilities assumed to be measured at fair value as of the acquisitiondate.  Liabilities related to contingentconsideration are recognized and measured at fair value on the date ofacquisition rather than at a later date when the amount of the considerationmay be resolved beyond a reasonable doubt. This revised approach replaces SFAS 141’s cost allocation process inwhich the cost of an acquisition was allocated to the individual assetsacquired and liabilities assumed based on their respective fair value.  SFAS 141R requires any acquisition-related costsand restructuring costs to be expensed as incurred as opposed to allocatingsuch costs to the assets acquired and liabilities assumed as previouslyrequired by SFAS 141.  Under SFAS 141R,an acquirer recognizes liabilities for a restructuring plan in purchaseaccounting only if the requirements of SFAS 146, Accounting for CostsAssociated with Exit or Disposal Activities, are met.  SFAS 141R allows for the recognition ofpre-acquisition contingencies at fair value only if these contingencies arelikely to materialize.  If this criterionis not met at the acquisition date, then the acquirer accounts for thenon-contractual contingency in accordance with recognition criteria set forthunder SFAS 5, Accounting for Contingencies, in which case no amount should berecognized in purchase accounting.  SFAS141R is effective as of the beginning of an entity’s first fiscal year thatbegins after December 15, 2008.  Theadoption of SFAS 141R is not expected to have a material effect on ourconsolidated financial position or results of operations.

 

On April 1, 2009,the FASB issued FSP FAS 141(R)-1, which amends the guidance in FASB Statement No. 141(R),Business Combinations, to establish a model for pre-acquisition contingenciesthat is similar to the entities used under Statement 141.  The FSP is effective for businesscombinations whose acquisition date is on or after the beginning of the firstannual reporting period beginning on or after December 15, 2008.  The adoption of FSP FAS 141(R)-1 is notexpected to have a material effect on our consolidated financial position orresults of operations.

 

In December 2007,the FASB issued SFAS No. 160, Noncontrolling Interests in ConsolidatedFinancial Statements - An Amendment of ARB No. 51 (“SFAS 160”).  This Statement amends ARB 51 to establishaccounting and reporting standards

 

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for the noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary.  It clarifies that a noncontrolling interestin a subsidiary is an ownership interest in the consolidated entity and shouldbe reported as equity on the financial statements.  SFAS 160 requires consolidated net income tobe reported at amounts that include the amounts attributable to both the parentand the noncontrolling interest. Furthermore, disclosure of the amounts of consolidated net incomeattributable to the parent and to the noncontrolling interest is required onthe face of the financial statements. SFAS 160 is effective as of the beginning of an entity’s first fiscalyear that begins after December 15, 2008. The adoption of SFAS 160 did not have a material effect on ourconsolidated financial position or results of operations, other than thereclassification of minority interests to shareholder’s equity on January 1,2009.

 

In April 2008, theFASB issued FASB Staff Position FAS142-3, Determination of the Useful Life ofIntangible Assets.  This FSP amends thefactors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder FASB Statement No. 142, Goodwill and Other Intangible Assets.  This FSP is effective for fiscal yearsbeginning after December 15, 2008, and interim periods within those fiscalyears.  Early adoption isprohibited.  The guidance for determiningthe useful life of a recognized intangible asset in this FSP shall be appliedprospectively to intangible assets acquired after the effective date.  The adoption of FAS 142-3 is not expected tohave a material effect on our consolidated financial position or results ofoperations.

 

In June 2008, theFASB issued FASB Staff Position EITF 03-6-1, Determining Whether InstrumentsGranted in Share-Based Payment Transactions Are Participating Securities.  This FSP gives guidance on the computation ofearnings per share and the impact of share-based instruments that containcertain nonforfeitable rights to dividends or dividend equivalents.  The FSP is effective for fiscal yearsbeginning after December 31, 2008 and early application isprohibited.  The adoption of FSP 03-6-1is not expected to have a material effect on our consolidated financialposition or results of operations.

 

At a November 24, 2008meeting, the FASB ratified the consensus reached by the Task Force in Issue No. 08-6:Equity Method Investment Accounting Considerations (“EITF 08-6”).  Because of the significant changes to theguidance on subsidiary acquisitions and subsidiary equity transactions and theincreased use of fair value measurements as a result of SFAS141R and 160,questions have arisen regarding the application of that accounting guidance toequity method investments.  EITF 08-6provides guidance for entities that acquire or hold investments accounted forunder the equity method.  This issue iseffective for transactions occurring in fiscal years and interim periodsbeginning on or after December 15, 2008. Early adoption is not permitted. The adoption of EITF 08-6 is not expected to have a material effect onour consolidated financial position or results of operations.

 

On April 9, 2009,the FASB issued the FASB Staff Position FSP FAS 157-4, Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificant Decreased and Identifying Transactions That Are Not Orderly.  This statement provides additional guidancefor estimating fair value measurement in accordance with FAS 157 when thevolume and level of activity for the asset or liability have significantlydecreased and provides guidance on identifying circumstances that indicate atransaction is not orderly.  Itemphasizes that despite significant decreases in volume and level of activityand regardless of the valuation technique(s) used for the asset orliability, the fair value measurement stay the same.  Fair value is the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction (that is, not a forced liquidation or distressed sale) betweenmarket participants at the measurement date under current marketconditions.  This issue is effectiveprospectively for interim and annual periods ending after June 15,2009.  Early adoption is permitted forperiods ending after March 15, 2009. The adoption of FSP FAS 157-4 is not expected to have a material effecton our consolidated financial position or results of operations.

 

On April 9, 2009,the FASB issued the FASB Staff Position FSP FAS 107-1 and APB 28-1, InterimDisclosures about Fair Value of Financial Instruments.  This Statement amends FAS 107 to requireentities to disclose, among other things, the methods and significantassumptions used to estimate the fair value of financial instruments in bothinterim and annual financial statements and amends APB Opinion No. 28 torequire those disclosures in summarized financial information at interimreporting periods.  This FSP applies toall financial instruments within the scope of FAS 107 held by publicly tradedcompanies, as defined in Opinion 28. This issue is effective for interim and annual periods ending after June 15,2009.  Early adoption is permitted forperiods ending after March 15, 2009 only if a reporting entity also earlyadopts FAS 157-4, FAS115-2 and FAS 124-2. The adoption of FSP FAS 107-1 and APB 28-1 is not expected to have amaterial effect on our consolidated financial position or results ofoperations.

 

On April 9, 2009,the FASB issued the FASB Staff Position FSP FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments (“OTTI”).  This Statement amends the OTTI guidance fordebt securities to make the guidance more operational and to improve thepresentation and disclosure of OTTI on debt and equity securities in thefinancial statements.  This FSP does notamend existing recognition and measurement guidance related to OTTI of equitysecurities.  It gives guidance on theevaluation whether an impairment of a debt security is other-than-temporary andthe determination of amount of an OTTI recognized in earnings and othercomprehensive income.  The adoption ofFSP FAS 115-2 and FAS 124-2 is not expected to have a material effect on ourconsolidated financial position or results of operations.

 

On June 12, 2009,the FASB issued SFAS 166, Accounting for Transfers of Financial Assets (“SFAS166”). SFAS 166 amends the derecognition guidance in Statement 140 andeliminates the exemption from consolidation for qualifying special-purposeentities (QSPEs). As a result, a transferor will need to evaluate all existingQSPEs to determine whether they must now be consolidated in accordance withStatement 167. Statement 166 is effective is for financial asset transfersoccurring after the beginning of an entity’s first fiscal year that beginsafter November 15, 2009. We are in the process of assessing the potentialimpact the adoption of SFAS 166 may have on our consolidated financial positionor results of operations.

 

On June 12, 2009,the FASB issued SFAS 167, Amendments to FASB Interpretation No. 46(R) (“SFAS167”). SFAS 167 amends the consolidation guidance applicable to variableinterest entities. The amendments will significantly affect the

 

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overall consolidationanalysis under Interpretation 46(R). While the Board’s discussion leading up tothe issuance of Statement 167 focused extensively on structured financeentities, the amendments to the consolidation guidance affect all entities andenterprises currently within the scope of Interpretations 46(R), as well asQSPEs that are currently excluded from the scope of Interpretation 46(R). TheStatement is effective as of the beginning of the first fiscal year that beginsafter November 15, 2009. We are in the process of assessing the potentialimpact the adoption of SFAS 167 may have on our consolidated financial positionor results of operations.

 

**Item12.  Description of Securities Other thanEquity Securities**

 

Not Applicable.

 

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**PART II**

 

**Item 13.  Defaults, Dividend Arrearages andDelinquencies**

 

None.

 

**Item 14.  Material Modifications to the Rights ofSecurity Holders and Use of Proceeds**

 

The following “Use ofProceeds” information relates to the registration statement on Form F-1(File No. 333-147620) (the “Registration Statement”) for our initialpublic offering of 6,820,000 ADSs (including 1,364,000 ADSs being sold bycertain selling shareholders), for an aggregate offering price of $68,200,000,which Registration Statement was declared effective by the SEC on December 10,2007 and was terminated after all of the registered securities were sold.

 

We received net proceedsof approximately $47.8****million fromour initial public offering, after deducting underwriting discounts andcommissions and estimated offering expenses. We did not receive any of theproceeds from the sale of ADSs by the selling shareholders. None of thetransaction expenses for the offering included payments to directors orofficers of our company or their associates, persons owning more than 10% ormore of our equity securities or our affiliates.

 

We have used or intend touse the net proceeds received from our initial public offering for thefollowing purposes:

 

·                  approximately $5 million to expand ourexisting lines of business, including the funding of new collaborativealliances with university partners, approximately $0.7 million of which hadbeen used as of June 25, 2009;

 

·                  approximately $5 million to develop ourown initial network of learning centers, of which approximately $2.2 millionhas been used as of June 25, 2009 in connection with the opening of53  learning centers;

 

·                  approximately $15 million to complete the constructionof the new campuses at our Jingzhou School (Southern Campus) and Anqing School**,**of which****approximately $8.2 million****hasbeen used as of June 25, 2009;

 

·                  approximately $1.0 million to fund our acquisition ofthe remaining 20% minority interest in 101 online school, all of which was usedin May 2008;

 

·                  approximately $3.7 million to repay the loan incurredin connection with the acquisition of the new office building for ourheadquarters, which amounts were paid in July 2008;

 

·                  approximately $11.0 million to repurchase ordinary sharesfrom Tiger Global, a former majority shareholder, and approximately $3.0million to repurchase ordinary shares according to our share repurchase planfrom July 2008 to December 2008; and

 

·                  the balance of approximately $4.1 million for generalcorporate purposes, including:

 

·                  expanding our sales efforts;

·                  opening new offices; and

·                  developing new or enhanced technologies, products andservices.

 

Theallocation of approximately $14.0 million in net proceeds for the repurchase ofordinary shares was not specifically described in the use of proceeds sectionto the Registration Statement.  Nevertheless, we determined to use a portionof the IPO proceeds for this purpose given our belief that the trading price ofour ADSs has not reflected the company’s potential value, especially in lightof the recent economic downturn. Our management team and board of directorsbelieve the share repurchase transactions are in the best interests of thecompany and its shareholders.  The repurchase decisions also demonstratemanagement’s confidence in our long-term growth and profitability.

 

As of June 25, 2009,approximately $29.8 million of the net offering proceeds from our initialpublic offering had been applied.

 

**Item15.  Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

Our Chief ExecutiveOfficer and Chief Financial Officer have evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) of the Exchange Act as of the end of the period covered by thisannual report. They have concluded that, as of the end of the fiscal yearcovered by this annual report, our disclosure controls and procedures weredesigned, and were effective, to give reasonable assurance that the informationrequired to be disclosed by us in reports that we file under the Exchange Actis recorded, processed, summarized and reported within the time periodsspecified in the rules and forms of the SEC, and were also effective toensure that information required to be disclosed in the reports that we file orsubmit under the Exchange Act is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,to allow timely decisions regarding required disclosure.

 

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**Management’sReport on Internal Control over Financial Reporting**

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act for our company. Internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation ofconsolidated financial statements in accordance with generally acceptedaccounting principles, and includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of a company’s assets, (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of consolidated financial statements in accordance with generallyaccepted accounting principles, and that a company’s receipts and expendituresare being made only in accordance with authorizations of a company’s managementand directors, and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use or disposition of acompany’s assets that could have a material effect on the consolidatedfinancial statements.

 

Because of its inherentlimitations, a system of internal control over financial reporting can provideonly reasonable assurance with respect to consolidated financial statementpreparation and presentation, and may not prevent or detect misstatements.Also, projections of any evaluation of effectiveness to future periods aresubject to the risk that controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies and proceduresmay deteriorate.

 

As required by Section 404of the Sarbanes-Oxley Act and related rules as promulgated by the SEC, ourmanagement assessed the effectiveness of the internal control over financialreporting as of December 31, 2008 using criteria established in InternalControl — Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

Based on this evaluation,our management has concluded that the internal control over financial reportingwas effective as of December 31, 2008 based on the criteria established inInternal Control — Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

This Form 20-Fannual report does not include an attestation report of our registered publicaccounting firm, Deloitte Touche Tohmatsu CPA Ltd., regarding our internalcontrol over financial reporting. Management’s report was not subject toattestation by the Company’s registered public accounting firm pursuant totemporary rules of the SEC that permit us to provide only management’sreport in this annual report on Form 20-F.

 

**Changesin Internal Control over Financial Reporting**

 

We previously disclosedin our annual report on Form 20-F for the year ended December 31,2007 that we had identified material weaknesses and significant deficiencies ininternal control over financial reporting.  The following summarizesthe material weaknesses and significant deficiencies reported as of December 31,2007:

 

·                      Inadequate financial reporting and accountingresources with a good understanding of U.S. GAAP and SEC reportingrequirements. In particular, our independent registered public accounting firmdetermined that we had insufficient resources in the accounting department toproperly analyze transactions and prepare financial statements in accordancewith U.S. GAAP. We have experienced difficulties obtaining timely and consistentfinancial information from our subsidiaries, and we have limited resources tomonitor the accounting policies and financial activities of each subsidiary. Asa result, a significant number of audit adjustments have been made to ourmanagement financial statements.

 

·                      The lack of a comprehensive set of accounting policiesand procedures in accordance with U.S. GAAP, and inadequate guidance as to howtransactions should be accounted for under U.S. GAAP. This has resulted in asignificant number of audit adjustments in the past, and can cause materialaccounting and reporting errors not being detected in a timely manner.

 

The significantdeficiencies that we identified were that we did not have a qualified internaltax team to address our income tax accounting and compliance matters from aU.S. GAAP perspective, and we had certain significant deficiencies with respectto our management information systems.

 

In response to the aboveoutlined material weaknesses and significant deficiencies identified in our2007 filing, in cooperation with our Board and under the supervision of ourAudit Committee, we have been actively engaged in a number of actions toremediate the material weaknesses and significant deficiencies described above,including:

 

·                      Acquired additional resources in thefinancial reporting function with appropriate knowledge and experience in theapplication of U.S. GAAP to enhance controls over monitoring accountingpolicies and preparing financial statements in accordance with U.S. GAAP. A U.S.GAAP reporting team consisted of 3 personnel with rich U.S. GAAP workingexperiences and practices, under the leadership of our Chief Financial Officer,has been formed.

 

·                      Standardized the month-end closing checklist as wellas the reporting package across all subsidiaries with specific timing andcontent requirements. Key accounting functions such as U.S. GAAP reporting fora number of key subsidiaries have been centralized in Company headquarter.

 

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·                      Established a comprehensive accounting policies andaccounting manual in accordance with U.S. GAAP as well as PRC GAAP to provideguidance on the day-to-day operations of accounting and finance personnelacross all subsidiaries.

 

·                      Arranged training for financial and accountingpersonnel on a periodic basis to furnish them with adequate knowledge of U.S.GAAP and SEC rules and disclosure requirements.

 

·                      Hired a professional consulting firm to work with ourinternal audit and IT resources in evaluating, implementing and testing of internal control over financial reporting ona full scale. This contributed a great deal in helping the Company inremediating control deficiencies identified in all areas, especiallydeficiencies with respect to our management information systems.

 

As of December 31,2008, management determined that the applicable controls were effectivelydesigned and operating so as to enable management to conclude that theaforementioned material weaknesses and significant deficiencies have beenremediated.

 

Except for the remedialmeasures described above, there have been no significant changes in ourinternal control over financial reporting during the year ended December 31,2008 that have materially affected, or a reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**Item 16A.Audit Committee Financial Expert**

 

Our board of directorshas determined that Tianwen Liu, a member of our audit committee, is an auditcommittee financial expert as defined by the rules and regulations of theSEC. Tianwen Liu is an independent director as defined by NASDAQ Marketplace Rule 4200(a)(15)and under Rule 10A-3 of the Exchange Act.

 

**Item 16B.Code of Ethics**

 

Our board of directorshas adopted a code of ethics that applies to our directors, officers, employeesand agents, including certain provisions that specifically apply to our chiefexecutive officer, chief financial officer, chief operating officer, chieftechnology officer, vice presidents and any other persons who perform similarfunctions for us.  Our code of businessconduct and ethics is publicly available on our internet website at  http://ir.chinaedu.net and refer to “CorporateGovernance — Governance Policies”.

 

**Item 16C.Principal Accountant Fees and Services**

 

The following table setsforth the aggregate fees by categories specified below in connection withcertain professional services rendered by Deloitte Touche Tohmatsu CPA Ltd.,our independent registered public accounting firm, for the periods indicated.We did not pay any other fees to our independent registered public accountingfirm during the periods indicated below.

 
| ** **                    |   | **Years  ended December 31,** |   |
|-------------------------------|--------|------------------------------------|--------|
| ** **                    |   | **2007**                           |   | **2008** |   |
| ** **                    |   | **(In  thousands, in RMB)**        |
| **Audit fees****(1)**         |   | 12,184                             |   | 5,302 |   |
| **Audit-related fees****(2)** |   | —                             |   | — |   |
| **Tax  fees****(3)**          |   | 639                                |   | — |   |
| **All  other fees****(4)**    |   | —                             |   | — |   |

 

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(1)  “Audit fees”means the aggregate fees billed for professional services rendered by DeloitteTouche Tohmatsu CPA Ltd. for the audit of our annual financial statements andthe review of our comparative interim financial statements, which also includedthe issuance of the audit and review of financial statements and otherassurance services rendered in connection with our initial public offering in2008.

(2)  “Audit-relatedfees” represents aggregate fees billed for professional services rendered by Deloitte Touche Tohmatsu CPA Ltd. for the assurance and related services thatare reasonably related to the performance of the audit or review of ourfinancial statements and are not reported under “Audit fees.”

(3)  “Tax fees”represents the aggregated fees billed for professional services rendered by Deloitte Touche Tohmatsu CPA Ltd. for tax compliance, tax advice, and taxplanning.

(4) “All otherfees” comprise fees for all other services provided by Deloitte Touche TohmatsuCPA Ltd., other than those services covered in footnotes (1) to (3) above.

 

The policy of our audit committee is to pre-approve all audit andnon-audit services provided by Deloitte Touche Tohmatsu CPA Ltd., includingaudit services, audit-related services, tax services and other services asdescribed above.  All audit and non-auditservices disclosed in the table above were pre-approved by the audit committee,or the full board of directors in the event such services were pre-approvedprior to the formation of the audit committee.

 

**Item 16D. Exemptions from the Listing Standards for Audit Committees**

 

Not applicable.

 

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**Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers**

 
| **Period**                                              | ** ** | **Total********Number of********Shares********Purchased** | ** ** | **Average********Price Paid********per Share********(US$)** | ** ** | **Total********Number of********Shares********Purchased as********Part of********Publicly********Announced********Plans or********Programs(2)** | ** ** | **Maximum********Number of********Shares that********May Yet Be********Purchased********Under********the Plans or********Programs(2)** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|
| January 1, 2008 — January 31, 2008       |       | —                                                         |       | —                                                      |       | —                                                                                                                                                    |       | —                                                                                                                                      |       |
| February 1, 2008 — February 28, 2008     |       | —                                                         |       | —                                                      |       | —                                                                                                                                                    |       | —                                                                                                                                      |       |
| March 1, 2008 — March 31, 2008           |       | —                                                         |       | —                                                      |       | —                                                                                                                                                    |       | —                                                                                                                                      |       |
| April 1, 2008 — April 30, 2008           |       | —                                                         |       | —                                                      |       | —                                                                                                                                                    |       | —                                                                                                                                      |       |
| May 1, 2008 — May 31, 2008               |       | —                                                         |       | —                                                      |       | —                                                                                                                                                    |       | —                                                                                                                                      |       |
| June 1, 2008 — June 30, 2008             |       | —                                                         |       | —                                                      |       | —                                                                                                                                                    |       | —                                                                                                                                      |       |
| July 1, 2008 — July 31, 2008             |       | 210,834                                                        |       | 1.31                                                        |       | 210,834                                                                                                                                                   |       | 3,605,960                                                                                                                                   |       |
| August 1, 2008 — August 31, 2008         |       | 575,010                                                        |       | 1.30                                                        |       | 575,010                                                                                                                                                   |       | 3,030,950                                                                                                                                   |       |
| September 1, 2008 — September 30,  2008  |       | 733,401                                                        |       | 1.54                                                        |       | 733,401                                                                                                                                                   |       | 2,297,549                                                                                                                                   |       |
| October 1, 2008 — October 31, 2008       |       | 518,793                                                        |       | 1.27                                                        |       | 518,793                                                                                                                                                   |       | 1,778,756                                                                                                                                   |       |
| November 1, 2008 — November 30,  2008(1) |       | 1,626,058                                                      |       | 1.34                                                        |       | 107,109                                                                                                                                                   |       | 1,671,165                                                                                                                                   |       |
| December 1, 2008 — December 31,  2008    |       | 38,487                                                         |       | 1.43                                                        |       | 38,487                                                                                                                                                    |       | 1,633,160                                                                                                                                   |       |
| **Total**                                               |       | 3,702,583                                                      |       | 1.35                                                        |       | 2,183,634                                                                                                                                                 |       | 1,520,070                                                                                                                                   |       |

 

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(1)          Pursuant to a sharerepurchase agreement entered into with Tiger Global in November 2008, weagreed to purchase from Tiger Global an aggregate of 8,364,634 ordinary shares(2,788,211 ADSs) at US$1.3167 per ordinary share (US$3.95 per ADS), for anaggregate purchase price of RMB75.3 million ($11.0 million).  The agreementalso stipulated that all warrants held by Tiger Global, which represented theright to purchase an aggregate of 1,768,300 ordinary shares, would becancelled.  As of December 31, 2008,we had repurchased and cancelled 1,518,949 ordinary shares and 321,109 warrantsfor an aggregate consideration of RMB13.7 million ($2.0 million).  Subsequent to December 31, 2008, werepurchased and cancelled 6,845,685 ordinary shares and 1,447,191warrants foran aggregate consideration of RMB61.6 million ($9.0 million) in January 2009.

 

(2)          In June 2008, ourboard of directors approved a share repurchase program over a period of 12months for the repurchase up to $5 million of our outstanding ADSs.  The share repurchase program terminated in June 2009.

 

**Item 16F.  Change in Registrant’s Certifying Accountant**

 

Not applicable.

 

**Item 16G. Corporate Governance**

 

We are incorporated under the laws of the Cayman Islands. Our ADSs areregistered with the SEC and listed on the NASDAQ Global Market. However,certain of the corporate governance rules of the NASDAQ Marketplace Rules donot apply to us as a “foreign private issuer,” and we are permitted to followthe corporate governance practices in the Cayman Islands in lieu of mostcorporate governance standards contained in the NASDAQ Marketplace Rules.  Rule 5615(a)(3) of the NASDAQMarketplace Rules requires foreign private issuers listed on the NASDAQ todisclose each requirement that it does not follow and include a brief statementof the home country practice that the company follows in lieu of such corporategovernance requirement(s).  Set forthbelow a brief summary of such significant differences.

 

***Board and Committee Independence***

 

While the NASDAQ Marketplace Rules requireU.S. domestic issuers to have a majority of independent directors, we arenot subject to this requirement. Three of our seven directors are independentnon-executive directors.

 

The NASDAQ Marketplace Rules requireU.S. domestic issuers to regularly schedule executive sessions to beattended by only independent directors. We are not subject to such requirementand our independent directors are entitled to attend all of our board meetings.

 

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***Shareholder Approval***

 

The NASDAQ Marketplace Rules require shareholder approval prior tothe issuance of securities when a stock option or purchase plan is to beestablished or materially amended or other equity compensation arrangement madeor materially amended, pursuant to which stock may be acquired by officers,directors, employees, or consultants. Our stockholders have approved an amendment to our existing equityincentive plan to permit our board of directors at any time to amend, suspendor terminate our equity incentive plan. Any amendment, suspension ortermination of our equity incentive plan must not adversely affect awardsalready granted without consent of the recipient of such awards.

 

**PART III**

** **

**Item 17. Financial Statements**

 

We have elected to provide the financial statements and relatedinformation specified in Item 18.

 

**Item 18. Financial Statements**

 

The consolidated financial statements of ChinaEdu Corporation areincluded in this annual report beginning on page F-1.

 

**Item 19. Exhibits**

 
| **Exhibit  Number** | ** ** | **Description of  Document**                                                                                                                                                                                                                                                                                                                                                                  |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                                          |
| 1.1                 |       | Form of Fifth Amended and Restated Memorandum of Association  (incorporated by reference to Exhibit 3.1 from our registration  statement on Form F-1 (File No. 333-147620), as amended, initially  filed with the SEC on November 26, 2007)                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                          |
| 1.2                 |       | Form of Fifth Amended and Restated Articles of Association  (incorporated by reference to Exhibit 3.2 from our registration  statement on Form F-1 (File No. 333-147620), as amended, initially  filed with the SEC on November 26, 2007)                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.1                 |       | Form of Deposit Agreement among Registrant, depositary and  holders of the American Depositary Receipts (incorporated by reference to  Exhibit 4.1 from our registration statement on Form F-1 (File  No. 333-147620), as amended, initially filed with the SEC on  November 26, 2007)                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.2                 |       | Registrant’s Specimen Certificate for Ordinary Shares (incorporated  by reference to Exhibit 4.2 from our registration statement on  Form F-1 (File No. 333-147620), as amended, initially filed with  the SEC on November 26, 2007)                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.3                 |       | Registrant’s Specimen American Depositary Receipt (incorporated by  reference to Exhibit 4.3 from our registration statement on  Form F-1 (File No. 333-147620), as amended, initially filed with  the SEC on November 26, 2007)                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.1                 |       | English Translation of Shareholder’s Voting Rights Entrustment  Agreement among Hongcheng Technology, Yang Xueshan, Wang Gongquan and Xiandai  Technology dated July 12, 2005 (incorporated by reference to  Exhibit 10.21 from our registration statement on Form F-1 (File  No. 333-147620), as amended, initially filed with the SEC on  November 26, 2007)  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.2                 |       | English Translation of Shareholder’s Voting Rights Entrustment  Agreement among Hongcheng Technology, Yang Xueshan, Xie Changqing and  Hongcheng Education dated July 12, 2005 (incorporated by reference to  Exhibit 10.22 from our registration statement on Form F-1 (File  No. 333-147620), as amended, initially filed with the SEC on  November 26, 2007) |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                          |
| 3. 3                |       | English Translation of Shareholder’s Voting Rights Entrustment  Agreement among Hongcheng Technology, Xie Changqing and Hongcheng Education  dated December 20, 2005 (incorporated by reference to Exhibit 10.23  from our registration statement on Form F-1 (File No. 333-147620),  as amended, initially filed with the SEC on November 26, 2007)            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.1*                |       | Form of Amended Equity Incentive Plan, dated March 2009,  approved by shareholders at the Extraordinary General Meeting on  March 6, 2009                                                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.2                 |       | Form of Indemnification Agreement between the Registrant and its  officers and directors (incorporated by reference to Exhibit 10.2 from  our registration statement on Form F-1 (File No. 333-147620), as  amended, initially filed with the SEC on November 26, 2007)                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.3                 |       | Form of Employment Agreement between the Registrant and a Senior  Executive Officer of the Registrant (incorporated by reference to  Exhibit 10.3 from our registration statement on Form F-1 (File  No. 333-147620), as amended, initially filed with the SEC on  November 26, 2007)                                                                                |

 

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| **Exhibit  Number** | ** ** | **Description of  Document**                                                                                                                                                                                                                                                                                                                                        |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                |
| 4.4                 |       | Fourth Amended and Restated Registration Rights Agreement  (incorporated by reference to Exhibit 10.4 from our registration  statement on Form F-1 (File No. 333-147620), as amended, initially  filed with the SEC on November 26, 2007)                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                |
| 4.5                 |       | English Translation of Loan Agreement between Registrant and Xie  Changqing dated July 15, 2005 (incorporated by reference to  Exhibit 10.5 from our registration statement on Form F-1 (File  No. 333-147620), as amended, initially filed with the SEC on  November 26, 2007)                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                |
| 4.6                 |       | English Translation of Supplementary Agreement to Loan Agreement  between Registrant and Xie Changqing dated July 18, 2007 (incorporated  by reference to Exhibit 10.6 from our registration statement on  Form F-1 (File No. 333-147620), as amended, initially filed with  the SEC on November 26, 2007)                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                |
| 4.7                 |       | English Translation of Amended and Renewed Loan Agreement between  Registrant and Xie Changqing dated July 12, 2005 (incorporated by  reference to Exhibit 10.7 from our registration statement on  Form F-1 (File No. 333-147620), as amended, initially filed with  the SEC on November 26, 2007)                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                                                |
| 4.8                 |       | English Translation of Supplementary Agreement to Amended and Renewed  Loan Agreement between Registrant and Xie Changqing dated July 18, 2007  (incorporated by reference to Exhibit 10.8 from our registration  statement on Form F-1 (File No. 333-147620), as amended, initially  filed with the SEC on November 26, 2007)             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                |
| 4.9                 |       | English Translation of Amended and Renewed Loan Agreement between  Registrant and Yang Xueshan dated June 2005 (incorporated by reference  to Exhibit 10.9 from our registration statement on Form F-1 (File  No. 333-147620), as amended, initially filed with the SEC on  November 26, 2007)                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                |
| 4.10                |       | English Translation of Supplementary Agreement to Amended and Renewed  Loan Agreement between Registrant and Yang Xueshan dated July 18, 2007 (incorporated  by reference to Exhibit 10.10 from our registration statement on  Form F-1 (File No. 333-147620), as amended, initially filed with  the SEC on November 26, 2007)             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                |
| 4.11                |       | English Translation of Loan Agreement between Hongcheng Technology  and Wang Gongquan dated July 12, 2005 (incorporated by reference to  Exhibit 10.11 from our registration statement on Form F-1 (File  No. 333-147620), w as amended, initially filed with the SEC on  November 26, 2007)                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                                |
| 4.12                |       | English Translation of Supplementary Agreement to Loan Agreement  between Hongcheng Technology and Wang Gongquan dated August 30, 2006  (incorporated by reference to Exhibit 10.12 from our registration  statement on Form F-1 (File No. 333-147620), as amended, initially  filed with the SEC on November 26, 2007)                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                |
| 4.13                |       | English Translation of Loan Agreement between Hongcheng Technology  and Yang Xueshan dated July 12, 2005 (incorporated by reference to  Exhibit 10.13 from our registration statement on Form F-1 (File  No. 333-147620), as amended, initially filed with the SEC on  November 26, 2007)                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                |
| 4.14                |       | English Translation of Supplementary Agreement to Loan Agreement  between Hongcheng Technology and Yang Xueshan dated August 30, 2006  (incorporated by reference to Exhibit 10.14 from our registration  statement on Form F-1 (File No. 333-147620), as amended, initially  filed with the SEC on November 26, 2007)                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                |
| 4.15                |       | English Translation of Equity Pledge Agreement among Hongcheng  Technology, Xie Changqing and Yang Xueshan dated July 12, 2005 (incorporated  by reference to Exhibit 10.15 from our registration statement on  Form F-1 (File No. 333-147620), as amended, initially filed with  the SEC on November 26, 2007)                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                |
| 4.16                |       | English Translation of Supplementary Agreement to Equity Pledge  Agreement among Hongcheng Technology, Xie Changqing and Yang Xueshan dated  July 18, 2007 (incorporated by reference to Exhibit 10.16 from our  registration statement on Form F-1 (File No. 333-147620), as  amended, initially filed with the SEC on November 26, 2007) |
|                |       |                                                                                                                                                                                                                                                                                                                                                                |
| 4.17                |       | English Translation of Equity Pledge Agreement among Hongcheng  Technology, Wang Gongquan and Yang Xueshan dated July 12, 2005  (incorporated by reference to Exhibit 10.17 from our registration  statement on Form F-1 (File No. 333-147620), as amended, initially  filed with the SEC on November 26, 2007)                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                |
| 4.18                |       | English Translation of Supplementary Agreement to Equity Pledge  Agreement among Hongcheng Technology, Wang Gongquan and Yang Xueshan dated  July 18, 2007 (incorporated by reference to Exhibit 10.18 from our  registration statement on Form F-1 (File No. 333-147620), as  amended, initially filed with the SEC on November 26, 2007) |
|                |       |                                                                                                                                                                                                                                                                                                                                                                |
| 4.19                |       | English Translation of Equity Pledge Agreement between Hongcheng  Technology and Xie Changqing dated December 20, 2005 (incorporated by  reference to Exhibit 10.19 from our registration statement on  Form F-1 (File No. 333-147620), as amended, initially filed with  the SEC on November 26, 2007)                                    |

 

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| **Exhibit  Number** | ** ** | **Description of  Document**                                                                                                                                                                                                                                                                                                   |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.20                |       | English Translation of Supplementary Agreement to Equity Pledge  Agreement between Hongcheng Technology and Xie Changqing dated July 18, 2007  (incorporated by reference to Exhibit 10.20 from our registration statement  on Form F-1 (File No. 333-147620), as amended, initially filed with the SEC  on November 26, 2007) |
|                |       |                                                                                                                                                                                                                                                                                                                           |
| 4.21                |       | English Translation of Call Option Agreement among Hongcheng  Technology, Yang Xueshan and Xie Changqing dated July 12, 2005 (incorporated  by reference to Exhibit 10.24 from our registration statement on Form F-1  (File No. 333-147620), as amended, initially filed with the SEC on November 26,  2007)                  |
|                |       |                                                                                                                                                                                                                                                                                                                           |
| 4.22                |       | English Translation of Call Option Agreement among Hongcheng  Technology, Yang Xueshan and Wang Gongquan dated July 12, 2005 (incorporated  by reference to Exhibit 10.25 from our registration statement on Form F-1  (File No. 333-147620), as amended, initially filed with the SEC on November 26,  2007)                  |
|                |       |                                                                                                                                                                                                                                                                                                                           |
| 4.23                |       | English Translation of Call Option Agreement between Hongcheng  Technology and Xie Changqing dated December 20, 2005 (incorporated by  reference to Exhibit 10.26 from our registration statement on Form F-1 (File  No. 333-147620), as amended, initially filed with the SEC on November 26,  2007)                          |
|                |       |                                                                                                                                                                                                                                                                                                                           |
| 4.24                |       | English Translation of Power of Attorney executed by Yang Xueshan  dated July 12, 2005 (incorporated by reference to Exhibit 10.27 from our  registration statement on Form F-1 (File No. 333-147620), as amended,  initially filed with the SEC on November 26, 2007)                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                           |
| 4.25                |       | English Translation of Power of Attorney executed by Wang Gongquan  dated July 12, 2005 (incorporated by reference to Exhibit 10.28 from our  registration statement on Form F-1 (File No. 333-147620), as amended,  initially filed with the SEC on November 26, 2007)                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                           |
| 4.26                |       | English Translation of Power of Attorney executed by Yang Xueshan  dated July 12, 2005 (incorporated by reference to Exhibit 10.29 from our  registration statement on Form F-1 (File No. 333-147620), as amended,  initially filed with the SEC on November 26, 2007)                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                           |
| 4.27                |       | English Translation of Power of Attorney executed by Xie Changqing  dated July 12, 2005 (incorporated by reference to Exhibit 10.30 from our  registration statement on Form F-1 (File No. 333-147620), as amended,  initially filed with the SEC on November 26, 2007)                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                           |
| 4.28                |       | English Translation of Power of Attorney executed by Xie Changqing  dated December 20, 2005 (incorporated by reference to Exhibit 10.31 from our  registration statement on Form F-1 (File No. 333-147620), as amended,  initially filed with the SEC on November 26, 2007)                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                           |
| 4.29                |       | English Translation of Technical Consulting and Services Agreement between  Hongcheng Technology and Xiandai Technology dated July 18, 2007 (incorporated  by reference to Exhibit 10.32 from our registration statement on Form F-1  (File No. 333-147620), as amended, initially filed with the SEC on November 26,  2007)   |
|                |       |                                                                                                                                                                                                                                                                                                                           |
| 4.30                |       | English Translation of Technical Consulting and Services Agreement  between Hongcheng Technology and Hongcheng Education dated July 18, 2007  (incorporated by reference to Exhibit 10.33 from our registration statement  on Form F-1 (File No. 333-147620), as amended, initially filed with the SEC  on November 26, 2007)  |
|                |       |                                                                                                                                                                                                                                                                                                                           |
| 4.31                |       | English Translation of Collaborative Alliance Contract between the  Company and Renda Century dated October 22, 2002 (incorporated by reference  to Exhibit 10.34 from our registration statement on Form F-1 (File No. 333-147620),  as amended, initially filed with the SEC on November 26, 2007)                           |
|                |       |                                                                                                                                                                                                                                                                                                                           |
| 4.32                |       | English Translation of Technology Development Agreement between Renda  Online School and CMR dated July 15, 2003 (incorporated by reference to Exhibit  10.35 from our registration statement on Form F-1 (File No. 333-147620), as  amended, initially filed with the SEC on November 26, 2007)                               |
|                |       |                                                                                                                                                                                                                                                                                                                           |
| 4.33                |       | English Translation of Service Agreement between Renda Online School  and CMR dated March 31, 2003 (incorporated by reference to Exhibit 10.36 from  our registration statement on Form F-1 (File No. 333-147620), as amended,  initially filed with the SEC on November 26, 2007)                                             |
|                |       |                                                                                                                                                                                                                                                                                                                           |
| 4.34                |       | English Translation of Memorandum of Understanding (Regarding Service  Fee Payment) between Renda Online School and CMR dated May 16, 2003  (incorporated by reference to Exhibit 10.37 from our registration statement  on Form F-1 (File No. 333-147620), as amended, initially filed with the SEC  on November 26, 2007)    |
|                |       |                                                                                                                                                                                                                                                                                                                           |
| 4.35                |       | English Translation of Memorandum of Understanding between Renda  Online School, CMR, Renda Century and the Company dated March 31, 2003  (incorporated by reference to Exhibit 10.38 from our registration statement  on Form F-1 (File No. 333-147620), as amended, initially filed with the SEC  on November 26, 2007)      |
|                |       |                                                                                                                                                                                                                                                                                                                           |
| 4.36                |       | English Translation of Memorandum of Understanding (Regarding Service  Fee Alteration) between Renda Online School and CMR dated May 16, 2003  (incorporated by reference to Exhibit 10.39 from our                                                                                                                            |

 

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| **Exhibit  Number** | ** ** | **Description of  Document**                                                                                                                                                                                                                                                                                                                                                                                         |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       | registration statement on Form F-1 (File No. 333-147620), as amended,  initially filed with the SEC on November 26, 2007)                                                                                                                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.37                |       | English Translation of Collaborative Alliance Contract among China  Agriculture University, Hongcheng Liye, Shanghai SVA Communication Co., Ltd.  and Beijing CAU Technological Enterprise Incubator Co., Ltd. dated April 28,  2005 (incorporated by reference to Exhibit 10.40 from our registration  statement on Form F-1 (File No. 333-147620), as amended, initially filed with  the SEC on November 26, 2007) |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.38                |       | English Translation of Cooperation Agreement between Zhong Nongda  Networks Development Co., Ltd. and China Agriculture University dated  December 12, 2005 (incorporated by reference to Exhibit 10.41 from our  registration statement on Form F-1 (File No. 333-147620), as amended,  initially filed with the SEC on November 26, 2007)                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.39                |       | English Translation of Service Agreement between China Agriculture  University and Zhong Nongda Networks Development Co., Ltd dated April 28,  2005 (incorporated by reference to Exhibit 10.42 from our registration  statement on Form F-1 (File No. 333-147620), as amended, initially filed with  the SEC on November 26, 2007)                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.40                |       | English Translation of Memorandum of Service Agreement between China  Agriculture University and Zhong Nongda Networks Development Co., Ltd. dated  April 28, 2005 (incorporated by reference to Exhibit 10.43 from our  registration statement on Form F-1 (File No. 333-147620), as amended,  initially filed with the SEC on November 26, 2007)                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.41                |       | English Translation of Collaborative Alliance Contract between  Hongcheng Liye and Dongbei University of Finance and Economics dated May,  2003 (incorporated by reference to Exhibit 10.44 from our registration  statement on Form F-1 (File No. 333-147620), as amended, initially filed with  the SEC on November 26, 2007)                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.42                |       | English Translation of Supplementary Agreement to Collaborative  Alliance Contract between Hongcheng Liye and Dongbei University of Finance  and Economics dated May, 2003 (incorporated by reference to Exhibit 10.45  from our registration statement on Form F-1 (File No. 333-147620), as  amended, initially filed with the SEC on November 26, 2007)                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.43                |       | English Translation of Service Agreement between Dongbei University  of Finance and Economics and Dalian Dongcai Technology Development Co., Ltd.  dated June 26, 2003 (incorporated by reference to Exhibit 10.46 from our  registration statement on Form F-1 (File No. 333-147620), as amended,  initially filed with the SEC on November 26, 2007)                                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.44                |       | English Translation of Licensing Agreement between Dalian Dongcai  Technology Development Co., Ltd, and Hongcheng Technology Development Co.,  Ltd. dated September 18, 2003 (incorporated by reference to Exhibit 10.47  from our registration statement on Form F-1 (File No. 333-147620), as amended,  initially filed with the SEC on November 26, 2007)                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 8.1*                |       | List of subsidiaries of ChinaEdu Corporation                                                                                                                                                                                                                                                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 12.1*               |       | Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a)  under the Exchange Act, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 12.2*               |       | Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a)  under the Exchange Act, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 13.1*               |       | Certification of Chief Executive Officer required by Rule 13a-14(b)/15d-14(b)  under the Exchange Act, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 13.2*               |       | Certification of Chief Financial Officer required by Rule 13a-14(b)/15d-14(b)  under the Exchange Act, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 15.1*               |       | Consent of Deloitte Touche Tohmatsu CPA Ltd.                                                                                                                                                                                                                                                                                                                                                                         |

 

----

*   Filedherewith

 

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**SIGNATURES**

 

The registrant hereby certifies that it meets all of the requirementsfor filing on Form 20-F and that it has duly caused and authorized theundersigned to sign this annual report on its behalf.

 

 
|   | CHINAEDU CORPORATION |
|--------|----------------------|
|   |                 |   |
|   | By                   | /s/ Julia Huang |
|   | Name:                | Julia Huang |
|   | Title:               | Chairman and Chief Executive Officer |

 

Date: June 30, 2009

 

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CHINAEDU CORPORATION

 

Report of Independent Registered

Public Accounting Firm and

Consolidated Financial Statements

For the years ended December 31, 2006, 2007 and 2008

 

F-1

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| **CONTENTS**                                                                                                                                | ** ** | **PAGE** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                                                        |       |     |
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING  FIRM                                                                                    |       | F-3      |
|                                                                                                                                        |       |     |
| CONSOLIDATED  BALANCE SHEETS AS OF DECEMBER 31, 2007 AND 2008                                                                               |       | F-4      |
|                                                                                                                                        |       |     |
| CONSOLIDATED  STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008                                                 |       | F-6      |
|                                                                                                                                        |       |     |
| CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND  COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND  2008 |       | F-7      |
|                                                                                                                                        |       |     |
| CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS  ENDED DECEMBER 31, 2006, 2007 AND 2008                                                 |       | F-8      |
|                                                                                                                                        |       |     |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                                  |       | F-10     |
|                                                                                                                                        |       |     |
| SCHEDULE  I                                                                                                                                 |       | F-53     |

 

F-2

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Table of Contents

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

TO THE BOARD OF DIRECTORS

AND SHAREHOLDERS OF CHINAEDU CORPORATION

 

We have audited the accompanying consolidated balance sheets ofChinaEdu Corporation (the “Company”), its subsidiaries, and its variableinterest entities (collectively, the “Group”) as of December 31, 2007 and 2008and the related consolidated statements of operations, shareholders’ equity andcomprehensive income (loss), and cash flows for each of the three years in theperiod ended December 31, 2008, and the related financial statement scheduleincluded in Schedule 1.  These financialstatements and the related financial statement schedule are the responsibilityof the Group’s management.  Ourresponsibility is to express an opinion on these consolidated financialstatements and the related financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. The Group is not required to have, nor were we engaged to perform, anaudit of its internal control over financial reporting.  Our audits include consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Group’s internal control over financialreporting.  Accordingly, we express nosuch opinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position of the Group as of December 31,2007 and 2008 and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2008 in conformity withaccounting principles generally accepted in the United States of America.  Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic consolidatedfinancial statements taken as a whole, presents fairly in all materialrespects, the information set forth therein.

 

As described in Note 2 to the consolidated financial statements,effective January 1, 2007, the Company adopted the recognition and measurementmethods under Financial Accounting Standards Board Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes - An Interpretation of FASB Statement No.109”.

 

Our audits also comprehended the translation of Renminbi amounts intoUnited States dollar amounts and, in our opinion, such translation has beenmade in conformity with the basis stated in Note 2.  Such United States dollar amounts arepresented solely for the convenience of the readers.

 

Deloitte Touche Tohmatsu CPA Ltd.

Beijing, the People’s Republic of China

June 26, 2009

 

F-3

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**CHINAEDU CORPORATION**

** **

**CONSOLIDATEDBALANCE SHEETS**

**(In thousands, except share-related data)**

 
| ** **                                                                                                                    | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                    | ** ** | **2007**         | ** ** | **2008** | ** ** | **2008** | ** ** |
| ** **                                                                                                                    | ** ** | **RMB**          | ** ** | **RMB** | ** ** | **US$** | ** ** |
| Assets                                                                                                                        |       |             |       |   |   |   |   |
|                                                                                                                          |       |             |       |   |   |   |   |
| Current assets:                                                                                                               |       |             |       |   |   |   |   |
| Cash and cash equivalents                                                                                                     |       | 497,114          |       | 353,933 |   | 51,877 |   |
| Accounts receivable, net                                                                                                      |       | 1,238            |       | 14,854 |   | 2,177 |   |
| Term deposits                                                                                                                 |       | 6,042            |       | 63,500 |   | 9,307 |   |
| Prepaid expenses and other current assets                                                                                     |       | 17,492           |       | 20,251 |   | 2,968 |   |
| Amounts due from related parties                                                                                              |       | 105,522          |       | 150,472 |   | 22,055 |   |
| Deferred tax assets                                                                                                           |       | 9,521            |       | 3,986 |   | 584 |   |
| Total current assets                                                                                                          |       | 636,929          |       | 606,996 |   | 88,968 |   |
|                                                                                                                          |       |             |       |   |   |   |   |
| Cost method investment                                                                                                        |       | 1,210            |       | 1,210 |   | 177 |   |
| Land use rights, net                                                                                                          |       | 26,949           |       | 28,344 |   | 4,154 |   |
| Property and equipment, net                                                                                                   |       | 130,745          |       | 161,925 |   | 23,734 |   |
| Deposits paid for acquisition of property and  equipment                                                                      |       | 2,025            |       | 8,619 |   | 1,263 |   |
| Intangible assets, net                                                                                                        |       | 105,852          |       | 70,377 |   | 10,315 |   |
| Deferred tax assets                                                                                                           |       | 1,416            |       | 2,096 |   | 307 |   |
| Rental deposits                                                                                                               |       | 1,623            |       | 958 |   | 140 |   |
| Goodwill                                                                                                                      |       | 73,319           |       | 38,155 |   | 5,593 |   |
| Total assets                                                                                                                  |       | 980,068          |       | 918,680 |   | 134,651 |   |
|                                                                                                                          |       |             |       |   |   |   |   |
| Liabilities, minority interest and  shareholders’ equity                                                                 |       |             |       |   |   |   |   |
|                                                                                                                          |       |             |       |   |   |   |   |
| Current liabilities:                                                                                                          |       |             |       |   |   |   |   |
| Accounts payable                                                                                                              |       | 2,773            |       | 8,530 |   | 1,250 |   |
| Deferred revenues (including deferred revenuefrom related parties of RMB47,407 and RMB55,615 in 2007 and 2008,  respectively) |       | 83,816           |       | 96,068 |   | 14,081 |   |
| Accrued expenses and other current  liabilities                                                                               |       | 42,096           |       | 51,629 |   | 7,567 |   |
| Amounts due to related parties                                                                                                |       | 28,316           |       | 25,769 |   | 3,777 |   |
| Income taxes payable                                                                                                          |       | 22,455           |       | 27,917 |   | 4,092 |   |
| Other taxes payable                                                                                                           |       | 6,666            |       | 12,008 |   | 1,760 |   |
| Total current liabilities                                                                                                     |       | 186,122          |       | 221,921 |   | 32,527 |   |
| Long-term debt                                                                                                                |       | 25,724           |       | — |   | — |   |
| Deferred revenue                                                                                                              |       | 3,124            |       | 6,073 |   | 890 |   |
| Deferred tax liabilities                                                                                                      |       | 24,036           |       | 11,069 |   | 1,622 |   |
| Unrecognized tax benefit                                                                                                      |       | 4,332            |       | 5,473 |   | 802 |   |
| Total liabilities                                                                                                             |       | 243,338          |       | 244,536 |   | 35,841 |   |

 

F-4

----

Table of Contents

 

**CHINAEDU CORPORATION**

** **

**CONSOLIDATED BALANCE SHEETS - continued**

**(In thousands, except share-related data)**

 
| ** **                                                                                                                                                                         | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                                                                         | ** ** | **2007**         | ** ** | **2008** | ** ** | **2008** | ** ** |
| ** **                                                                                                                                                                         | ** ** | **RMB**          | ** ** | **RMB** | ** ** | **US$** | ** ** |
| Commitments (Note 20)                                                                                                                                                              |       |             |       |   |   |   |   |
|                                                                                                                                                                               |       |             |       |   |   |   |   |
| Minority interest                                                                                                                                                                  |       | 57,996           |       | 84,315 |   | 12,358 |   |
| Shareholders’ equity                                                                                                                                                          |       |             |       |   |   |   |   |
| Ordinary shares (RMB0.08 (US$0.01) par value;  100,000,000 shares authorized; 58,434,407 shares issued and outstanding in  2007; 63,076,129 shares issued and outstanding in 2008) |       | 4,805            |       | 4,573 |   | 670 |   |
| Additional paid-in capital                                                                                                                                                         |       | 760,858          |       | 734,733 |   | 107,693 |   |
| Warrants                                                                                                                                                                           |       | 6,370            |       | 5,555 |   | 814 |   |
| Statutory reserves                                                                                                                                                                 |       | 12,161           |       | 9,597 |   | 1,407 |   |
| Accumulated deficits                                                                                                                                                               |       | (103,254         | )          | (143,709 | ) | (21,064 | ) |
| Accumulated other comprehensive loss                                                                                                                                               |       | (2,206           | )          | (20,920 | ) | (3,068 | ) |
| Total shareholders’ equity                                                                                                                                                    |       | 678,734          |       | 589,829 |   | 86,452 |   |
| Total liabilities, minority interest, and  shareholders’ equity                                                                                                               |       | 980,068          |       | 918,680 |   | 134,651 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-5

----

Table of Contents

 

**CHINAEDU CORPORATION**

** **

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(In thousands, except share-related data)**

 
| ** **                                                                                                                                  | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                  | ** ** | **2006**                     | ** ** | **2007** | ** ** | **2008** | ** ** | **2008** | ** ** |
| ** **                                                                                                                                  | ** ** | **RMB**                      | ** ** | **RMB** | ** ** | **RMB** | ** ** | **US$** | ** ** |
| Net revenue                                                                                                                                 |       |                         |       |   |   |   |   |   |   |
| Sales to third  parties                                                                                                                     |       | 88,286                       |       | 103,604 |   | 107,950 |   | 15,823 |   |
| Sales to related  parties                                                                                                                   |       | 125,245                      |       | 161,384 |   | 209,770 |   | 30,746 |   |
| Net revenue                                                                                                                                 |       | 213,531                      |       | 264,988 |   | 317,720 |   | 46,569 |   |
| Cost of revenue -  third parties (including share-based compensation of RMB300, RMB55 and RMB133  for 2006, 2007 and 2008, respectively)    |       | 48,305                       |       | 65,759 |   | 70,628 |   | 10,353 |   |
| Cost of revenue -  related parties (including share-based compensation of RMB168, RMB291 and  RMB341 for 2006, 2007 and 2008, respectively) |       | 32,003                       |       | 30,590 |   | 47,105 |   | 6,904 |   |
| Total cost of  revenue                                                                                                                      |       | 80,308                       |       | 96,349 |   | 117,733 |   | 17,257 |   |
| Gross profit                                                                                                                                |       | 133,223                      |       | 168,639 |   | 199,987 |   | 29,312 |   |
| Operating expenses:                                                                                                                         |       |                         |       |   |   |   |   |   |   |
| General and  administrative (including share-based compensation of RMB1,942, RMB2,960 and  RMB4,073 for 2006, 2007 and 2008, respectively)  |       | 48,846                       |       | 76,893 |   | 86,908 |   | 12,738 |   |
| Selling and  marketing (including share-based compensation of RMB205, RMB222 and RMB506  for 2006, 2007 and 2008, respectively)             |       | 12,893                       |       | 14,277 |   | 29,851 |   | 4,375 |   |
| Research and  development (including share-based compensation of RMB96, RMB115 and RMB178  for 2006, 2007 and 2008, respectively)           |       | 14,263                       |       | 21,021 |   | 26,185 |   | 3,838 |   |
| Goodwill impairment                                                                                                                         |       | —                       |       | 16,192 |   | 41,036 |   | 6,015 |   |
| Intangible assets  impairment                                                                                                               |       | —                       |       | — |   | 29,057 |   | 4,259 |   |
| Total operating  expenses                                                                                                                   |       | 76,002                       |       | 128,383 |   | 213,037 |   | 31,225 |   |
| Income (loss) from  operations                                                                                                              |       | 57,221                       |       | 40,256 |   | (13,050 | ) | (1,913 | ) |
| Other income                                                                                                                                |       | —                       |       | 394 |   | 562 |   | 82 |   |
| Interest income                                                                                                                             |       | 1,172                        |       | 4,118 |   | 10,652 |   | 1,561 |   |
| Interest expense                                                                                                                            |       | (2,279                       | )          | (2,130 | ) | (1,298 | ) | (190 | ) |
| Income (loss) before  income tax provisions and minority interest                                                                           |       | 56,114                       |       | 42,638 |   | (3,134 | ) | (460 | ) |
| Income tax  provisions:                                                                                                                     |       |                         |       |   |   |   |   |   |   |
| - Current                                                                                                                                   |       | 9,475                        |       | 16,286 |   | 11,860 |   | 1,738 |   |
| - Deferred                                                                                                                                  |       | (2,481                       | )          | (1,283 | ) | (8,387 | ) | (1,229 | ) |
| Total income tax  provisions                                                                                                                |       | 6,994                        |       | 15,003 |   | 3,473 |   | 509 |   |
| Income (loss) before  minority interest                                                                                                     |       | 49,120                       |       | 27,635 |   | (6,607 | ) | (969 | ) |
| Minority interest,  net of taxes                                                                                                            |       | 23,581                       |       | 25,148 |   | 36,412 |   | 5,337 |   |
| Net income (loss)                                                                                                                           |       | 25,539                       |       | 2,487 |   | (43,019 | ) | (6,306 | ) |
| Net income (loss)  per ordinary share-basic                                                                                                 |       | 0.65                         |       | 0.06 |   | (0.75 | ) | (0.11 | ) |
| Net income (loss)  per preferred A share-basic                                                                                              |       | 0.65                         |       | 0.06 |   | — |   | — |   |
| Net income (loss)  per preferred B share-basic                                                                                              |       | 0.65                         |       | 0.06 |   | — |   | — |   |
| Net income (loss)  per preferred C share-basic                                                                                              |       | 0.65                         |       | 0.06 |   | — |   | — |   |
| Net income (loss)  per preferred D share-basic                                                                                              |       | —                       |       | 0.06 |   | — |   | — |   |
| Net income (loss)  per ordinary share-diluted                                                                                               |       | 0.60                         |       | 0.05 |   | (0.75 | ) | (0.11 | ) |
| Weighted average  shares used in calculating ordinary basic net income per share                                                            |       | 18,540,732                   |       | 20,585,074 |   | 57,679,504 |   | 57,679,504 |   |
| Weighted average  shares used in calculating preferred A basic net income per share                                                         |       | 5,150,000                    |       | 4,991,507 |   | — |   | — |   |
| Weighted average  shares used in calculating preferred B basic net income per share                                                         |       | 12,140,495                   |       | 11,561,814 |   | — |   | — |   |
| Weighted average  shares used in calculating preferred C basic net income per share                                                         |       | 3,378,379                    |       | 3,221,030 |   | — |   | — |   |
| Weighted average  shares used in calculating preferred D basic net income per share                                                         |       | —                       |       | 1,787,745 |   | — |   | — |   |
| Weighted average  shares used in calculating ordinary diluted net income per share                                                          |       | 42,708,213                   |       | 47,322,184 |   | 57,679,504 |   | 57,679,504 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-6

----

Table of Contents

 

**CHINAEDUCORPORATION**

 

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY ANDCOMPREHENSIVE INCOME (LOSS)**

**(In thousands, exceptshare-related data)**
|                                                                                 |   |                           |       |                           |       |                           |       |                           |       |                |       |        |       |             |       |       |       |          |       |            |       |              |       |           |       |              |       |        |       |         |       | ** **        |       |      |       |              |       |
|--------------------------------------------------------------------------------------|--------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|---------------------|------------|-------------|------------|------------------|------------|------------|------------|---------------|------------|-----------------|------------|-------------------|------------|----------------|------------|-------------------|------------|-------------|------------|--------------|------------|-------------------|------------|-----------|------------|-------------------|------------|
|                                                                                 |   |                           |       |                           |       |                           |       |                           |       |                |       |        |       |             |       |       |       |          |       |            |       |              |       |           |       |              |       |        |       |         |       | **Accumulated**   |       |      |       |              |       |
|                                                                                 |   | **Series A  convertible** |       | **Series B  convertible** |       | **Series C  convertible** |       | **Series D  convertible** |       |                |       |        |       | **Additional**   |       |       |       |          |       |            |       |              |       | **other**      |       |              |       |        |       |
|                                                                                 |   | **preferred shares**           |       | **preferred shares**           |       | **preferred shares**           |       | **preferred shares**           |       | **Ordinary shares** |       | **paid-in** |       | **Subscription** |       |       |       | **Statutory** |       | **Accumulated** |       | **comprehensive** |       |           |       | **Comprehensive** |       |
|                                                                                 |   | **Shares**                     | ** ** | **Amount**                     | ** ** | **Shares**                     | ** ** | **Amount**                     | ** ** | **Shares**          | ** ** | **Amount**  | ** ** | **Shares**       | ** ** | **Amount** | ** ** | **Shares**    | ** ** | **Amount**      | ** ** | **capital**       | ** ** | **receivable** | ** ** | **Warrants**      | ** ** | **reserve** | ** ** | **deficits** | ** ** | **income (loss)** | ** ** | **Total** | ** ** | **income (loss)** | ** ** |
|                                                                                 |   |                           |       | **RMB**                        | ** ** | ** **                     | ** ** | **RMB**                        | ** ** | ** **          | ** ** | **RMB**     | ** ** | ** **       | ** ** | **RMB**    | ** ** | ** **    | ** ** | **RMB**         | ** ** | **RMB**           | ** ** | **RMB**        | ** ** | **RMB**           | ** ** | **RMB**     | ** ** | **RMB**      | ** ** | **RMB**           | ** ** | **RMB**   | ** ** | **RMB**           | ** ** |
| Balance at  January 1, 2006                                                     |   | 5,150,000                      |       | 426                            |       | 12,140,495                     |       | 1,005                          |       | 3,378,379           |       | 272         |       | —           |       | —     |       | 16,432,347    |       | 1,503           |       | 309,388           |       | —         |       | 8,076             |       | 4,621       |       | (119,996     | )          | (1,060            | )          | 204,235   |       | (3,610            | )          |
| Issuance of ordinary  shares for purchase of a subsidiary                            |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | 2,025,061     |       | 163             |       | 29,995            |       | —         |       | —            |       | —      |       | —       |       | —            |       | 30,158    |       |              |       |
| Exercise of share  options                                                           |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | 550,000       |       | 44              |       | 1,073             |       | (1,117         | )          | —            |       | —      |       | —       |       | —            |       | —    |       |              |       |
| Amortization of  share-based compensation                                            |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | —        |       | —          |       | 2,711             |       | —         |       | —            |       | —      |       | —       |       | —            |       | 2,711     |       |              |       |
| Foreign currency  translation adjustments                                            |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | —        |       | —          |       | —            |       | —         |       | —            |       | —      |       | —       |       | 1,676             |       | 1,676     |       | 1,676             |       |
| Net income                                                                           |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | —        |       | —          |       | —            |       | —         |       | —            |       | —      |       | 25,539       |       | —            |       | 25,539    |       | 25,539            |       |
| Balance at  December 31, 2006                                                   |   | 5,150,000                      |       | 426                            |       | 12,140,495                     |       | 1,005                          |       | 3,378,379           |       | 272         |       | —           |       |       |       | 19,007,408    |       | 1,710           |       | 343,167           |       | (1,117         | )          | 8,076             |       | 4,621       |       | (94,457      | )          | 616               |       | 264,319   |       | 27,215            |       |
|                                                                                 |   |                           |       |                           |       |                           |       |                           |       |                |       |        |       |             |       |       |       |          |       |            |       |              |       |           |       |              |       |        |       |         |       |              |       |      |       |              |       |
| Issuance of Series D  convertible preferred shares                              |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | 2,598,503        |       | 200        |       | —        |       | —          |       | 74,322            |       | —         |       | —            |       | —      |       | —       |       | —            |       | 74,522    |       |              |       |
| Repurchase of ordinary  share as treasury stock                                      |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | (2,300,000    | )          | (178            | )          | (49,869           | )          | —         |       | —            |       | —      |       | —       |       | —            |       | (50,047   | )          |              |       |
| Issuance of treasury  share to new shareholders                                      |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | 2,300,000     |       | 178             |       | 49,869            |       | —         |       | —            |       | —      |       | —       |       | —            |       | 50,047    |       |              |       |
| Collection of  subscriptions receivable                                              |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | —        |       | —          |       | —            |       | 1,117          |       | —            |       | —      |       | —       |       | —            |       | 1,117     |       |              |       |
| Amortization of  share-based compensation                                            |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | —        |       | —          |       | 3,643             |       | —         |       | —            |       | —      |       | —       |       | —            |       | 3,643     |       |              |       |
| Accumulated adjustment  of unrecognized tax benefit                                  |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | —        |       | —          |       | —            |       | —         |       | —            |       | —      |       | (3,744       | )          | —            |       | (3,744    | )          |              |       |
| Repurchase and  cancellation of ordinary share                                       |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | (600,000      | )          | (46             | )          | (12,767           | )          | —         |       | —            |       | —      |       | —       |       | —            |       | (12,813   | )          |              |       |
| Repurchase and  cancellation of Series B convertible preferred share            |   | —                         |       | —                         |       | (30,000                        | )          | (2                             | )          | —              |       | —      |       | —           |       | —     |       | —        |       | —          |       | (638              | )          | —         |       | —            |       | —      |       | —       |       | —            |       | (640      | )          |              |       |
| Exercise of warrants  for Series A convertible preferred shares                 |   | 300,000                        |       | 23                             |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | —        |       | —          |       | 3,386             |       | —         |       | (1,235            | )          | —      |       | —       |       | —            |       | 2,174     |       |              |       |
| Exercise warrants for  ordinary shares                                               |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | 121,622       |       | 9               |       | 2,126             |       | —         |       | (471              | )          | —      |       | —       |       | —            |       | 1,664     |       |              |       |
| Conversion of series  A, B, C, D preferred shares                                    |   | (5,450,000                     | )          | (449                           | )          | (12,110,495                    | )          | (1,003                         | )          | (3,378,379          | )          | (272        | )          | (2,598,503       | )          | (200       | )          | 23,537,377    |       | 1,924           |       | —            |       | —         |       | —            |       | —      |       | —       |       | —            |       | —    |       |              |       |
| Issuance of ordinary  shares on IPO (net of issuance cost of RMB25,665)              |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | 16,368,000    |       | 1,208           |       | 347,619           |       | —         |       | —            |       | —      |       | —       |       | —            |       | 348,827   |       |              |       |
| Provision for  statutory reserves                                                    |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | —        |       | —          |       | —            |       | —         |       | —            |       | 7,540       |       | (7,540       | )          | —            |       | —    |       |              |       |
| Foreign currency  translation adjustments                                            |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | —        |       | —          |       | —            |       | —         |       | —            |       | —      |       | —       |       | (2,822            | )          | (2,822    | )          | (2,822            | )          |
| Net income                                                                           |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | —        |       | —          |       | —            |       | —         |       | —            |       | —      |       | 2,487        |       | —            |       | 2,487     |       | 2,487             |       |
| Balance at  December 31, 2007                                                   |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | 58,434,407    |       | 4,805           |       | 760,858           |       | —         |       | 6,370             |       | 12,161      |       | (103,254     | )          | (2,206            | )          | 678,734   |       | (335              | )          |
|                                                                                 |   |                           |       |                           |       |                           |       |                           |       |                |       |        |       |             |       |       |       |          |       |            |       |              |       |           |       |              |       |        |       |         |       |              |       |      |       |              |       |
| Common shares  converted to ADS shares for future exercise of share options (note 1) |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | 8,344,305     |       | —          |       | —            |       | —         |       | —            |       | —      |       | —       |       | —            |       | —    |       |              |       |
| Repurchase of ordinary  shares and forfeiture of warrants                            |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | (3,702,583    | )          | (253            | )          | (33,122           | )          | —         |       | (815              | )          | —      |       | —       |       | —            |       | (34,190   | )          |              |       |
| Exercise of stock  options (note 1)                                                  |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | —        |       | 21              |       | 1,766             |       | —         |       | —            |       | —      |       | —       |       | —            |       | 1,787     |       |              |       |
| Amortization of  share-based compensation                                            |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | —        |       | —          |       | 5,231             |       | —         |       | —            |       | —      |       | —       |       | —            |       | 5,231     |       |              |       |
| Transfer statutory  reserve                                                          |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | —        |       | —          |       | —            |       | —         |       | —            |       | (5,264      | )          | 5,264        |       | —            |       | —    |       |              |       |
| Provision for  statutory reserves                                                    |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | —        |       | —          |       | —            |       | —         |       | —            |       | 2,700       |       | (2,700       | )          | —            |       | —    |       |              |       |
| Foreign currency  translation adjustments                                            |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | —        |       | —          |       | —            |       | —         |       | —            |       | —      |       | —       |       | (18,714           | )          | (18,714   | )          | (18,714           | )          |
| Net loss                                                                             |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | —        |       | —          |       | —            |       | —         |       | —            |       | —      |       | (43,019      | )          | —            |       | (43,019   | )          | (43,019           | )          |
| Balance at  December 31, 2008                                                   |   | —                         |       | —                         |       | —                         |       | —                         |       | —              |       | —      |       | —           |       | —     |       | 63,076,129    |       | 4,573           |       | 734,733           |       | —         |       | 5,555             |       | 9,597       |       | (143,709     | )          | (20,920           | )          | 589,829   |       | (61,733           | )          |
|                                                                                 |   |                           |       |                           |       |                           |       |                           |       |                |       |        |       |             |       |       |       |          |       | US$             | 670        |              | US$        | 107,693        |       |              |       | US$         | 814        |         | US$        | 1,407             |       | US$       | (21,064    | )                 | US$        | (3,068 | ) | US$ | 86,452 |   |   |   |
|                                                                                      |        |                                |            |                                |            |                                |            |                                |            |                     |            |             |            |                  |            |            |            |               |            |                 |            |                   |            |                |            |                   |            |             |            |              |            |                   |            |           |            |                   |            |  |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-7

----

Table of Contents

 

**CHINAEDUCORPORATION**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands, exceptshare-related data)**

 
| ** **                                                                                                          | ** ** | **Years ended  December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2006**                           | ** ** | **2007** | ** ** | **2008** | ** ** | **2008** | ** ** |
|                                                                                                                |       | RMB                                |       | **RMB** | ** ** | **RMB** | ** ** | **US$** | ** ** |
| Cash flows from  operating activities:                                                                              |       |                               |       |   |   |   |   |   |   |
| Net income (loss)                                                                                                   |       | 25,539                             |       | 2,487 |   | (43,019 | ) | (6,306 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities:                           |       |                               |       |   |   |   |   |   |   |
| Minority interest                                                                                                   |       | 23,581                             |       | 25,148 |   | 36,412 |   | 5,337 |   |
| Share-based  compensation                                                                                           |       | 2,711                              |       | 3,643 |   | 5,231 |   | 767 |   |
| Depreciation and  amortization of property and equipment                                                            |       | 8,157                              |       | 8,206 |   | 12,212 |   | 1,790 |   |
| Amortization of  land use rights                                                                                    |       | 518                                |       | 533 |   | 606 |   | 89 |   |
| Amortization of  intangible assets                                                                                  |       | 8,294                              |       | 8,548 |   | 8,746 |   | 1,282 |   |
| Goodwill and  intangible assets impairment                                                                          |       | —                             |       | 16,192 |   | 70,093 |   | 10,274 |   |
| Provision for  amounts due from related parties                                                                     |       | —                             |       | 7,049 |   | 1,215 |   | 178 |   |
| Property and  equipment write down                                                                                  |       | —                             |       | 688 |   | — |   | — |   |
| Gain on conversion  of warrants of series D convertible preferred shares                                            |       | —                             |       | (394 | ) | — |   | — |   |
| Interest expenses                                                                                                   |       | 2,279                              |       | 2,130 |   | — |   | — |   |
| Loss (gain) from  disposal of property and equipment                                                                |       | (51                                | )          | 89 |   | 1,663 |   | 244 |   |
| Deferred income  taxes                                                                                              |       | (2,481                             | )          | (1,283 | ) | (8,387 | ) | (1,229 | ) |
| Changes in assets  and liabilities:                                                                                 |       |                               |       |   |   |   |   |   |   |
| Accounts receivable                                                                                                 |       | (7,679                             | )          | 11,340 |   | (14,658 | ) | (2,148 | ) |
| Prepaid expenses  and other current assets                                                                          |       | 2,729                              |       | (8,737 | ) | (2,970 | ) | (435 | ) |
| Amounts due from  related parties                                                                                   |       | (2,609                             | )          | (52,492 | ) | (44,950 | ) | (6,588 | ) |
| Accounts payable                                                                                                    |       | 3,685                              |       | (5,640 | ) | (950 | ) | (139 | ) |
| Deferred revenue                                                                                                    |       | 9,705                              |       | 7,905 |   | 15,210 |   | 2,229 |   |
| Accrued expenses  and other current liabilities                                                                     |       | 1,128                              |       | 20,860 |   | 10,011 |   | 1,467 |   |
| Amounts due to  related parties                                                                                     |       | 763                                |       | 25,045 |   | (4,368 | ) | (640 | ) |
| Unrecognized tax  benefit                                                                                           |       | —                             |       | 588 |   | 1,141 |   | 167 |   |
| Income taxes  payable                                                                                               |       | 6,144                              |       | 9,495 |   | 5,462 |   | 801 |   |
| Rental deposits                                                                                                     |       | 458                                |       | (1,187 | ) | 665 |   | 97 |   |
| Other taxes payable                                                                                                 |       | (73                                | )          | 2,914 |   | 5,342 |   | 783 |   |
| Net cash provided  by operating activities                                                                          |       | 82,798                             |       | 83,127 |   | 54,707 |   | 8,020 |   |
|                                                                                                                |       |                               |       |   |   |   |   |   |   |
| Cash flows from  investing activities:                                                                              |       |                               |       |   |   |   |   |   |   |
| Purchase of  businesses, net of cash acquired of RMB1,330, RMB625 and RMB nil in 2006, 2007 and  2008, respectively |       | (30,795                            | )          | (16,520 | ) | (6,700 | ) | (982 | ) |
| Payment of  contingent consideration                                                                                |       | —                             |       | (6,000 | ) | — |   | — |   |
| Purchase of land  use rights                                                                                        |       | (19,092                            | )          | (2,195 | ) | (160 | ) | (23 | ) |
| Purchase of  property and equipment                                                                                 |       | (18,470                            | )          | (69,687 | ) | (36,323 | ) | (5,324 | ) |
| Deposits paid for  acquisition of property and equipment                                                            |       | —                             |       | (2,025 | ) | (8,650 | ) | (1,268 | ) |
| Purchase of term  deposits                                                                                          |       | (10,000                            | )          | 3,958 |   | (57,458 | ) | (8,422 | ) |
| Purchase of  contractual rights                                                                                     |       | (3,450                             | )          | (3,430 | ) | (1,225 | ) | (180 | ) |
| Purchase of cost  method investment                                                                                 |       | (1,110                             | )          | — |   | — |   | — |   |
| Proceeds from  disposal of property and equipment                                                                   |       | 141                                |       | — |   | 31 |   | 5 |   |
| Net cash used in  investing activities                                                                              |       | (82,776                            | )          | (95,899 | ) | (110,485 | ) | (16,194 | ) |

 

F-8

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Tableof Contents

 

**CHINAEDUCORPORATION**

 

**CONSOLIDATED STATEMENTSOF CASH FLOWS - continued**

**(In thousands, exceptshare-related data)**

 
| ** **                                                                                                | ** ** | **Years ended  December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                | ** ** | **2006**                           | ** ** | **2007** | ** ** | **2008** | ** ** | **2008** | ** ** |
| ** **                                                                                                | ** ** | **RMB**                            | ** ** | **RMB** | ** ** | **RMB** | ** ** | **US$** | ** ** |
| Cash flows from  financing activities:                                                                    |       |                               |       |   |   |   |   |   |   |
| Proceeds from  Initial Public Offering (“IPO”) (net of issuance cost of RMB25,665)              |       | —                             |       | 348,827 |   | — |   | — |   |
| Cash dividends paid  to minority shareholders                                                             |       | (12,898                            | )          | (19,028 | ) | (11,319 | ) | (1,659 | ) |
| Capital  contribution by minority shareholders                                                            |       | 6,090                              |       | 2,030 |   | 1,225 |   | 180 |   |
| Proceeds from  issuance of Series D convertible preferred shares (net of issuance costs of RMB2,598) |       | —                             |       | 72,033 |   | — |   | — |   |
| Proceeds from  exercise of warrants                                                                       |       | —                             |       | 3,838 |   | — |   | — |   |
| Repurchase of  Series B convertible preferred shares                                                 |       | —                             |       | (640 | ) | — |   | — |   |
| Repurchase and  cancellation of ordinary shares                                                           |       | —                             |       | (12,813 | ) | (34,190 | ) | (5,011 | ) |
| Issuance of  convertible notes                                                                            |       | —                             |       | — |   | — |   | — |   |
| Repayment of  convertible notes                                                                           |       | —                             |       | (27,783 | ) | — |   | — |   |
| Repayment of  long-term debts                                                                             |       | —                             |       | (1,080 | ) | (25,724 | ) | (3,770 | ) |
| Collection of  subscription receivable                                                                    |       | —                             |       | 1,117 |   | — |   | — |   |
| Proceeds from  exercise of share options                                                                  |       | —                             |       | — |   | 1,787 |   | 262 |   |
| Net cash (used in)  provided by financing activities                                                      |       | (6,808                             | )          | 366,501 |   | (68,221 | ) | (9,998 | ) |
| Effect of exchange  rate changes                                                                          |       | (811                               | )          | (4,930 | ) | (19,182 | ) | (2,815 | ) |
| Net increase in  cash and cash equivalents                                                                |       | (7,597                             | )          | 348,799 |   | (143,181 | ) | (20,987 | ) |
| Cash and cash  equivalents, beginning of year                                                             |       | 155,912                            |       | 148,315 |   | 497,114 |   | 72,864 |   |
| Cash and cash  equivalents, end of year                                                                   |       | 148,315                            |       | 497,114 |   | 353,933 |   | 51,877 |   |
| Supplemental  disclosure of cash flow information                                                         |       |                               |       |   |   |   |   |   |   |
| Income taxes paid                                                                                         |       | 3,331                              |       | 6,791 |   | 4,987 |   | 731 |   |
| Interest paid                                                                                             |       | —                             |       | 4,743 |   | 1,294 |   | 190 |   |
| Supplemental  disclosure of non-cash financing activities:                                                |       |                               |       |   |   |   |   |   |   |
| Receivable for the  issuance of ordinary shares upon exercise of share options by employees               |       | 1,117                              |       | — |   | — |   | — |   |
| Issuance of ordinary  shares for purchases of subsidiaries                                                |       | 30,158                             |       | — |   | — |   | — |   |
| Conversion of  convertible note into Series D preferred shares                                       |       | —                             |       | 2,489 |   | — |   | — |   |
| Purchase of  building financed by mortgage loan                                                           |       | —                             |       | 26,430 |   | — |   | — |   |
| Conversion of  Series A, B, C, D preferred shares into ordinary shares                               |       | —                             |       | 1,924 |   | — |   | — |   |

 

The accompanying notes are an integralpart of these consolidated financial statements.

 

F-9

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Tableof Contents

 

**CHINAEDUCORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDEDDECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, exceptshare-related data)**

 

**1.****                                     ****ORGANIZATION AND PRINCIPAL ACTIVITIES**

 

ChinaEdu Corporation (the “Company”) wasincorporated in the Cayman Islands on September 6, 1999.  The Company, its subsidiaries, and itsvariable interest entities are collectively referred to hereinafter as the “Group”.  The Group principally provides onlineeducational technical and consulting services to schools and universities thatprovide online education services, and traditional classroom and onlineeducation services in the People’s Republic of China (the “PRC”).

 

In June 2008, the Company transferred8,344,305 ordinary shares to its depositary bank representing 2,781,435 ADSs,to be issued to employees and non-employees upon the exercise of their vestedshare options. As of December 31, 2008, 306,825 common shares out of these8,344,305 common shares had been issued to employees and non-employees upon theexercise of their share options. 8,037,480 common shares remain for futureissuance.

 

A summary of the Company’s subsidiaries andvariable interest entities as of December 31, 2008 is as follows:

 
| ** **                                                                                         | ** ** | **Date of incorporation** | ** ** | **Percentage of** | ** ** | ** **                       | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-------------------|------------|----------------------------------|------------|
| **Name of subsidiaries and  variable interest entities**                                           | ** ** | **or establishment**      | ** ** | **ownership**     | ** ** | **Principal activities**         | ** ** |
| ** **                                                                                         | ** ** | ** **                | ** ** | ** **        | ** ** | ** **                       | ** ** |
| CMR Web-learning Co., Ltd. (“CMR Web”)                                                   |       | July 29, 1999        |       | 70                | %          | Online degree program            |       |
|                                                                                               |       |                      |       |              |       |                             |       |
| Beijing Hongcheng Liye Technology Co., Ltd.  (“Hongcheng Liye”)                          |       | April 15, 2003       |       | 100               | %          | Online degree program            |       |
|                                                                                               |       |                      |       |              |       |                             |       |
| Beijing Beiyuda Education Technology Co.,  Ltd. (“Beiyuda”)                              |       | September 26, 2006   |       | 51                | %          | Online degree program            |       |
|                                                                                               |       |                      |       |              |       |                             |       |
| Dalian Dongcai Technology Co., Ltd.  (“Dongcai”)                                         |       | June 4, 2003         |       | 70                | %          | Online degree program            |       |
|                                                                                               |       |                      |       |              |       |                             |       |
| Zhong Nongda Networks Development Co., Ltd.  (“Zhongnongda Networks”)                    |       | October 30, 2001     |       | 55                | %          | Online degree program            |       |
|                                                                                               |       |                      |       |              |       |                             |       |
| Beijing WITT Education Consultant Management  Co., Ltd. (“WITT Education”)               |       | July 4, 2003         |       | 100               | %          | International curriculum program |       |
|                                                                                               |       |                      |       |              |       |                             |       |
| Beijing WITT Science Co., Ltd. (“WITT  Science”)                                         |       | December 26, 2005    |       | 100               | %          | International curriculum program |       |
|                                                                                               |       |                      |       |              |       |                             |       |
| Beijing BCIT Science and Education Management  Consulting Limited (“Beijing BCIT”) (PRC) |       | January 13, 2005     |       | 100               | %          | International curriculum program |       |
|                                                                                               |       |                      |       |              |       |                             |       |
| Beijing Xuezhi Times Education Science Co.,  Ltd. (“Beijing Xuezhi”)                     |       | October 18, 2001     |       | 100               | %          | Online tutoring                  |       |
|                                                                                               |       |                      |       |              |       |                             |       |
| Beijing Gotop Education Co., Ltd. (“Gotop  Hongcheng”)                                   |       | December 26, 2005    |       | 100               | %          | Online tutoring                  |       |
|                                                                                               |       |                      |       |              |       |                             |       |
| Tianjin Gaotuo Hongcheng Education Technology  Co., Ltd. (“Tianjin Gaotuo Hongcheng”)    |       | June 26, 2006        |       | 100               | %          | Online tutoring                  |       |
|                                                                                               |       |                      |       |              |       |                             |       |
| Beijing Distance Education Technology Co.,  Ltd. (“Yuancheng Education”)                 |       | March 31, 2006       |       | 61                | %          | Online tutoring                  |       |
|                                                                                               |       |                      |       |              |       |                             |       |
| Hongcheng Technology Development Co., Ltd.  (“Hongcheng Technology”)                     |       | July 31, 2000        |       | 100               | %          | Online degree program            |       |
|                                                                                               |       |                      |       |              |       |                             |       |
| Chongqing Chongda Yuanxing Co., Ltd.  (“Chongda”)                                        |       | December 24, 2003    |       | 51                | %          | Online degree program            |       |
|                                                                                               |       |                      |       |              |       |                             |       |
| Beijing BCIT Science and Education Management  Consulting Limited (BVI) (“BJ-BCIT”)      |       | February 10, 2006    |       | 100               | %          | International curriculum program |       |
|                                                                                               |       |                      |       |              |       |                             |       |
| BJ-WITT EDU MAN. LTD. (BVI) (“BJ-WITT”)                                                  |       | July 4, 2003         |       | 100               | %          | International curriculum program |       |
|                                                                                               |       |                      |       |              |       |                             |       |
| Xiandai Xingye Network Technology Co., Ltd.  (“Xiandai Technology”)                      |       | November 7, 2000     |       | N/A               | *          | Provision of internet content    |       |
|                                                                                               |       |                      |       |              |       |                             |       |
| Beijing Gotop Electronic Science Co., Ltd.  (“Gotop Electronic”)                         |       | November 29, 1995    |       | 100               | %          | Provision of internet content    |       |

 

F-10

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Tableof Contents

 

**CHINAEDUCORPORATION**

 

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDEDDECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, exceptshare-related data)**

 

**1.****                                     ****ORGANIZATION AND PRINCIPAL ACTIVITIES - continued**

 
| ** **                                                                          | ** ** | **Date of incorporation** | ** ** | **Percentage of** | ** ** | ** **                            | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------|------------|-------------------|------------|---------------------------------------|------------|
| **Name of subsidiaries and  variable interest entities**                            | ** ** | **or establishment**      | ** ** | **ownership**     | ** ** | **Principal activities**              | ** ** |
| ** **                                                                          | ** ** | ** **                | ** ** | ** **        | ** ** | ** **                            | ** ** |
| Beijing Hongcheng Education Technology Co.,  Ltd. (“Hongcheng Education”) | ** ** | March 7, 2005        | ** ** | N/A               | *          | Private primary and secondary schools | ** ** |
|                                                                                | ** ** |                      | ** ** |              |       |                                  | ** ** |
| Jingzhou Tianchang Investment Co., Ltd.  (“Tianchang”)                    | ** ** | September 6, 2005    | ** ** | 72.5              | %          | Private primary and secondary schools | ** ** |
|                                                                                | ** ** |                      | ** ** |              |       |                                  | ** ** |
| Jingzhou Middle School South Campus (“South  Campus”)                     | ** ** | December 28, 2005    | ** ** | 54                | %          | Private primary and secondary schools | ** ** |
|                                                                                | ** ** |                      | ** ** |              |       |                                  | ** ** |
| Pingdingshan Wellent Bilingual School  (“Pingdingshan”)                   | ** ** | September 3, 2002    | ** ** | 100               | %          | Private primary and secondary schools | ** ** |
|                                                                                | ** ** |                      | ** ** |              |       |                                  | ** ** |
| Anqing Foreign Language Middle School  (“Anqing Foreign Language”)        | ** ** | August 2, 2004       | ** ** | 100               | %          | Private primary and secondary schools | ** ** |
|                                                                                | ** ** |                      | ** ** |              |       |                                  | ** ** |
| Beijing Mingdaoyuan Technology Co., Ltd  (“Beijing Mingdao”)              | ** ** | March 27, 2007       | ** ** | 51                | %          | Online degree program                 | ** ** |
| Shanghai Shangcai Education Technology Co.,  Ltd (“Shanghai Shangcai”)    | ** ** | April 18, 2008       | ** ** | 51                | %          | Online degree program                 | ** ** |
|                                                                                | ** ** |                      | ** ** |              |       |                                  | ** ** |
| Dongcai Online Training Center (“Dongcai  Online”)                        | ** ** | July 10, 2008        | ** ** | 70                | %          | Online degree program                 | ** ** |
|                                                                                | ** ** |                      | ** ** |              |       |                                  | ** ** |
| Beijing Zhonglin Technology Co., Ltd  (“Zhonglin”)                        | ** ** | November 3, 2008     | ** ** | 100               | %          | Online degree program                 | ** ** |

 

----

*                                         PRCregulations currently limit foreign ownership of entities that provide Internetcontent and engage in primary and junior high school education.  To comply with PRC laws and regulations, theCompany provides such services in China through its variable interest entities,Xiandai Technology and Hongcheng Education, and their respective subsidiaries.

 

PRC regulations currently limit foreignownership of entities providing Internet content and engaging in primary andjunior high school education.  To complywith PRC laws and regulations, the Company provides such services in Chinathrough its variable interest entities, Xiandai Technology and HongchengEducation, and their related subsidiaries.

 

Xiandai Technology was established by two ofthe Company’s former directors on November 7, 2000, and it holds certainInternet content provider licenses and operates the website www.chinaedu.net onbehalf of the Group.  The initial capitalcontributions from the two former directors were obtained from HongchengTechnology in the form of non-interest bearing loans totaling RMB600.  The loans were eliminated upon consolidation. A summary of the key terms in the loanagreements and the related pledge agreements is as follows:

 
| (i)   | Proceeds from the loans are to be used solely  for the investments in Xiandai Technology;                                                                           |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (ii)  | The loans can only be repaid by a transfer of  the equity ownership interest in Xiandai Technology to Hongcheng Technology;                                         |
| (iii) | Ownership interest in Xiandai Technology  cannot be transferred to other parties without the approval of Hongcheng  Technology;                                     |
| (iv)  | Hongcheng Technology has the right to appoint  all directors and senior management personnel of Xiandai Technology;                                                 |
| (v)   | All ownership rights, including voting rights  and rights to declare and rights to pay dividends, are assigned to Hongcheng  Technology for an indefinite term; and |
| (vi)  | Hongcheng Technology has the right to acquire  all of the ownership interests in Xiandai Technology at any time, when  permitted by the PRC law.                    |

 

F-11

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Tableof Contents

 

**CHINAEDUCORPORATION**

 

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDEDDECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, exceptshare-related data)**

 

**1.****                                     ****ORGANIZATION AND PRINCIPAL ACTIVITIES - continued**

 

In addition, the Company, through itswholly owned subsidiary, Hongcheng Technology, entered into an exclusivetechnical consulting and services agreement with Xiandai Technology.  Under this agreement Hongcheng Technologyprovides network technology development services, website design services,maintenance and security services, employee training services and any otherservices that may be agreed upon by the parties to Xiandai Technology.  As consideration for these services XiandaiTechnology pays Hongcheng Technology a service fee, which representssubstantially all of its net income.

 

Hongcheng Education was established on March 7,2005 by one of the Company’s management personnel and a former director of theCompany, and it holds certain education licenses on behalf of the Group.  The initial capital contributions from thetwo equity owners were obtained from the Company in the form of non-interestbearing loans totaling RMB54,200.  Theloans were eliminated upon consolidation. A summary of the key terms in the loan agreements and the related pledgeagreements is as follows:

 
| (i)   | Proceeds from the loans are to be used solely  for the investments in Hongcheng Education;                                                               |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| (ii)  | The loans can only be repaid by a transfer of  the equity ownership interest in Hongcheng Education to the Company;                                      |
| (iii) | Ownership interest in Hongcheng Education  cannot be transferred to other parties without the approval of the Company;                                   |
| (iv)  | The Company has the right to appoint all  directors and senior management personnel of Hongcheng Education;                                              |
| (v)   | All ownership rights, including voting rights  and rights to declare and rights to pay dividends, are assigned to the Group  for an indefinite term; and |
| (vi)  | The Company has the right to acquire all of  the ownership interests in Hongcheng Education at any time, when permitted by  the PRC law.                 |

 

The Company, through its wholly ownedsubsidiary, Hongcheng Technology, also entered into an exclusive technicalconsulting and services agreement with Hongcheng Education.  Under this agreement Hongcheng Technologyprovides courseware and product development services, website design services,maintenance and security services, employee training services and any otherservices that may be agreed upon by the parties to Hongcheng Education.  As consideration for these services HongchengEducation pays Hongcheng Technology a service fee, which representssubstantially all of its net income.

 

F-12

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Tableof Contents

 

**CHINAEDUCORPORATION**

 

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDEDDECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, exceptshare-related data)**

 

**1.****                                     ****ORGANIZATION AND PRINCIPAL ACTIVITIES - continued**

 

The Group had elected to adopt FinancialAccounting Standard Board (“FASB”) Interpretation No. 46 (revised) “Consolidationof Variable Interest Entities-an Interpretation of ARB No. 51” (“FIN 46R”)from its inception.  Through thecontractual agreements described above, both Xiandai Technology and HongchengEducation are considered to be variable interest entities in accordance withFIN 46R because the equity owners lack the ability to make operating andfinancial decisions about Xiandai Technology and Hongcheng Education’sactivities that have a significant effect on their success and substantiallyall of Xiandai Technology and Hongcheng Education’s businesses are conducted onbehalf of Hongcheng Technology and the Company, respectively.  Under the Technical Consulting and ServicesAgreements, Hongcheng Technology has the sole discretion to charge XiandaiTechnology and Hongcheng Education fees that represent substantially all of thevariable interest entities’ net income. In addition, the Company has assumed all of the voting rights of boththe board of directors and shareholders of Hongcheng Education, and HongchengTechnology has assumed all of the voting rights of both the board of directorsand shareholders of Xiandai Technology. The assumption of these rights gives the Company and HongchengTechnology the rights to declare and pay dividends or other forms ofdistribution.  Since the Company is thesole variable interest holder of Hongcheng Education, and Hongcheng Technologyis the sole variable interest holder of Xiandai Technology, the Company andHongcheng Technology are the primary beneficiaries of such variable interestentities.  Furthermore, because HongchengTechnology and the Company are the primary beneficiaries of Xiandai Technologyand Hongcheng Education, respectively, the accounts of Xiandai Technology andHongcheng Education are included in the accompanying consolidated financialstatements effective as of the date of the above agreements.

 

The following total assets, total liabilities,net revenue and income (loss) of Xiandai Technology and Hongcheng Educationwere included in the accompanying consolidated financial statements:

 
| ** **        | ** ** | **December 31,** | ** ** |
|-------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2007**              | ** ** | **2008** | ** ** |
| ** **        | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
|              |       |                  |       |   |   |
| Total assets      |       | 154,070               |       | 191,898 |   |
|              |       |                  |       |   |   |
| Total liabilities |       | 92,627                |       | 140,652 |   |

 
| ** **    | ** ** | **Years ended  December 31,** | ** ** |
|---------------|------------|------------------------------------|------------|
| ** **    | ** ** | **2006**                           | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **    | ** ** | **RMB**                            | ** ** | **RMB** | ** ** | **RMB** | ** ** |
|          |       |                               |       |   |   |   |   |
| Net revenue   |       | 13,798                             |       | 31,608 |   | 49,517 |   |
| Income (loss) |       | 2,436                              |       | 3,592 |   | (7,566 | ) |

 

F-13

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Tableof Contents

 

**CHINAEDUCORPORATION**

 

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDEDDECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, exceptshare-related data)**

 

**2.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis of presentation**

 

The consolidated financial statements of theGroup have been prepared in accordance with accounting principles generallyaccepted in the United States of America (“US GAAP”).  The accompanying consolidated financialstatements of the Group are stated in Renminbi (“RMB”).  The presentation of the amounts in UnitedStates dollar (“US$”) is included solely for the convenience of the reader andwere converted at a rate of RMB6.8225 to US$1.00, the approximate rate ofexchange at December 31, 2008.  Suchtranslation should not be construed to be the amounts that would have beenreported under US GAAP.

 

**Basis of consolidation**

 

The consolidated financial statements includethe financial statements of the Company, its subsidiaries, and its variableinterest entities.  All inter-companytransactions and balances have been eliminated upon consolidation.

 

**Cash and cash equivalents**

 

Cash and cash equivalents consist of cash onhand and demand deposits which are unrestricted as to withdrawal or use, andhave remaining maturities of three months or less when purchased.

 

**Term deposits**

 

Term deposits consist of deposits placed withfinancial institutions with original maturity terms of greater than threemonths but less than one year.

 

**Fair value**

 

The Group adopted SFAS No. 157 “Fair ValueMeasurements” on January 1, 2008 for all financial assets and liabilitiesand nonfinancial assets and liabilities that are recognized or disclosed atfair value in the financial statements on a recurring basis (at leastannually).  SFAS No. 157 definesfair value, establishes a framework for measuring fair value, and expandsdisclosures about fair value measurements.

 

SFAS 157 defines fair value as the price thatwould be received from selling an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date.  When determining the fair value measurementsfor assets and liabilities required or permitted to be recorded at fair value,the Company considers the principal or most advantageous market in which itwould transact and it considers assumptions that market participants would usewhen pricing the asset or liability.

 

F-14

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Tableof Contents

 

**CHINAEDUCORPORATION**

 

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDEDDECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, exceptshare-related data)**

 

**2.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Fair value** - continued

 

SFAS 157 establishes a fair value hierarchythat requires an entity to maximize the use of observable inputs and minimizethe use of unobservable inputs when measuring fair value.  A financial instrument’s categorizationwithin the fair value hierarchy is based upon the lowest level of input that issignificant to the fair value measurement. SFAS 157 establishes three levels of inputs that may be used to measurefair value:

 

*Level 1*

 

Level 1 applies to assets or liabilities forwhich there are quoted prices in active markets for identical assets orliabilities.

 

*Level 2*

 

Level 2 applies to assets or liabilities forwhich there are inputs other than quoted prices included within Level 1 thatare observable for the asset or liability such as quoted prices for similarassets or liabilities in active markets; quoted prices for identical assets orliabilities in markets with insufficient volume or infrequent transactions(less active markets); or model-derived valuations in which significant inputsare observable or can be derived principally from, or corroborated by,observable market data.

 

*Level 3*

 

Level 3 applies to assets or liabilities forwhich there are unobservable inputs to the valuation methodology that aresignificant to the measurement of the fair value of the assets or liabilities.

 

As of December 31, 2008, the Group did nothave any financial assets and liabilities or nonfinancial assets andliabilities that were measured or recognized at fair value on a recurringbasis.

 

**Use of estimates**

 

The preparation of financial statements inconformity with US GAAP requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and revenue andexpenses in the financial statements and the accompanying notes.  Significant accounting estimates reflected inthe Group’s financial statements include the allowance of doubtful debts, theuseful lives and impairment of property and equipment, and intangible assetswith definite lives; valuation allowance for deferred tax assets; impairment ofgoodwill and indefinite life intangible assets; purchase price allocationrelating to the businesses acquired; and share-based compensation.  Actual results could differ from thoseestimates.

 

F-15

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Tableof Contents

 

**CHINAEDUCORPORATION**

 

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDEDDECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, exceptshare-related data)**

 

**2.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Land use rights, net**

 

Land use rights are recorded at cost lessaccumulated amortization.  Amortizationis provided on a straight-line basis over the estimated useful lives, which isgenerally 50 years and represents the shorter of the estimated usage periods orthe terms of the agreements.

 

**Property and equipment, net**

 

Property and equipment are carried at cost lessaccumulated depreciation and amortization. Assets under construction are not depreciated until they are ready fortheir intended use.  Depreciation andamortization is calculated on a straight-line basis over the followingestimated useful lives:

 
| Buildings                          |   | 20 years                                                |   |
|------------------------------------|--------|---------------------------------------------------------|--------|
| Furniture, fixtures  and equipment |   | 3-5 years                                               |   |
| Motor vehicles                     |   | 5 years                                                 |   |
| Leasehold  improvements            |   | Shorter of the lease term or the estimated useful lives |   |

 

**Acquired intangible assets,net**

 

Acquired intangible assets other than goodwillconsist of trade names, copyrights, customer base, software platform,contractual rights and prepaid operating contracts, and are carried at cost,less accumulated amortization and impairment. Amortization of acquired intangible assets (other than trade names,which are discussed below) is calculated on a straight-line basis over theshorter of the contractual terms or the expected useful lives of the acquiredassets.  The weighted averageamortization periods by major intangible assets class are as follows:

 
| Service agreements  with universities and high schools |   | 26 years |   |
|--------------------------------------------------------|--------|----------|--------|
| Operating platforms                                    |   | 6 years  |   |
| Customer base                                          |   | 4 years  |   |
| Online coursewares                                     |   | 3 years  |   |
| Agency agreements                                      |   | 5 years  |   |
| Contractual rights                                     |   | 16 years |   |
| Prepaid operating  contracts                           |   | 22 years |   |

 

Management has determined that the Group’strade names do not have determinable useful lives.  Consequently, the carrying amounts of tradenames are not amortized but are tested for impairment annually or morefrequently if events or circumstances indicate that the asset may beimpaired.  Such impairment test consistsof a comparison of the fair values of the trade names with their carryingamounts and an impairment loss is recognized if and when the carrying amountsof the trade names exceed their fair values. The estimates of fair values of intangible assets not subject toamortization are determined using various discounted cash flow valuationmethodologies.  Significant assumptionsare inherent in this process, including estimates of discount rates.  Discount rate assumptions are based on anassessment of the risk inherent in the respective intangible assets.

 

F-16

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Tableof Contents

 

**CHINAEDUCORPORATION**

 

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDEDDECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, exceptshare-related data)**

 

**2.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Impairment of long-livedassets**

 

The Group reviews its long-lived assets forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may no longer be recoverable.  When these events occur, the Group measuresimpairment by comparing the carrying value of the long-lived assets to theestimated undiscounted future cash flows expected to result from the use of theassets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than thecarrying amount of the assets, the Group would recognize an impairment lossbased on the fair value of the assets.

 

**Goodwill**

 

Goodwill is not amortized but is evaluated atleast annually for impairment following a two-step process.  The first step compares the fair values ofeach reporting unit to its carrying amount, including goodwill.  If the fair value of each reporting unitexceeds its carrying amount, goodwill is not considered to be impaired and thesecond step will not be required.  If thecarrying amount of a reporting unit exceeds its fair value, the second stepcompares the implied fair value of goodwill to the carrying value of areporting unit’s goodwill.  The impliedfair value of goodwill is determined in a manner similar to accounting for abusiness combination with the allocation of the assessed fair value determinedin the first step to the assets and liabilities of the reporting unit.  The excess of the fair value of the reportingunit over the amounts assigned to the assets and liabilities is the impliedfair value of goodwill.  An impairmentloss is recognized for any excess in the carrying value of goodwill over theimplied fair value of goodwill.

 

**Revenue recognition**

 

The Group’s revenue is principally derived fromfour primary sources: (i) the provision of bundled online educationtechnical and consulting services; (ii) the provision of traditionalclassroom education services; (iii) the provision of online tutoringservices; and (iv) the licensing of online education technology platformand courseware for online education purposes. Revenue is recognized when earned and is reported net of business taxes,which totaled RMB6,247, RMB7,354 and RMB10,974 for the years ended December 31,2006, 2007 and 2008, respectively.

 

*(i)**                                 **Online education technical and consulting services*

 

The Group’s primary business is to provideonline education technical and consulting services to the online degreeprograms of leading Chinese universities. These services include academic program development, technology services,enrollment marketing, student support services, and finance operations.  Since each of the services does not have astand-alone value to the universities, these services are accounted for as oneunit of accounting and the related revenue is recognized ratably over theservice period.  The Group primarilyhosts the online education technology on its system and provides access to theuniversities to whom the Group provides services and their students.  Any universities that prefer hosting theonline education platform or courseware on their own systems must enter intoseparate arrangements with the Group (see Revenue recognition, *“(iv) Licensing of online education technologyplatform and courseware”*below).

 

The Group receives service fees from the universitieseach semester covering services to be provided to the universities during thatsemester.  The amount of service fees tobe received by the Group is derived from tuition fees collected by theuniversities from their students at the beginning of each semester, as adjustedfor the universities’ costs and expenses, such as refunds to students, fees toother service providers, and other operating costs and expenses.

 

Fees received are initially recorded asdeferred revenue and are recognized as revenue ratably over the six-monthschool semester during which the Group provides the services.  The semesters generally begin in April andOctober of each calendar year.  TheGroup does not provide services directly to the students and does not haveobligations to the students.

 

F-17

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**2.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Revenue recognition** - continued

 

*(ii)**                             **Traditional classroom education services*

 

The Group operates a number of private primary and secondary schools,and markets and supports international post-secondary and English languagecurriculum programs to established learning institutions.  Students must register and pay for theirclasses at the beginning of each semester. Fees collected from private primary and secondary schools operationsupfront are initially recorded as deferred revenue at the time the studentsregister for their classes and the Group receives payments.  Revenue is recognized ratably over theservice period, which is six months for each school semester, as the educationservices are delivered.  If a studentwithdraws from a class, any collected but unearned portion of the fee isrecognized at that time unless the student is entitled to a refund underlimited circumstances.

 

For the international post-secondary and English language curriculumprograms, students must register and pay for their classes at the beginning ofeach semester.  Fees collected from theprovision of teaching and other support services to the learning institutionsare recognized either when such services are provided, or on a straight-linebasis over the service period, which is typically the six-month schoolsemester.

 

*(iii)**                         **Online tutoring services*

 

The Group offers online interactive tutoring services to primary andsecondary students.  These services allowthe customers access to the online education services over a fixed period oftime, generally ranging from one month to three years, through the use ofprepaid cards.  The prepaid cards aresold to distributors, from whom the Group collects payments when the prepaidcards are delivered to the distributors. The distributors then resell the cards to end users.  All prepaid fees received from distributorsare initially recognized as deferred revenue and revenue is recognized ratablyover the applicable period that the Group provides services to the end users.

 

*(iv)**                           **Licensing of online education technology platform and courseware*

 

The Group licenses its online education technology platform andcourseware to universities and other education companies and also provides postcontract customer support (“PCS”), which includes telephone support andunspecified upgrades on a when-and-if available basis.  The Group recognizes revenue from licensingof online education technology platform and courseware when persuasive evidenceof an agreement exists, delivery of the services has occurred, the fee is fixedor determinable, and collectability is probable.  As the Group does not have vendor-specificobjective evidence to establish the fair values of the undelivered elements,the Group recognizes revenue from the licensing of online education technologyplatform and courseware over the PCS period, which is typically 12 months.

 

Revenue from the online education technical and consulting services andthe licensing of online education technology network platform and coursewarealso includes the rebate of value-added taxes. Such value-added taxes rebates are granted to the Group as part of thePRC government’s strategy to encourage high technology development in the PRC,and are recorded as a component of revenue when the relevant compliancerequirements are met and that, there are no further obligations, nor subject tofuture refunds or reimbursements. Rebates granted to the Group during 2006, 2007 and 2008 were RMB1,669,RMB2,405 and RMB9,870, respectively.

 

**Accounts receivable**

 

Accounts receivable relate to the online education technical andconsulting services provided to certain university customers.  Accounts receivable are recorded at amountsthat are presently due based on the service agreement, which are net ofallowance for doubtful accounts.

 

The Company writes off accounts receivable when it becomes apparentbased upon age or customer circumstances that such amounts will not becollected.

 

F-18

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**2.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Cost method investment**

 

For investment in an investee over which the Group does not havesignificant influence, the Group carries the investment at cost and recognizesincome as any dividends received from the distribution of the investee’searnings.  The Group reviews the costinvestment for impairment whenever events or changes in circumstances indicatethat the carrying value may no longer be recoverable.  An impairment loss is recognized in earningsequal to the difference between the investment’s cost and its fair value at thebalance sheet date of the reporting period for which the assessment ismade.  The fair value of the investmentwould then become the new cost basis of the investment.  No impairment charges were recorded duringthe years ended December 31, 2006, 2007 and 2008.

 

**Concentration of credit risk**

 

Financial instruments that potentially expose the Group toconcentrations of credit risk consist primarily of cash and cash equivalents,term deposits, accounts receivable and amount due from related parties.  The Group places its cash and cashequivalents and term deposits with financial institutions with high-creditratings and quality.

 

The Group conducts credit evaluations of its customers and generallydoes not require collateral or other security from them.  To date, the Group has not experiencedsignificant losses from uncollectible accounts. An allowance for doubtful accounts amounting to RMB7,049 and RMB1,215was recorded in 2007 and 2008, respectively, These amounts were written-off inthe same year. Management will continue to evaluate the Group’s collectionexperience and will provide for an allowance for doubtful accounts asappropriate.

 

A summary of the customers who accounted for 10% or more of the Group’sconsolidated net revenues was as follows:

 
| ** **    | ** ** | **Years ended December 31,** | ** ** |
|---------------|------------|-----------------------------------|------------|
| **Customers** | ** ** | **2006**                          | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **    | ** ** | **RMB**                           | ** ** | **RMB** | ** ** | **RMB** | ** ** |
|          |       |                              |       |   |   |   |   |
| A             |       | 39,947                            |       | 55,965 |   | 70,197 |   |
| B             |       | 32,522                            |       | 37,075 |   | 42,377 |   |
| C             |       | *                                 |       | * |   | * |   |
| D             |       | 39,643                            |       | 45,926 |   | 48,178 |   |

 

A summary of thecustomers who accounted for 10% or more of the Group’s consolidated accountsreceivable was as follows:

 
| ** **    | ** ** | ** ** | ** ** | **December 31,** | ** ** |
|---------------|------------|------------|------------|-----------------------|------------|
| **Customers** | ** ** | ** ** | ** ** | **2007**              | ** ** | **2008** | ** ** |
|          |       |       |       | **%**                 | ** ** | **%** | ** ** |
|          |       |       |       |                  |       |   |   |
| A             |       |       |       | 32                    |       | 40 |   |
| B             |       |       |       | 21                    |       | 17 |   |
| C             |       |       |       | 32                    |       | 18 |   |
| D             |       |       |       | *                     |       | * |   |
| E             |       |       |       | 11                    |       | 13 |   |

 

----

*                                         Representedless than 10% of consolidated revenue or accounts receivable balances.

 

F-19

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**2.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Research and development**

 

Research and development expenses include payroll, employee benefits,and other headcount-related costs associated with the development of onlineeducation technology platform and courseware. The Group expenses all research and development costs when incurred.

 

**Advertising costs**

 

Advertising costs are expensed as incurred.  The Group incurred advertising costs totalingRMB4,704, RMB5,575 and RMB8,216 for the years ended December 31, 2006,2007 and 2008, respectively, which were recorded as a component of selling andmarketing expenses in the  accompanyingconsolidated statements of operations.

 

**Royalty fees**

 

Royalty fees payable to a middle school increase each year from the2005 calendar year to the 2024 calendar year. Royalty fees during this period were aggregated and recognized asroyalty expense on a straight-line basis. The difference between royalty fees paid and the amount reported asexpenses was included as a component of accrued expenses and other currentliabilities in the accompanying consolidated balance sheets.

 

**Foreign currency translation**

 

The functional currency of the Company, BJ-BCIT and BJ-WITT is theUS$.  The functional currency of allentities within the Group, excluding the Company, BJ-BCIT and BJ-WITT, is theRMB.  Transactions in other currenciesare recorded in each relevant entity’s functional currency at the rates ofexchange prevailing when the transactions occur.  Monetary assets and liabilities denominatedin other currencies are translated into the applicable functional currencies atrates of exchange in effect at the balance sheet dates.  Nonmonetary assets and liabilities areremeasured into the applicable functional currencies at historical exchangerates and transactions denominated in other currencies are converted at theapplicable rates of exchange prevailing when the transactions occur.  Exchange gains and losses are recorded in theconsolidated statements of operations.

 

The Company’s reporting currency is the RMB.  Currency translation involves translatingfrom the functional currency of PRC entities of RMB into the Company’sfunctional currency of US$ followed by a translation from US$ to the reportingcurrency of RMB.  Assets and liabilitiesare translated at the exchange rates at the balance sheet date, equity amountsare translated at historical exchange rates and revenues, expenses, gains, andlosses are translated using the average rate for the year.  Translation adjustments are reported ascumulative translation adjustments and are shown as a separate component ofother comprehensive loss in the consolidated statements of shareholders’equity.

 

**Foreign currency risk**

 

The RMB is not a freely convertible currency.  The State Administration for ForeignExchange, under the authority of the People’s Bank of China, controls theconversion of RMB into foreign currencies. The value of the RMB is subject to changes in central governmentpolicies and to international economic and political developments affecting supplyand demand in the China Foreign Exchange Trading System market.  Cash and cash equivalents and term depositsof the Group included aggregate amounts of RMB171,831 and RMB266,760 at December 31,2007 and 2008, respectively, which were denominated in RMB.

 

F-20

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**2.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Income taxes**

 

Deferred income taxes are recognized for temporary differences betweenthe tax basis of assets and liabilities and their reported amounts in the financialstatements, net operating loss carry forwards and credits, by applying enactedstatutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in theopinion of management, it is more likely than not that some portion or all ofthe deferred tax assets will not be realized. Current income taxes are provided in accordance with the laws of therelevant taxing authorities.

 

On January 1, 2007, the Group adopted FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes - an interpretation of FASBStatement No. 109” (“FIN 48”).  As aresult of the implementation of FIN 48, the accumulated unrecognized taxbenefits were RMB4,332 and RMB5,473 as of December 31, 2007 and 2008,respectively.  The Group recognizedRMB3,744 accumulated impacts to accumulated deficits as of January 1,2007.  The Group recognizes interest andpenalties related to uncertain tax positions in income tax expense, and theGroup recognized RMB269 and RMB nil of accrued interest and penalties,respectively, related to uncertain tax positions as of December 31,2008.  The Group is primarily subject totaxation in China.

 

**Comprehensive income (loss)**

 

Comprehensive income (loss) includes net income and foreign currencytranslation adjustments.  Comprehensiveincome (loss) is reported as a component of the consolidated statements ofshareholders’ equity.

 

**Fair value of financial instruments**

 

Financial instruments include cash and cash equivalents, term deposits,accounts receivable, accounts payable, long-term debt, long-term investment,and amounts due from and due to related parties.  The carrying values of cash and cashequivalents, term deposits, accounts receivable, accounts payable and amountsdue from and to related parties approximate their fair values due to theirshort-term maturities.

 

The fair value of the long-term investment is not disclosed because itis not readily determinable.

 

**Net income (loss) per share**

 

The Group had determined that its convertible preferred shares wereparticipating securities as the preferred shares participate in undistributedearnings on an as-if-converted basis. The holders of the preferred shares were entitled to receive dividendson a pro rata basis, as if their shares had been converted into ordinaryshares.  Accordingly, the Group used thetwo-class method of computing net income (loss) per share, for ordinary andpreferred shares according to participation rights in undistributed earnings.  Under this method, net income applicable toholders of ordinary shares was allocated on a pro rata basis to the ordinaryand preferred shares to the extent that each class may share income for theperiod; whereas undistributed net loss was allocated to ordinary shares becausepreferred shares were not contractually obligated to share the loss.

 

To calculate the number of shares for diluted net income (loss) pershare, convertible preferred shares were computed using the if-convertedmethod.  The effect of the warrants andstock options were computed using the treasury stock method.

 

F-21

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**2.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Share-based compensation**

 

The Group grants stock options to its employees and directors.  Prior to January 1, 2006, the Groupaccounted for employee share-based compensation in accordance with AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees”(“APB Opinion 25”), and its related interpretations, which required the Groupto record a compensation charge for the excess of the fair value for theordinary shares at the grant date over the amount an employee must pay toacquire the ordinary shares.  Thecompensation expense is recognized on a straight-line basis over the applicableservice period, which is usually the vesting period.

 

In December 2004, the FASB issued Statements of FinancialAccounting Standard (“SFAS”) No. 123R, which is a revision of SFAS No. 123,“Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25.  Effective January 1, 2006, the Groupadopted SFAS No. 123R and recognized compensation cost on a straight-linebasis over the requisite service period which is the vesting period.  The Group used the prospective method.  Under this method, share-based compensationexpense recognized includes: (a) compensation expense for all share-basedcompensation awards granted prior to, but not yet vested as of, January 1,2006, based on the intrinsic value as of the grant date; and (b) compensationexpense for all share-based compensation awards granted on or subsequent to January 1,2006, based on the grant-date fair value, estimated using the Black-Scholesoption pricing model.

 

SFAS 123R requires companies to estimate the fair value of share-basedpayment awards on the date of grant using an option-pricing model.  The value of the portion of the award that isultimately expected to vest is recognized as expense ratably over the requisiteservice periods.  The Company hasestimated the fair value of share options as of the date of grant or assumptionusing the Black-Scholes option pricing model, which was developed for use inestimating the value of traded options that have no vesting restrictions andthat are freely transferable.  TheBlack-Scholes model considers, among other factors, the expected life of theaward and the expected volatility of stock price.

 

**Recently issued accounting standards**

 

In September 2006, FASB issued Statement of Financial AccountingStandards (SFAS) No. 157, “Fair Value Measurements” (“SFAS 157”).  Effective January 1, 2008, the Companyadopted the measurement and disclosure other than those requirements related tononfinancial assets and liabilities in accordance with guidance from FASB StaffPosition 157-2, “Effective Date of FASB Statement No. 157,” which delayedthe effective date of SFAS 157 for all nonfinancial assets and nonfinancialliabilities, except for items that are recognized or disclosed at fair value inthe financial statements on a recurring basis (at least annually), until thebeginning of fiscal year 2009.  The Groupdoes not expect the adoption of SFAS 157 for nonfinancial assets andliabilities will have a significant effect on the Group’s consolidatedfinancial statements.

 

In December 2007, the FASB issued SFAS No. 141, BusinessCombinations: (Revised 2007) (“SFAS 141R”). SFAS 141R is relevant to all transactions or events in which one entityobtains control over one or more other businesses.  SFAS 141R requires an acquirer to recognizeany assets and noncontrolling interest acquired and liabilities assumed to bemeasured at fair value as of the acquisition date.  Liabilities related to contingentconsideration are recognized and measured at fair value on the date of acquisitionrather than at a later date when the amount of the consideration may beresolved beyond a reasonable doubt.  Thisrevised approach replaces SFAS 141’s cost allocation process in which the costof an acquisition was allocated to the individual assets acquired andliabilities assumed based on their respective fair value.  SFAS 141R requires any acquisition-relatedcosts and restructuring costs to be expensed as incurred as opposed toallocating such costs to the assets acquired and liabilities assumed aspreviously required by SFAS 141.  UnderSFAS 141R, an acquirer recognizes liabilities for a restructuring plan inpurchase accounting only if the requirements of SFAS 146, Accounting for CostsAssociated with Exit or Disposal Activities, are met.  SFAS 141R allows for the recognition of pre-acquisitioncontingencies at fair value only if these contingencies are likely tomaterialize.  If this criterion is notmet at the acquisition date, then the acquirer accounts for the non-contractualcontingency in accordance with recognition criteria set forth under SFAS 5,Accounting for Contingencies, in which case no amount should be recognized inpurchase accounting.  SFAS 141R iseffective as of the beginning of an entity’s first fiscal year that beginsafter December 15, 2008.  Theadoption of SFAS 141R is not expected to have a material effect on the Group’sconsolidated financial position or results of operations.

 

F-22

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**2.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Recently issued accounting standards** -continued

 

On April 1, 2009, the FASB issued FSP FAS 141(R)-1, which amendsthe guidance in FASB Statement No. 141(R), Business Combinations, toestablish a model for pre-acquisition contingencies that is similar to the oneentity used under Statement 141.  The FSPis effective for business combinations whose acquisition date is on or afterthe beginning of the first annual reporting period beginning on or after December 15,2008.  The adoption of FSP FAS 141(R)-1is not expected to have a material effect on the Group’s consolidated financialposition or results of operations.

 

In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements - An Amendment ofARB No. 51 (“SFAS 160”).  ThisStatement amends ARB 51 to establish accounting and reporting standards for thenoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary.  It clarifies that anoncontrolling interest in a subsidiary is an ownership interest in theconsolidated entity and should be reported as equity on the financialstatements.  SFAS 160 requiresconsolidated net income to be reported at amounts that include the amountsattributable to both the parent and the noncontrolling interest.  Furthermore, disclosure of the amounts ofconsolidated net income attributable to the parent and to the noncontrollinginterest is required on the face of the financial statements.  SFAS 160 is effective as of the beginning ofan entity’s first fiscal year that begins after December 15, 2008.  The Group’s adoption of SFAS 160 did not havea material effect on its consolidated financial position or results ofoperations, other than the reclassification of minority interests toshareholder’s equity on January 1, 2009.

 

In April 2008, the FASB issued FASB Staff Position FAS142-3,Determination of the Useful Life of Intangible Assets.  This FSP amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under FASB Statement No. 142,Goodwill and Other Intangible Assets. This FSP is effective for fiscal years beginning after December 15,2008, and interim periods within those fiscal years.  Early adoption is prohibited.  The guidance for determining the useful lifeof a recognized intangible asset in this FSP shall be applied prospectively tointangible assets acquired after the effective date.  The adoption of FAS 142-3 is not expected tohave a material effect on the Group’s consolidated financial position orresults of operations.

 

In June 2008, the FASB issued FASB Staff Position EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities.  This FSP givesguidance on the computation of earnings per share and the impact of share-basedinstruments that contain certain nonforfeitable rights to dividends or dividendequivalents.  The FSP is effective forfiscal years beginning after December 31, 2008 and early application isprohibited.  The adoption of FSP 03-6-1is not expected to have a material effect on the Group’s consolidated financialposition or results of operations.

 

At a November 24, 2008 meeting, the FASB ratified the consensusreached by the Task Force in Issue No. 08-6: Equity Method InvestmentAccounting Considerations (“EITF 08-6”). Because of the significant changes to the guidance on subsidiaryacquisitions and subsidiary equity transactions and the increased use of fairvalue measurements as a result of SFAS141R and 160, questions have arisenregarding the application of that accounting guidance to equity methodinvestments.  EITF 08-6 provides guidancefor entities that acquire or hold investments accounted for under the equitymethod.  This issue is effective fortransactions occurring in fiscal years and interim periods beginning on orafter December 15, 2008.  Earlyadoption is not permitted.  The adoptionof EITF 08-6 is not expected to have a material effect on the Group’sconsolidated financial position or results of operations.

 

F-23

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**2.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Recently issued accounting standards** -continued

 

On April 9, 2009, the FASB issued the FASB Staff Position FSP FAS157-4, Determining Fair Value When the Volume and Level of Activity for theAsset or Liability Have Significant Decreased and Identifying Transactions ThatAre Not Orderly.  This statement providesadditional guidance for estimating fair value measurement in accordance withFAS 157 when the volume and level of activity for the asset or liability havesignificantly decreased and provides guidance on identifying circumstances thatindicate a transaction is not orderly. It emphasizes that despite significant decreases in volume and level ofactivity and regardless of the valuation technique(s) used for the assetor liability, the fair value measurement stay the same.  Fair value is the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction (that is, not a forced liquidation or distressed sale) betweenmarket participants at the measurement date under current marketconditions.  This issue is effective prospectivelyfor interim and annual periods ending after June 15, 2009.  Early adoption is permitted for periodsending after March 15, 2009.  Theadoption of FSP FAS 157-4 is not expected to have a material effect on theGroup’s consolidated financial position or results of operations.

 

On April 9, 2009, the FASB issued the FASB Staff Position FSP FAS107-1 and APB 28-1, Interim Disclosures about Fair Value of FinancialInstruments.  This Statement amends FAS107 to require entities to disclose, among other things, the methods andsignificant assumptions used to estimate the fair value of financialinstruments in both interim and annual financial statements and amends APBOpinion No. 28 to require those disclosures in summarized financialinformation at interim reporting periods. This FSP applies to all financial instruments within the scope of FAS107 held by publicly traded companies, as defined in Opinion 28.  This issue is effective for interim andannual periods ending after June 15, 2009. Early adoption is permitted for periods ending after March 15, 2009only if a reporting entity also early adopts FAS 157-4, FAS115-2 and FAS124-2.  The adoption of FSP FAS 107-1 andAPB 28-1 is not expected to have a material effect on the Group’s consolidatedfinancial position or results of operations.

 

On April 9, 2009, the FASB issued the FASB Staff Position FSP FAS115-2 and FAS 124-2, Recognition and Presentation of Other-Than-TemporaryImpairments (“OTTI”).  This Statementamends the OTTI guidance for debt securities to make the guidance moreoperational and to improve the presentation and disclosure of OTTI on debt andequity securities in the financial statements. This FSP does not amend existing recognition and measurement guidancerelated to OTTI of equity securities.  Itgives guidance on the evaluation whether an impairment of a debt security isother-than-temporary and the determination of amount of an OTTI recognized inearnings and other comprehensive income. The adoption of FSP FAS 115-2 and FAS 124-2 is not expected to have amaterial effect on the Group’s consolidated financial position or results ofoperations.

 

On June 12, 2009, the FASB issued SFAS 166, Accounting forTransfers of Financial Assets (“SFAS 166”). SFAS 166 amends the derecognitionguidance in Statement 140 and eliminates the exemption from consolidation forqualifying special-purpose entities (QSPEs). As a result, a transfer will needto evaluate all existing QSPEs to determine whether they must now beconsolidated in accordance with Statement 167. Statement 166 is effective isfor financial asset transfers occurring after the beginning of an entity’sfirst fiscal year that begins after November 15, 2009. The Group is in theprocess of assessing the potential impact the adoption of SFAS 166 may have onits consolidated financial position or results of operations.

 

On June 12, 2009, the FASB issued SFAS 167, Amendments to FASBInterpretation No. 46(R) (“SFAS 167”). SFAS 167 amends theconsolidation guidance applicable to variable interest entities. The amendmentswill significantly affect the overall consolidation analysis underInterpretation 46(R). While the Board’s discussion leading up to the issuanceof Statement 167 focused extensively on structured finance entities, theamendments to the consolidation guidance affect all entities and enterprisescurrently within the scope of Interpretations 46(R), as well as QSPEs that arecurrently excluded from the scope of Interpretation 46(R). The Statement iseffective as of the beginning of the first fiscal year that begins after November 15,2009. The Group is in the process of assessing the potential impact theadoption of SFAS 167 may have on its consolidated financial position or resultsof operations.

 

F-24

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**3.****                                     ****ACQUISITIONS**

 

During the periods from 2006 to 2008, in order to enhance its leadingonline degree education service offerings, and to diversify its serviceofferings under the private primary and secondary schools, online tutoring, andinternational curriculum programs, the Group consummated the acquisitions setforth below.  Because the acquirees’business models are similar to that of the Group, the combination of theiroperations with the Group is expected to strengthen the Group’s position in therespective service offerings.  Thesetransactions were recorded using the purchase method of accounting, andaccordingly, the acquired assets and liabilities were recorded at theirestimated fair values on the acquisition date.

 

(a)                                  In May 2007,the Group acquired the remaining 20% equity interest in WITT Education for cashconsideration of RMB12,800 (US$1,654), and WITT Education became a wholly-ownedsubsidiary of the Group.  In addition,the Group paid an additional RMB6,000 to the original shareholder in 2007 sinceWITT Education met the operating performance target set forth in the purchaseagreement, consequently increasing the goodwill by RMB6,000.

 

The purchase price for this 20% minority interest was allocated basedon the fair values of the acquired assets and liabilities on the date of theacquisition.

 

The purchase price was allocated based on the fair value of theacquired assets and liabilities as follows:

 
| ** **                                                          | ** ** | ** ** | ** ** | **Weighted**            | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|-------------------------|------------|
| ** **                                                          | ** ** | ** ** | ** ** | **average remaining**   | ** ** |
| ** **                                                          | ** ** | **RMB**    | ** ** | **amortization period** | ** ** |
| Intangible assets:                                                  |       |       |       |                    |       |
| Service agreement with a high school                                |       | 3,154      |       | 18.7 years              |       |
| Service agreements with other high schools                          |       | 4,980      |       | 13.7 years              |       |
| Total intangible assets                                             |       | 8,134      |       | 15.6 years              |       |
| Deferred tax liabilities relating to  intangibleassets  acquired    |       | (1,907     | )          |                    |       |
| Goodwill (allocated to the internationalcurriculum program segment) |       | 6,573      |       |                    |       |
| Total                                                               |       | 12,800     |       |                    |       |

 

(b)                                 On February 13,2007, Hongcheng Education acquired an additional 10% equity interest inTianchang for cash consideration of RMB3,520. After the acquisition, the equity interest in Tianchang increased to72.5%.

 

The purchase price for the extra 10% equity interest was allocatedbased on the fair values of the acquired assets and liabilities on the date ofthe acquisition.  The followingallocation of purchase price is preliminary and may be revised as furtherinformation becomes available to management.

 
| ** **                                                             | ** ** | **RMB** | ** ** |
|------------------------------------------------------------------------|------------|---------|------------|
|                                                                   |       |    |       |
| Cash and cash equivalents                                              |       | 625     |       |
| Accounts receivable                                                    |       | 13      |       |
| Amounts due from related parties                                       |       | 75      |       |
| Property and equipment                                                 |       | 355     |       |
| Land use right                                                         |       | 1,852   |       |
| Amounts due to related parties                                         |       | (74     | )          |
| Net assets acquired                                                    |       | 2,846   |       |
| Goodwill (allocated to private primary and  secondary schools segment) |       | 674     |       |
| Total                                                                  |       | 3,520   |       |

 

F-25

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**3.             ACQUISITIONS- continued**

 

(c)                                  On February 23,2006, Hongcheng Liye acquired an 80% equity interest in Beijing BCIT by issuing2,025,061 ordinary shares with a fair value of US$3,746 (an equivalent ofRMB30,158) on the acquisition date. Beijing BCIT provides international polytechnic education services (“BCITprogram”).

 

The purchase price was allocated based on the fair values of theacquired assets and liabilities as follows:

 
| ** **                                                          | ** ** | ** ** | ** ** | **Weighted average**    | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|-------------------------|------------|
| ** **                                                          | ** ** | **RMB**    | ** ** | **amortization period** | ** ** |
| Cash and cash equivalents                                           |       | 1,330      |       |                    |       |
| Accounts receivable                                                 |       | 86         |       |                    |       |
| Prepaid expenses                                                    |       | 1,326      |       |                    |       |
| Property and equipment                                              |       | 168        |       |                    |       |
| Accounts payable                                                    |       | (335       | )          |                    |       |
| Accrued expenses                                                    |       | (136       | )          |                    |       |
| Deferred revenue                                                    |       | (1,184     | )          |                    |       |
| Net tangible assets acquired                                        |       | 1,255      |       |                    |       |
| Minority interest                                                   |       | (251       | )          |                    |       |
| Intangible assets:                                                  |       |       |       |                    |       |
| Service agreement with a university                                 |       | 17,600     |       | 30 years                |       |
| Service agreements with other universities                          |       | 2,400      |       | 15 years                |       |
| Total intangible assets                                             |       | 20,000     |       | 28.2 years              |       |
| Deferred tax liabilities relating to  intangibleassets  acquired    |       | (6,148     | )          |                    |       |
| Goodwill (allocated to the internationalcurriculum program segment) |       | 15,302     |       |                    |       |
| Total                                                               |       | 30,158     |       |                    |       |

 

The fair values of the ordinary shares issued in connection with theseacquisitions were determined by a retrospective valuation.  The valuation analysis utilizes and considersgenerally accepted valuation methodologies such as the income, market, cost andactual transaction of the Group.  TheGroup has incorporated certain assumptions, which include projected cash flowsand replacement costs.

 

The Group purchased the remaining 20% of the minority interest inBeijing BCIT for no additional consideration because Beijing BCIT did not meetthe operating performance targets as stated in the original purchaseagreement.  This transaction was completedin May 2007 and Beijing BCIT became wholly owned by the Groupthereafter.  The Group incurred RMB200transaction costs in connection with the acquisition of Beijing BCIT.

 

F-26

----

Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**3.             ACQUISITIONS- continued**

 

(d)                                 In May 2008,the Group acquired the remaining 20% equity interest in Gotop Electronic andBeijing Xuezhi from Tianjin Tianxingjian Co Lts., (“Tianxingjian”), which wereengaged in providing online tutoring service, for an aggregate purchase price acash consideration of RMB6,700 (US$982) and Gotop Electronic and Beijing Xuezhibecame wholly owned by the Group.

 

The purchase price for this 20% minority interest was allocated basedon the fair value of the acquired assets and liabilities on the date ofacquisition.

 
| ** **                                                       | ** ** | ** ** | ** ** | **Weighted**            | ** ** |
|------------------------------------------------------------------|------------|------------|------------|-------------------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | **average remaining**   | ** ** |
| ** **                                                       | ** ** | **RMB**    | ** ** | **amortization period** | ** ** |
| Intangible assets:                                               |       |       |       |                    |       |
| Trade name                                                       |       | 854        |       | indefinite life         |       |
| Online courseware                                                |       | 119        |       | 2 years                 |       |
| Agency agreements                                                |       | 61         |       | 5 years                 |       |
| Operation platform                                               |       | 69         |       | 5 years                 |       |
| Total intangible assets                                          |       | 1,103      |       |                    |       |
| Deferred tax liabilities relating to  intangibleassets  acquired |       | (275       | )          |                    |       |
| Goodwill (allocated to the online tutoring  segment)             |       | 5,872      |       |                    |       |
| Total                                                            |       | 6,700      |       |                    |       |

 

The following unaudited pro forma information summarizes the results ofoperations for the Group for the years ended December 31, 2006, 2007, and2008  assuming that all significantacquisitions during the year ended December 31, 2006 occurred as of January 1,2006; assuming that the significant acquisitions during the year ended December 31,2007 occurred as of January 1, 2006 and 2007, respectively; and assumingthat the significant acquisitions during the year ended December 31, 2008occurred as of January 1, 2007 and 2008, respectively.  The pro forma results have been prepared forcomparative purposes only and do not purport to be indicative of the results ofoperations that would have resulted had the significant acquisitions occurredas of January 1, 2006, nor are they indicative of future operatingresults.

 

F-27

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**3.****            ****ACQUISITIONS- continued**

 
| ** **                                                    | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                    | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                                                    | ** ** | **RMB**                                     | ** ** | **RMB** | ** ** | **RMB** | ** ** |
| ** **                                                    | ** ** | **(Unaudited)**                             | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
|                                                          |       |                                        |       |   |   |   |   |
| Pro forma net revenues                                        |       | 213,862                                     |       | 264,988 |   | 317,720 |   |
| Pro forma net income (loss)                                   |       | 25,163                                      |       | 2,000 |   | (43,046 | ) |
| Pro forma net income (loss) perordinary shares-basic          |       | 0.64                                        |       | 0.05 |   | (0.75 | ) |
| Pro forma net income (loss) perpreferred A share shares-basic |       | 0.64                                        |       | 0.05 |   | — |   |
| Pro forma net income (loss) perpreferred B share shares-basic |       | 0.64                                        |       | 0.05 |   | — |   |
| Pro forma net income (loss) perpreferred C share shares-basic |       | 0.64                                        |       | 0.05 |   | — |   |
| Pro forma net income (loss) perpreferred D share shares-basic |       | —                                      |       | 0.05 |   | — |   |
| Income (loss) per share-diluted                               |       | 0.59                                        |       | 0.04 |   | (0.75 | ) |

 

 

**4.****                                     ****ACCOUNTS RECEIVABLE, NET**

 

Accounts receivable, net consisted of the following:

 
| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2007**              | ** ** | **2008** | ** ** |
| ** **                            | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
|                                  |       |                  |       |   |   |
| Accounts receivable                   |       | 1,238                 |       | 14,854 |   |
| Less: allowance for doubtful accounts |       | —                |       | — |   |
| Accounts receivable, net              |       | 1,238                 |       | 14,854 |   |

 

Movement of allowance for doubtful accounts was as follow:

 
| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2007**              | ** ** | **2008** | ** ** |
| ** **                      | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
|                            |       |                  |       |   |   |
| Balance as of January 1    |       | —                |       | — |   |
| Charged to expenses             |       | 4,031                 |       | 1,042 |   |
| Written off                     |       | (4,031                | )          | (1,042 | ) |
| Balances as of December 31 |       | —                |       | — |   |

 

F-28

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**5.****                                     ****PREPAID EXPENSES AND OTHER CURRENT ASSETS**

 

Prepaid expenses and other current assets consisted of:

 
| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2007**              | ** ** | **2008** | ** ** |
| ** **                        | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
|                              |       |                  |       |   |   |
| Staff advances                    |       | 1,911                 |       | 1,877 |   |
| Advance to an online school       |       | 5,009                 |       | 2,457 |   |
| Prepaid expenses                  |       | 4,360                 |       | 4,052 |   |
| Advances to suppliers             |       | 6,212                 |       | 3,782 |   |
| Interest receivables              |       | —                |       | 2,078 |   |
| Value-added tax rebate receivable |       | —                |       | 6,005 |   |
|                              |       | 17,492                |       | 20,251 |   |

 

Advance to an online school represented amount loaned to an onlineeducation alliance program to fund its operations.  Advance to an online school is non-interestbearing and is payable on demand. Value-added tax rebate receivable represented the accrued value addedtax rebate from online degree programs which will be received in 2009.

 

**6.****                                     ****COST METHOD INVESTMENT**

 

In June 2004, the Group obtained a 10% equity interest inHongcheng Xueyuan Technology Development Co., Ltd. (“Hongcheng Xueyuan”), acompany established in the PRC that is engaged in the provision of educationservices in the PRC, for consideration of RMB100.  In December 2006, the Group increasedits equity interest in Hongcheng Xueyuan to 19% by acquiring an additional 9%equity interest for cash consideration of RMB1,110.

 

**7.****                                     ****LAND USE RIGHTS, NET**

 

Land use rights, net consisted of the following:

 
| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2007**              | ** ** | **2008** | ** ** |
| ** **                     | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
|                           |       |                  |       |   |   |
| Land use rights                |       | 28,137                |       | 30,138 |   |
| Less: accumulated amortization |       | (1,188                | )          | (1,794 | ) |
| Land use rights, net           |       | 26,949                |       | 28,344 |   |

 

Amortization expenses for land use rights totaled RMB518, RMB533 andRMB606 for the years ended December 31, 2006, 2007, and 2008,respectively.  Future amortizationexpenses are RMB604 per year for each of the next five years through December 31,2013.

 

F-29

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**8.****                                     ****PROPERTY AND EQUIPMENT, NET**

 

Property and equipment, net consisted of the following:

 
| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2007**              | ** ** | **2008** | ** ** |
| ** **                                       | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
|                                             |       |                  |       |   |   |
| Buildings                                        |       | 72,248                |       | 123,428 |   |
| Furniture, fixtures and equipment                |       | 34,983                |       | 47,179 |   |
| Motor vehicles                                   |       | 8,983                 |       | 9,630 |   |
| Leasehold improvements                           |       | 9,458                 |       | 13,770 |   |
|                                             |       | 125,672               |       | 194,007 |   |
| Less: accumulated depreciation and  amortization |       | (29,624               | )          | (37,917 | ) |
|                                             |       | 96,048                |       | 156,090 |   |
| Construction in progress                         |       | 34,697                |       | 5,835 |   |
|                                             |       | 130,745               |       | 161,925 |   |

 

Depreciation and amortization expenses for the years ended December 31,2006, 2007 and 2008 were RMB8,157, RMB8,206 and RMB12,212, respectively.

 

**9.****                                     ****INTANGIBLE ASSETS, NET**

 

Intangible assets, net including those acquired as part of businesscombination consisted of the following:

 
| ** **                                            | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                            | ** ** | **2007**                                    | ** ** | **2008** | ** ** |
| ** **                                            | ** ** | **Gross**                                   | ** ** | ** ** | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                                            | ** ** | **carrying**                                | ** ** | **Accumulated** | ** ** | **carrying** | ** ** | **carrying** | ** ** | **Accumulated** | ** ** | **Accumulated** | ** ** | **carrying** | ** ** |
| ** **                                            | ** ** | **amount**                                  | ** ** | **amortization** | ** ** | **amount** | ** ** | **amount** | ** ** | **amortization** | ** ** | **Impairment** | ** ** | **amount** | ** ** |
| ** **                                            | ** ** | **RMB**                                     | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** |
|                                                  |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Intangible assets  with definite lives                |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Service agreements  with universitiesand high schools |       | 89,235                                      |       | (6,550 | ) | 82,685 |   | 89,235 |   | (9,916 | ) | (29,057 | ) | 50,262 |   |
| Operating platforms                                   |       | 690                                         |       | (356 | ) | 334 |   | 759 |   | (487 | ) | — |   | 272 |   |
| Customer base                                         |       | 11,708                                      |       | (7,684 | ) | 4,024 |   | 11,708 |   | (10,934 | ) | — |   | 774 |   |
| Online coursewares                                    |       | 3,504                                       |       | (3,150 | ) | 354 |   | 3,623 |   | (3,543 | ) | — |   | 80 |   |
| Agency agreements                                     |       | 295                                         |       | (177 | ) | 118 |   | 356 |   | (244 | ) | — |   | 112 |   |
| Contract rights                                       |       | 15,230                                      |       | (4,194 | ) | 11,036 |   | 16,455 |   | (5,347 | ) | — |   | 11,108 |   |
| Prepaid operating contracts                           |       | 4,464                                       |       | (625 | ) | 3,839 |   | 4,464 |   | (1,011 | ) | — |   | 3,453 |   |
| Total intangible  assets definite lives               |       | 125,126                                     |       | (22,736 | ) | 102,390 |   | 126,600 |   | (31,482 | ) | (29,057 | ) | 66,061 |   |
| Intangible assets  with indefinite livesTrade name    |       | 3,462                                       |       | — |   | 3,462 |   | 4,316 |   | — |   | — |   | 4,316 |   |
| Total                                                 |       | 128,588                                     |       | (22,736 | ) | 105,852 |   | 130,916 |   | (31,482 | ) | (29,057 | ) | 70,377 |   |

 

F-30

----

Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**9.****                                     ****INTANGIBLE ASSETS, NET - continued**

 

The carrying amount of intangible assets, net by operating segment wasas follows:

 
| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2007**              | ** ** | **2008** | ** ** |
| ** **                            | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
|                                  |       |                  |       |   |   |
| Online degree programs                |       | 50,636                |       | 46,313 |   |
| Private primary and secondary schools |       | 3,840                 |       | 3,453 |   |
| Online tutoring program               |       | 3,737                 |       | 4,645 |   |
| International curriculum program      |       | 47,639                |       | 15,966 |   |
|                                  |       | 105,852               |       | 70,377 |   |

 

Amortization expenses of intangible assets with definite lives wereRMB8,294, RMB8,548 and RMB8,746 for the years ended December 31, 2006,2007 and 2008, respectively. Amortization expenses for intangible assets with definite lives for thenext five years are follows:

 
| **Years ending December 31,** | ** ** | **RMB** | ** ** |
|----------------------------------------------|------------|---------|------------|
|                                         |       |    |       |
| 2009                                         |       | 5,132   |       |
| 2010                                         |       | 4,211   |       |
| 2011                                         |       | 3,436   |       |
| 2012                                         |       | 3,436   |       |
| 2013                                         |       | 3,436   |       |

 

**10.****         ****IMPAIRMENT**

 

(a)                                  Intangibleassets impairment

 

No impairment of intangible assets with definite lives was recorded in2006 or 2007. The Group recorded impairment loss of intangible assets withdefinite lives of RMB29,057 for the year ended December 31, 2008.  The impairment loss is related to theinternational curriculum program, for which management has significantlyreduced its profitability forecast due to adverse changes in the governmentregulatory environment and the resulting early termination of an agreement witha previous overseas partner of the Group.

 

(b)                                 Goodwillimpairment

 

Management performed the annual goodwill test as of December 31,2006, 2007 and 2008.  No impairmentlosses were recorded in 2006.  Based onthe impairment assessment performed by management, the Company incurred agoodwill impairment charge of RMB16,192 and RMB41,036 for the years ended December 31,2007 and 2008, respectively.

 

The impairment for the year ended December 31, 2007 charge relatesto the Friendly Experimental Class program reporting unit (the “FECprogram”) which is a component of the international curriculum programoperating segment, as management has significantly adjusted downward theprofitability forecast for this portion of the Company’s business.

 

Of the RMB41,036 impairment charge for the year ended December 31,2008, RMB39,112 is related to the international curriculum program operatingsegment, for which management has significantly reduced its profitabilityforecast due to adverse change in government regulatory environment and theresulting early termination of its agreement with an overseas partner. Theremaining impairment charge of RMB1,924 is related to the impairment chargetaken for the private primary and secondary school program operating segment in2008 and is primarily due to management’s assessment that construction ofJingzhou School’s South campus will be further delayed, and as a result thereis no definite expected enrollment period.

 

F-31

----

Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**10.          IMPAIRMENT- continued**

 

(b)                                 Goodwillimpairment - continued

 

The fair values of the reporting units were established using acombination of market approach and income approach valuation methodology.  The discounted cash flows for each reportingunit were based on discrete five year financial forecasts developed bymanagement for planning purposes.  Cashflows beyond the five year discrete forecast were estimated using a terminalvalue calculation, which incorporated historical and forecasted financialtrends for each reporting unit and considered long-term earnings growth ratesfor publicly traded peer companies.  Specifically, the income approach valuationsincluded reporting unit cash flow discount rate at approximately 24%, 20% and23.5%, and a terminal value growth rate at 3% for the international curriculumprogram, online degree and online tutoring respectively.  Publicly available information regarding themarket capitalization of the Company was also considered in assessing thereasonableness of the cumulative fair values of the reporting units estimatedusing the discounted cash flow methodology.

 

The changes in the carrying amount of goodwill by operating segmentsfor the years ended December 31, 2007 and 2008 were as follows:

 
| ** **                           | ** ** | **Online**  | ** ** | **Private primary** | ** ** | **Online**   | ** ** | **International** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|-------------|------------|--------------------------|------------|--------------|------------|-------------------|------------|------------|------------|
| ** **                           | ** ** | **degree**  | ** ** | **and secondary**   | ** ** | **tutoring** | ** ** | **curriculum**    | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **program** | ** ** | **schools**              | ** ** | **program**  | ** ** | **program**       | ** ** | **Total**  | ** ** |
| ** **                           | ** ** | **RMB**     | ** ** | **RMB**                  | ** ** | **RMB**      | ** ** | **RMB**           | ** ** | **RMB**    | ** ** |
|                                 |       |        |       |                     |       |         |       |              |       |       |       |
| Balance as of January 1, 2007   |       | 12,860      |       | 1,250                    |       | 14,926       |       | 47,473            |       | 76,509     |       |
| Goodwill acquired during the year    |       | —      |       | 674                      |       | —       |       | 12,328            |       | 13,002     |       |
| Goodwill impairment during the year  |       | —      |       | —                   |       | —       |       | (16,192           | )          | (16,192    | )          |
| Balance as of December 31, 2007 |       | 12,860      |       | 1,924                    |       | 14,926       |       | 43,609            |       | 73,319     |       |
| Goodwill acquired during the year    |       | —      |       | —                   |       | 5,872        |       | —            |       | 5,872      |       |
| Goodwill impairment during the year  |       | —      |       | (1,924                   | )          | —       |       | (39,112           | )          | (41,036    | )          |
| Balance as of December 31, 2008 |       | 12,860      |       | —                   |       | 20,798       |       | 4,497             |       | 38,155     |       |

 

**11.****                              ****ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES**

 

Accrued expenses and other current liabilities consisted of thefollowing:

 
| ** **                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2007**              | ** ** | **2008** | ** ** |
| ** **                                    | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
|                                          |       |                  |       |   |   |
| Advances from students                        |       | 8,541                 |       | 10,774 |   |
| Accrued expenses                              |       | 1,913                 |       | 1,918 |   |
| Accrued professional fees                     |       | 13,247                |       | 5,571 |   |
| Accrued employee payroll and welfare benefits |       | 14,375                |       | 28,294 |   |
| Other payables                                |       | 4,020                 |       | 5,072 |   |
|                                          |       | 42,096                |       | 51,629 |   |

 

Advances from students represented amounts received for books andmaterials, which the Group collected from students on behalf of third partyvendors.

 

F-32

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**12.****                              ****OTHER TAXES PAYABLE**

 

Other taxes payable consisted of the following:

 
| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2007**              | ** ** | **2008** | ** ** |
| ** **                      | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
|                            |       |                  |       |   |   |
| Value-added taxes payable       |       | 3,057                 |       | 5,272 |   |
| Business taxes payable          |       | 3,064                 |       | 6,156 |   |
| Individual income taxes payable |       | 465                   |       | 488 |   |
| Real estate tax                 |       | 80                    |       | 92 |   |
|                            |       | 6,666                 |       | 12,008 |   |

 

The Group is subject to business taxes at a rate of 5% to 5.5%, whichare applied to service revenue generated from online education programs.  The Group is also required to withhold PRCindividual income taxes on employees’ payroll for remittance to the taxauthorities.

 

**13.****                              ****SHARE OPTION PLAN**

 

The Group’s original employee share option plan (the “Original Plan”)was effective on August 10, 2000 and allowed the Group to offer a varietyof incentive awards to employees and non-employee directors of the Group andany consultant who performs services for the Group.  Pursuant to the Original Plan, an incentiveoption could only be granted to employees and a non-qualified option could begranted to employees, non-employee directors and consultants.  The number of option shares granted under theOriginal Plan was not permitted to exceed 15% of the aggregate number of theissued and outstanding shares of the Company, calculated on a fully-dilutedbasis.  Under the terms of the OriginalPlan, the exercise price for an incentive option shall not be less than 100% ofthe fair market value of the ordinary share on the date of grant.  Option vesting schedule shall be more thanthree years and no acceleration for option vesting schedule shall be permitted,unless approved by Board of Directors. On December 13, 2004, an Amended and Restated Stock Option Plan(the “Amended Plan”) became effective, and replaced the Original Plan.  Under the Amended Plan, options to purchaseordinary shares increased to 12,846,621.

 

In March 2007, the Company adopted the Second Amended and RestatedStock Option Plan (the “Second Amended Plan”), which replaced the Amended Planand provided for the grant of restricted shares as well as options.  Under the Second Amended Plan, the Companywas permitted to grant options to purchase up to 12,846,621 ordinary shares tothe Group’s employees, directors and consultants.  The minimum option vesting period for anyoption grants under the Second Amended Plan was three years and acceleration ofoption vesting was not permitted, unless approved by the Board of Directors.

 

The terms of the Second Amended Plan did not permit incentive stockoptions to be granted to greater than 10% shareholders unless the exerciseprice equaled at least 110% of the fair market value.

 

The Group adopted the equity incentive plan (the “Equity Incentive Plan”)in November 2007.  The EquityIncentive Plan replaced the Second Amended Plan adopted in March 2007.  The Equity Incentive Plan allows the Group tooffer a variety of incentive awards to employees and non-employee directors ofthe Group and any consultant who performs services for the Group.  Pursuant to the Equity Incentive Plan, anincentive share option (“ISO”) may only be granted to employees and anon-qualified option may be granted to employees, non-employee directors andconsultants.  Not more than 12,846,621shares may be issued under the Equity Incentive Plan; provided, however, thatthere shall be an annual increase on January 1 of each year in an amountequal to two percent (2%) of the total number of the Company’s outstandingshares at December 31 of the preceding calendar year.  Under the terms of the Equity Incentive Plan,the exercise price for an ISO shall not be less than 100% of the fair marketvalue per share on the grant date. However, in the case of an ISO awarded to a grantee who at the time ofgrant owned shares representing more than 10% of the combined voting power ofall classes of the Company’s share capital (including any equity of any of theCompany’s Chinese subsidiaries), the exercise price of option may not be lessthan 110% of the fair market value of the ordinary shares on the date of grantof such ISO and the option period may not be greater than five years from thedate of grant.  The minimum optionvesting period for any option grant is three years and acceleration of vestingis not permitted, unless approved by the Board of Directors.

 

F-33

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**13.****                              ****SHARE OPTION PLAN - continued**

 

All options granted will vest over periods ranging from immediately tofour years and any unexercised options will expire ten years from the date ofgrant.  As of December 31, 2007 and2008, respectively, options to purchase 9,435,000 and 9,892,800 ordinary shareswere outstanding, and options to purchase 161,621 and 565,685 ordinary sharesremained available for future grants.

 

Options to employees

 

Through December 31, 2008, the Group had granted to its employees,officers, and directors an accumulated total of 14,354,400 share options topurchase ordinary shares, all of which were exercisable in US$.

 

For the share options granted after January 1, 2006, the Grouprecorded compensation expense under the fair value method according to SFAS No. 123R,estimated using the Black-Scholes option pricing model.  The Group recorded a total compensationexpense of RMB2,677, RMB3,643 and RMB5,226 for the years ended December 31,2006, 2007 and 2008, respectively.

 

The following assumptions were used in the employee option pricingmodel:

 
| ** **                                    | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                          |       |     |       |     |       |     |       |
| Weighted average risk-free interest rate      |       | 4.68     | %          | 4.45     | %          | 2.62     | %          |
| Weighted average expected option life (years) |       | 4.8      |       | 5.0      |       | 6.0      |       |
| Weighted average volatility rate              |       | 47.6     | %          | 44.1     | %          | 46.6     | %          |
| Weighted average dividend yield               |       | —   |       | —   |       | —   |       |

 

Options to non-employees

 

On May 20, 2004, the Group granted 5,000 share options with anexercise price of US$1.09 (RMB9.02) per share to a legal advisor for thesettlement of prior services rendered to the Group, which options were fullyvested in 2006.  On January 21,2008, the Group granted 4,000 share options with an exercise price of US$2.07(RMB14.12) per share to two consultants. The Group recorded compensation expense of RMB34, RMBnil and RMB5 forthe years ended December 31, 2006, 2007 and 2008, respectively, estimatedusing the Black-Scholes option pricing model.

 

The following assumptions were used in the non-employee option pricingmodel:

 
| ** **                                    | ** ** | **2006** | ** ** | **2008** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
|                                          |       |     |       |     |       |
| Weighted average risk-free interest rate      |       | 4.66     | %          | 2.64     | %          |
| Weighted average expected option life (years) |       | 6.5      |       | 6.0      |       |
| Weighted average volatility rate              |       | 53       | %          | 44       | %          |
| Weighted average dividend yield               |       | —   |       | —   |       |

 

F-34

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**13.****                              ****SHARE OPTION PLAN - continued**

 

The following assumptions were used in the employee and non-employeeoption pricing model:

 

(1)                                  Volatility

 

The volatility of the underlying ordinary shares during the life of theoptions was estimated based on the historical stock price volatility of theCompany’s ordinary shares and listed shares of comparable companies over aperiod comparable to the expected term of the options.

 

(2)                                  Risk-freeinterest rate

 

Risk-free interest rate was estimated based on the yield to maturity oftreasury bonds of the United States with a maturity period close to theexpected term of the options.

 

(3)                                  Expectedterm

 

As the Company did not have sufficient historical data on the exerciseof share options, it estimated the expected term as the average between theweighted average vesting period of the options and the contractual term.

 

(4)                                  Dividendyield

 

The Company assumed a zero dividend yield based on its expecteddividend policy over the expected term of the options.  The Company anticipates growing its businesswith internally generated cash and does not expect to pay dividends in the foreseeablefuture, nor has it paid any dividends to date.

 

(5)                                  Exerciseprice

 

The exercise price of the options was determined by the Board ofDirectors.

 

(6)                                  Fair valueof underlying ordinary shares

 

When estimating the fair value of the ordinary shares on the grantdates before the Company’s initial public offering (“IPO”), managementconsidered a number of factors, including the result of equity transactions ofthe Company, while taking into account standard valuation methods and theachievement of certain events.  After theIPO, the closing market price of the Company’s ordinary shares as of the grantdate was used as the fair value of the underlying ordinary shares on that date.

 

F-35

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**13.****                              ****SHARE OPTION PLAN - continued**

 

Summary of share options to employees and non-employee

 

A summary of the share option activity, including grants to bothemployees and non-employees, was as follows. Each of the fair value of the ordinary shares, intrinsic value andexercise prices set forth in the tables below are denominated in US$ becausethe share options are exercisable in US$.

 
| ** **                            | ** ** | **Outstanding options** | ** ** |
|---------------------------------------|------------|------------------------------|------------|
| ** **                            | ** ** | ** **                   | ** ** | **Weighted** | ** ** | **Weighted average** | ** ** |
| ** **                            | ** ** | **Number of**           | ** ** | **average exercise** | ** ** | **grant-date** | ** ** |
| ** **                            | ** ** | **options**                  | ** ** | **price per share** | ** ** | **fair value** | ** ** |
| ** **                            | ** ** | ** **                   | ** ** | **US$** | ** ** | **US$** | ** ** |
|                                  |       |                         |       |   |   |   |   |
| Outstanding at January 1, 2006   |       | 9,026,050                    |       | 1.08 |   | 1.01 |   |
| Granted                               |       | 1,056,350                    |       | 1.85 |   | 1.85 |   |
| Exercised                             |       | (550,000                     | )          | 0.26 |   | 0.92 |   |
| Cancelled                             |       | (849,800                     | )          | 1.20 |   | 1.19 |   |
| Outstanding at December 31, 2006 |       | 8,682,600                    |       | 1.22 |   | 1.10 |   |
| Granted                               |       | 925,000                      |       | 2.85 |   | 3.05 |   |
| Exercised                             |       | —                       |       | — |   | — |   |
| Cancelled                             |       | (172,600                     | )          | 1.43 |   | 1.43 |   |
| Outstanding at December 31, 2007 |       | 9,435,000                    |       | 1.38 |   | 1.29 |   |
| Granted                               |       | 1,279,000                    |       | 1.86 |   | 1.86 |   |
| Exercised                             |       | (306,825                     | )          | 0.85 |   | 0.72 |   |
| Cancelled                             |       | (413,306                     | )          | 2.77 |   | 3.00 |   |
| Expired                               |       | (101,069                     | )          | 1.60 |   | 1.60 |   |
| Outstanding at December 31, 2008 |       | 9,892,800                    |       | 1.40 |   | 1.30 |   |

 

The weighted average per share fair values of options as of theirrespective grant dates were as follows:

 
| ** ** | ** ** | **December 31,** | ** ** |
|------------|------------|-----------------------|------------|
| ** ** | ** ** | **2006**              | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** ** | ** ** | **US$**               | ** ** | **US$** | ** ** | **US$** | ** ** |
|       |       |                  |       |   |   |   |   |
| Options    |       | 0.86                  |       | 1.28 |   | 0.89 |   |

 

F-36

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**13.****                              ****SHARE OPTION PLAN - continued**

 

Summary of share options to employees and non-employee -continued

 

The following table summarizes information regarding options issuedwithin the 12-month period prior to December 31, 2008:

 
| ** **             | ** ** | ** **                  | ** ** | ** **              | ** ** | **Fair value of** | ** ** | **Intrinsic value**    | ** ** |
|------------------------|------------|-----------------------------|------------|-------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Grant date**    | ** ** | **No. of shares** | ** ** | **Exercise price** | ** ** | **ordinary shares**    | ** ** | **at grant date** | ** ** |
|                   |       |                        |       |                    |       |                        |       |                        |       |
| January 21, 2008  |       | 154,000                     |       | US$                     | 2.07       |                        | US$        | 2.07                        | *          | — |   |
| March 18, 2008    |       | 730,000                     |       | 2.13                    |       | 2.13                        | *          | —                      |       |
| August 15, 2008   |       | 375,000                     |       | 1.27                    |       | 1.27                        | *          | —                      |       |
| September 9, 2008 |       | 20,000                      |       | 1.56                    |       | 1.56                        | *          | —                      |       |
|                        |            |                             |            |                         |            |                             |            |                             |            |  |  |

 

----

*                                         Determinedbased on the closing market price of the ADS, as quoted on the NASDAQ GlobalMarket on the grant date, divided by three.

 

The following table summarizes information with respect to employee andnon-employee share options outstanding at December 31, 2008:

 
| ** **              | ** ** | **Options outstanding** | ** ** | **Options exercisable** | ** ** |
|-------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **              | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **              | ** ** | ** **                   | ** ** | **average**                  | ** ** | **Weighted** | ** ** | **average** | ** ** | ** ** | ** ** | **average** | ** ** | **Weighted** | ** ** | **average** | ** ** |
| ** **              | ** ** | **Number**                   | ** ** | **remaining**                | ** ** | **average** | ** ** | **intrinsic** | ** ** | **Number** | ** ** | **remaining** | ** ** | **average** | ** ** | **intrinsic** | ** ** |
| ** **              | ** ** | **outstanding**              | ** ** | **contractual life**    | ** ** | **exercise price** | ** ** | **value** | ** ** | **exercisable** | ** ** | **contractual life** | ** ** | **exercise price** | ** ** | **value** | ** ** |
| ** **              | ** ** | ** **                   | ** ** | ** **                   | ** ** | **US$** | ** ** | **US$** | ** ** | ** ** | ** ** | ** ** | ** ** | **US$** | ** ** | **US$** | ** ** |
|                    |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Average exercise price: |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| US$                     |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| 0.50                    |       | 926,000                      |       | 3.72 years                   |       | 0.50 |   | 1.13 |   | 926,000 |   | 3.72 years |   | 0.50 |   | 1.13 |   |
| 0.86                    |       | 438,000                      |       | 5.90 years                   |       | 0.86 |   | 0.77 |   | 438,000 |   | 5.90 years |   | 0.86 |   | 0.77 |   |
| 1.00                    |       | 645,000                      |       | 2.32 years                   |       | 1.00 |   | 0.63 |   | 645,000 |   | 2.32 years |   | 1.00 |   | 0.63 |   |
| 1.09-1.85               |       | 6,466,500                    |       | 6.45 years                   |       | 1.31 |   | 0.36 |   | 5,747,583 |   | 6.18 years |   | 1.28 |   | 0.38 |   |
| 1.86-2.85               |       | 837,300                      |       | 9.20 years                   |       | 2.12 |   | — |   | — |   | — |   | — |   | — |   |
| 2.86-3.05               |       | 580,000                      |       | 8.36 years                   |       | 2.87 |   | — |   | 193,333 |   | 8.36 years |   | 2.87 |   | — |   |
|                    |       | 9,892,800                    |       | 6.24 years                   |       | 1.35 |   | 0.41 |   | 7,949,916 |   | 5.62 years |   | 1.18 |   | 0.50 |   |

 

The weighted average intrinsic value in the table above represents thedifference between the Company’s estimated fair value as of December 31,2008 and the weighted average exercise price.

 

Total intrinsic value of options exercised for the years ended December 31,2006, 2007 and 2008 was RMB365, RMB nil and RMB1,629, respectively.

 

As of December 31, 2008, there was RMB9,095 unrecognizedshare-based compensation cost related to share options.  That deferred cost is expected to berecognized over a weighted-average vesting period of 1.87 years.  To the extent the actual forfeiture rate isdifferent from the Company’s original estimate, the actual share-basedcompensation cost related to these awards may differ from such estimate.

 

F-37

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**13.****                              ****SHARE OPTION PLAN - continued**

 

Summary of share options to employees and non-employees -continued

 

For share-based compensation awards that were granted to employeesprior to January 1, 2006 that are not yet vested and continue to bereported under APB Opinion 25, the following is the Group’s pro forma netincome (loss) that would have been reported if such awards were accounted forunder SFAS No. 123R:

 
| ** **                                                            | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                            | ** ** | **RMB**  | ** ** | **RMB**  | ** ** | **RMB**  | ** ** |
|                                                                  |       |     |       |     |       |     |       |
| Net income (loss), as reported                                        |       | 25,539   |       | 2,487    |       | (43,019  | )          |
| Add: Share-based compensation as reported                             |       | 2,711    |       | 3,643    |       | 5,231    |       |
| Less: Share-based compensation determined  usingthe fair value method |       | 7,355    |       | 7,108    |       | 5,686    |       |
| Pro forma net income (loss) attributableto ordinary shareholders      |       | 20,895   |       | (978     | )          | (43,474  | )          |
| Basic income (loss) per share:                                        |       |     |       |     |       |     |       |
| As reported                                                           |       | 0.65     |       | 0.06     |       | (0.75    | )          |
| Pro forma                                                             |       | 0.53     |       | (0.02    | )          | (0.75    | )          |
| Diluted income (loss) per share:                                      |       |     |       |     |       |     |       |
| As reported                                                           |       | 0.60     |       | 0.05     |       | (0.75    | )          |
| Pro forma                                                             |       | 0.49     |       | (0.02    | )          | (0.75    | )          |

 

**14.****                              ****INCOME TAXES**

 

The Company is a tax-exempt entity incorporated in the Cayman Islands.

 

BJ-BCIT and BJ-WITT are tax exempt entities incorporated in the BritishVirgin Islands.

 

The Company’s subsidiaries and variable interest entities incorporatedin the PRC are governed by the Enterprise Income Tax Law (the “EIT Law”) of thePRC that went into effect January 1, 2008. Prior to January 1, 2008, the statutory income tax rate was 33%.Pursuant to the EIT Law, the PRC enterprises are now subject to income tax at astatutory rate of 25% on PRC taxable income, except for entities that enjoy atax holiday or preferential tax treatment.

 

From January 1, 2008, seven of the Company’s subsidiaries andvariable interest entities have been reapproved and classified as “high and newtechnology enterprises” and, therefore, enjoy a preferential income tax rate of15%. Four of these subsidiaries (Hongcheng Liye, Hongcheng Education, GotopHongcheng and Beiyuda) will continue to enjoy full exemptions for 3 yearsstarting from the commencement of their respective tax holidays, followed by a50% reduction for the next 3 years, according to the previous treatment andtransitional rules (see table below). The remaining three subsidiaries (CMR WEB, Zhongcai and ZhongNongdaNetwork) are also subject to a preferential income tax rate of 15%. While thecertificates granted to these entities are valid for three years, the Companybelieves it will be able to successfully reapply for their renewal as theCompany believes these entities will continue to meet the published criteria.These seven subsidiaries have used the reduced applicable tax rate incalculations of deferred tax balances related to the acquired intangible assetsfor the foreseeable future.

 

F-38

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**14.****                              ****INCOME TAXES - continued**

 
| **PRC Entity** | ** ** | **PRC  Statutory income  tax rate** | ** ** | **Concession from  Chinese Statutory  income tax**                                                                      | ** ** | **Year of  commencement  of tax holiday** |
|---------------------|------------|-----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|
| ** **          | ** ** | **(%)**                                       | ** ** | ** **                                                                                                                             | ** ** | ** **                                               |
|                |       |                                          |       |                                                                                                                                   |       |                                                     |
| Hongcheng Liye      |       | 15                                            |       | Full exemption for 3  years starting from the commencement of tax holiday followed by a 50% reduction  for the next 3 years thereafter |       | 2003                                                     |
|                |       |                                          |       |                                                                                                                                   |       |                                                     |
| Hongcheng Education |       | 15                                            |       | Full exemption for 3  years starting from the commencement of tax holiday followed by a 50% reduction  for the next 3 years thereafter |       | 2005                                                     |
|                |       |                                          |       |                                                                                                                                   |       |                                                     |
| Gotop Hongcheng     |       | 15                                            |       | Full exemption for 3  years starting from the commencement of tax holiday followed by a 50% reduction  for the next 3 years thereafter |       | 2006                                                     |
|                |       |                                          |       |                                                                                                                                   |       |                                                     |
| Beiyuda             |       | 15                                            |       | Full exemption for 3  years starting from the commencement of tax holiday followed by a 50% reduction  for the next 3 years thereafter |       | 2006                                                     |

 

One of the Company’s majority owned subsidiaries, Chongda, qualified asa “software enterprise” and was granted a two-year income tax exemption by therelevant tax authorities for 2006 and 2007, followed by a 50% reduction in taxrates for 2008, 2009 and 2010.

 

The current and deferred components of the income tax expense appearingin the consolidated statements of operation are as follows:

 
| ** **   | ** ** | **Year ended December 31,** | ** ** |
|--------------|------------|--------------------------------------------|------------|
| ** **   | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **   | ** ** | **RMB**                                    | ** ** | **RMB** | ** ** | **RMB** | ** ** |
|         |       |                                       |       |   |   |   |   |
| Current tax  |       | 9,475                                      |       | 16,286 |   | 11,860 |   |
| Deferred tax |       | (2,481                                     | )          | (1,283 | ) | (8,387 | ) |
|         |       | 6,994                                      |       | 15,003 |   | 3,473 |   |

 

F-39

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**14.****                              ****INCOME TAXES - continued**

 

The principal components of the Group’s deferred income tax assets andliabilities are as follows:

 
| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2007**              | ** ** | **2008** | ** ** |
| ** **                                        | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
|                                              |       |                  |       |   |   |
| Current deferred tax assets                       |       |                  |       |   |   |
| Deferred revenue                                  |       | 9,521                 |       | 3,986 |   |
| Net current deferred tax assets                   |       | 9,521                 |       | 3,986 |   |
| Non-current deferred tax assets                   |       |                  |       |   |   |
| Intangible assets                                 |       | 1,273                 |       | 1,204 |   |
| Deferred revenue                                  |       | 143                   |       | 219 |   |
| Net operating loss carryforwards                  |       | 399                   |       | 3,129 |   |
| Total non-current deferred taxes                  |       | 1,815                 |       | 4,552 |   |
| Less: valuation allowance on deferred tax  assets |       | (399                  | )          | (2,456 | ) |
| Total non-current deferred taxes                  |       | 1,416                 |       | 2,096 |   |
| Non-current deferred tax liabilities              |       |                  |       |   |   |
| Property and equipment                            |       | 774                   |       | 249 |   |
| Intangible assets                                 |       | 23,262                |       | 10,820 |   |
| Total deferred tax liabilities                    |       | 24,036                |       | 11,069 |   |

 

The Group has net operating loss carryforwards of RMB12,515 from itsPRC subsidiaries for the year ended December 31, 2008 that will expire onvarious dates between December 31, 2009 and December 31, 2013.

 

As of December 31, 2008, a valuation allowance of RMB2,456 wasprovided against deferred tax assets arising from net operating losscarryforwards of certain of the Group’s PRC subsidiaries and variable interestentities due to the Group’s determination that it is more likely than not thatthese deferred tax assets related to the respective entities will not berealized.  Adjustments will be made tothe valuation allowance if events occur in the future that indicate changes inthe amount of deferred tax assets that may be realized.

 

The Group operates through multiple subsidiaries and variable interestentities and the valuation allowances are considered separately for eachsubsidiary and variable interest entity. The Group does not file consolidated tax returns, and, therefore, lossesand deferred taxes from one subsidiary or variable interest entity may not beused to offset another subsidiary’s or variable interest entity’s earnings ordeferred taxes.

 

Reconciliation between total income tax expense and the amount computedby applying the statutory income tax rate to income before income taxes is asfollows:

 
| ** **                                         | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                    | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                                         | ** ** | **%**                                       | ** ** | **%** | ** ** | **%** | ** ** |
|                                               |       |                                        |       |   |   |   |   |
| Statutory rate                                     |       | 33                                          |       | 33 |   | 25 |   |
| Tax holiday                                        |       | (45                                         | )          | (42 | ) | 406 |   |
| Effect on tax rates in different tax  jurisdiction |       | 3                                           |       | 7 |   | (116 | ) |
| Permanent book-tax differences                     |       | 20                                          |       | 27 |   | (356 | ) |
| Changes in valuation allowance                     |       | 1                                           |       | — |   | (34 | ) |
| Increased in unrecognized tax benefit              |       | —                                      |       | 1 |   | (36 | ) |
| Effect of new tax law                              |       | —                                      |       | 9 |   | — |   |
| Effective tax rates                                |       | 12                                          |       | 35 |   | (111 | ) |

 

F-40

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**14.****                              ****INCOME TAXES - continued**

 

For the years ended December 31, 2006, 2007 and 2008, if theCompany’s subsidiaries and variable interest entities in the PRC had not beenawarded tax holidays or received special tax concessions, provision for incometaxes, net income (loss), and net income (loss) per share would have been asfollows:

 
| ** **                                               | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                    | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                                               | ** ** | **RMB**                                     | ** ** | **RMB** | ** ** | **RMB** | ** ** |
|                                                     |       |                                        |       |   |   |   |   |
| Net income (loss), as reported                           |       | 25,539                                      |       | 2,487 |   | (43,019 | ) |
| Less: Increase in provision for income taxes             |       | 25,251                                      |       | 18,006 |   | 10,862 |   |
| Pro forma net income (loss)                              |       | 288                                         |       | (15,519 | ) | (53,881 | ) |
| Pro forma net income (loss) per ordinary  share-basic    |       | —                                      |       | (0.37 | ) | (0.93 | ) |
| Pro forma net income (loss) per preferred A  share-basic |       | —                                      |       | — |   | — |   |
| Pro forma net income (loss) per preferred B  share-basic |       | —                                      |       | — |   | — |   |
| Pro forma net income (loss) per preferred C  share-basic |       | —                                      |       | — |   | — |   |
| Pro forma net income (loss) per preferred D  share-basic |       | —                                      |       | — |   | — |   |
| Pro forma net income (loss) per ordinary  share-diluted  |       | —                                      |       | (0.37 | ) | (0.93 | ) |

 

In June 2006, the FASB issued FIN 48, which prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return.  As a result of the Group’sadoption of FIN 48 on January 1, 2007, the accumulated unrecognized taxbenefits was RMB4,332 and RMB5,473 as of December 31, 2007 and 2008,respectively.  The Group recognizedRMB3,744 accumulated impact of unrecognized tax benefit to accumulated deficitsas of January 1, 2007.

 

The Group has adopted the accounting policy that interest recognized inaccordance with paragraph 15 of FIN 48 and penalties recognized in accordancewith paragraph 16 of FIN 48 are classified as part of its income taxes.  RMB269 interest and RMB nil penalties wererecognized in the consolidated financial statements for the year the ended December 31,2008.

 

A reconciliation of the beginning and ending amount of unrecognized taxbenefits is as follows:

 
| ** **                                                    | ** ** | **RMB** | ** ** |
|---------------------------------------------------------------|------------|---------|------------|
| Balance at January 1, 2007                               |       | 3,744   |       |
| Additions based on tax positions related to  the current year |       | —  |       |
| Additions for tax positions of prior years                    |       | —  |       |
| Reductions for tax positions of current year                  |       | —  |       |
| Audit settlement paid in current year                         |       | —  |       |
| Other - interest and penalty                                  |       | 588     |       |
| Balance at January 1, 2008                               |       | 4,332   |       |
| Additions based on tax positions related to  the current year |       | 872     |       |
| Additions for tax positions of prior years                    |       | —  |       |
| Reductions for tax positions of current year                  |       | —  |       |
| Audit settlement paid in current year                         |       | —  |       |
| Other - interest and penalty                                  |       | 269     |       |
| Balance at December 31, 2008                             |       | 5,473   |       |

 

The Group’s subsidiaries and variable interest entities are subject totaxation in China.  There are no ongoingexaminations by taxing authorities at this time.  Tax years of each of the Company’ssubsidiaries and variable interest entities from 2003 through 2008 remainsubject to review and potential recourse by the PRC.

 

The Group does not anticipate any significant change within 12 monthsof this reporting date of its uncertain tax positions.

 

F-41

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**14.****         ****INCOMETAXES - continued**

 

Under PRC tax laws in effect prior to January 1, 2008, dividendspaid to foreign investors by foreign-invested enterprises, such as dividendspaid to overseas holding companies by PRC subsidiaries, were exempt from PRCwithholding tax.  Under the EIT Law andits implementation rules which became effective on January 1, 2008,dividends declared on earnings generated after January 1, 2008 and payableby a foreign-invested enterprise in China to its foreign investors who arenon-resident enterprises are subject to a 10% withholding tax, unless any suchforeign investor’s jurisdiction of incorporation has a tax treaty with Chinathat provides for a different withholding arrangement.  The Cayman Islands, where the Company isincorporated, does not have a tax treaty with China.

 

Since the Group’s subsidiaries located in the PRC had aggregateaccumulated losses of approximately RMB4,351 as of December 31, 2008, noprovision has been made for the Chinese dividend withholding taxes that wouldbe payable upon the distribution of those amounts to the Company under APBopinion No.23, Accounting for Income Taxes-Special Areas.  Accordingly, no deferred tax liability hasbeen accrued for the Chinese dividend withholding taxes that would be payableupon the distribution of those amounts to the Company as of December 31,2008.

 

Under applicable accounting principles, a deferred tax liability shouldbe recorded for taxable temporary differences attributable to the excess ofcarrying amount over tax basis, including those differences attributable to amore than 50% interest in a domestic subsidiary.  However, recognition is not required insituations where the tax law provides a means by which reported amounts of suchinterest investment can be recovered tax-free and the enterprise expects thatit will ultimately use that means.  TheGroup has not recorded any such deferred tax liability attributable to thefinancial interest in its variable interest entities because the variableinterest entities were in an accumulated loss position as of December 31,2008.

 

Furthermore, the EIT Law includes a provision specifying that legalentities organized outside China will be considered residents for Chineseincome tax purposes if their place of effective management or control is withinChina.  If legal entities organizedoutside China were considered residents for Chinese income tax purpose, theywould become subject to the EIT Law on their worldwide income.  This would cause income any legal entitiesorganized outside China earned to be subject to China’s 25% EIT.  The Implementation Rules to EIT Lawprovide that non-resident legal entities will be considered China residents ifsubstantial and overall management and control over the manufacturing andbusiness operations, personnel, accounting, properties, etc. resides withinChina.  Pursuant to the additionalguidance released by the Chinese government on April 22, 2009, managementdoes not believe that the legal entities organized outside China should becharacterized as China tax residents for EIT Law purposes.

 

F-42

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**15.****                              ****NET INCOME (LOSS) PER SHARE**

 

The following table sets forth the computation of basic and diluted netincome (loss) per share for the periods indicated:

 
| ** **                                                                                                                      | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                      | ** ** | **2006**                                    | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                                                                                                                      | ** ** | **RMB**                                     | ** ** | **RMB** | ** ** | **RMB** | ** ** |
|                                                                                                                            |       |                                        |       |   |   |   |   |
| Net income (loss)-basic (numerator):                                                                                            |       |                                        |       |   |   |   |   |
| Net income (loss) attributable to ordinary  shareholders                                                                        |       | 12,077                                      |       | 1,215 |   | (43,019 | ) |
| Net income allocated to Series A  preferred shares                                                                         |       | 3,355                                       |       | 295 |   | — |   |
| Net income allocated to Series B  preferred shares                                                                         |       | 7,907                                       |       | 682 |   | — |   |
| Net income allocated to Series C  preferred shares                                                                         |       | 2,200                                       |       | 190 |   | — |   |
| Net income allocated to Series D  preferred shares                                                                         |       | —                                      |       | 105 |   | — |   |
| Net income (loss) attributable to ordinaryshareholders-diluted (numerator)                                                      |       | 25,539                                      |       | 2,487 |   | (43,019 | ) |
| Shares (denominator):                                                                                                           |       |                                        |       |   |   |   |   |
| Weighted average ordinary shares outstanding  usedin computing basic  net income (loss) per share                               |       | 18,540,732                                  |       | 20,585,074 |   | 57,679,504 |   |
| Weighted average preferred A shares usingif-converted method                                                                    |       | 5,150,000                                   |       | 4,991,507 |   | — |   |
| Weighted average preferred B shares usingif-converted method                                                                    |       | 12,140,495                                  |       | 11,561,814 |   | — |   |
| Weighted average preferred C shares usingif-converted method                                                                    |       | 3,378,379                                   |       | 3,221,030 |   | — |   |
| Weighted average preferred D shares usingif-converted method                                                                    |       | —                                      |       | 1,787,745 |   | — |   |
| Incremental weighted average ordinary sharesfrom assumed conversions of stock option and warrants using treasury  stock method: |       |                                        |       |   |   |   |   |
| Employee options (treasury share effect)                                                                                        |       | 2,668,170                                   |       | 3,714,016 |   | — |   |
| Non-employee options (treasury share effect)                                                                                    |       | 335,260                                     |       | 436,936 |   | — |   |
| Warrants (treasury share effect)                                                                                                |       | 495,177                                     |       | 1,024,062 |   | — |   |
| Weighted average ordinary shares outstanding  usedin computing diluted  net income (loss) per share                             |       | 42,708,213                                  |       | 47,322,184 |   | 57,679,504 |   |
| Net income (loss) per ordinary share-basic                                                                                      |       | 0.65                                        |       | 0.06 |   | (0.75 | ) |
| Net income (loss) per preferred A share-basic                                                                                   |       | 0.65                                        |       | 0.06 |   | — |   |
| Net income (loss) per preferred B share-basic                                                                                   |       | 0.65                                        |       | 0.06 |   | — |   |
| Net income (loss) per preferred C share-basic                                                                                   |       | 0.65                                        |       | 0.06 |   | — |   |
| Net income (loss) per preferred D share-basic                                                                                   |       | —                                      |       | 0.06 |   | — |   |
| Net income (loss) per ordinary share-diluted                                                                                    |       | 0.60                                        |       | 0.05 |   | (0.75 | ) |

 

Ordinary share equivalents of options and warrants are calculated usingthe treasury stock method.  Under thetreasury stock method, the proceeds from the assumed conversion of options andwarrants are used to repurchase outstanding ordinary shares using the averagefair value for the period.  The Group hasdetermined that its convertible preferred shares are participating securitiesas the preferred shares participate in undistributed earnings on anas-if-converted basis.  The holders ofthe preferred shares are entitled to receive dividends on a pro rata basis, asif their shares had been converted into ordinary shares.  Accordingly, the Group uses the two-classmethod of computing net income per share, for ordinary and preferred sharesaccording to participation rights in undistributed earnings.

 

F-43

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**15.****                              ****NET INCOME (LOSS) PER SHARE - continued**

 

For the years ended December 31, 2006, 2007, and 2008, the Companyhad the following securities outstanding, which could potentially dilute basicnet income per share in the future, but were excluded from the computation ofdiluted net income (loss) per share in 2006, 2007 and 2008 because their effectwould be anti-dilutive:

 
| ** **                                                | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                    | ** ** | **2007** | ** ** | **2008** | ** ** |
|                                                      |       |                                        |       |   |   |   |   |
| Preferred A shares                                        |       | —                                      |       | — |   | — |   |
| Preferred B shares                                        |       | —                                      |       | — |   | — |   |
| Preferred C shares                                        |       | —                                      |       | — |   | — |   |
| Outstanding employee options to purchase  ordinary shares |       | —                                      |       | — |   | 9,892,800 |   |
| Outstanding warrants to purchase ordinary  shares         |       | —                                      |       | — |   | 1,933,677 |   |

 

**16.****         ****LONG-TERMDEBT**

 

During the year ended December 31, 2007, the Group purchasedoffice space for RMB55,773, including RMB26,430 pursuant to a mortgage loanfrom a commercial bank, which loan had a repayment term of 5 years and boreinterest at a rate of 13% per annum. This mortgage loan was fully repaid during the year ended December 31,2008.

 

**17.****         ****WARRANTS**

 

In conjunction with the issuance of convertible notes in 2002, theCompany also issued to the convertible note holder a stock purchase warrantproviding for the right to purchase 300,000 shares of Series A preferredshares of the Company at US$1.00 per share. The stock purchase warrants expired five years from the date ofgrant.  The fair value and the allocatedvalue of the warrants were approximately RMB1,452 (US$175) and RMB1,235(US$149), respectively, at the grant date. The Company issued 300,000 shares of Series A preferred shares uponexercise of the stock purchase warrant in September 2007.

 

Pursuant to the terms of a Series B preferred share agreementdated December 13, 2004, the Company granted warrants to one of its Series Bpreferred shareholder, Tiger Global Private Investment Partners II, L.P. andTiger Global II, L.P. (collectively, “Tiger Global”), to purchase up to1,768,300 ordinary shares.  Thesewarrants have an exercise price of US$1.48 per share and are exercisable at anytime prior to December 13, 2009. The fair value and the allocated value of the warrants wereapproximately RMB4,719 (US$570) and RMB4,487 (US$542) at the grant date, respectively.

 

In November 2008, the Company entered into a share repurchaseagreement with Tiger Global.  The sharerepurchase agreement stipulated that the 1,768,300 warrants held by TigerGlobal, which represented the right to purchase an aggregate of 1,768,300ordinary shares, would be cancelled.  TheCompany recorded the first batch of cancelled warrants in November 2008,representing 321,109 underlying ordinary shares, and has recorded the secondbatch of cancelled warrants in January 2009, representing an additional1,447,191 underlying ordinary shares.

 

Pursuant to the terms of a Series C preferred share agreementdated July 14, 2005, the Company granted warrants to Series Cpreferred shareholders to purchase up to 608,108 ordinary shares.  The warrants have an exercise price ofUS$1.85 per share and are exercisable commencing on July 14, 2005 andending on August 12, 2010.  The fairvalue and the allocated value of the warrants were approximately RMB2,459(US$305) and RMB2,353 (US$292), respectively, at the grant date.

 

Up to the end of 2008, 121,622 warrants were exercised at US$1.85 topurchase the same number of ordinary shares, the fair value of the exercisedwarrants was approximately RMB471 (US$65).

 

As of December 31, 2008, the total number of shares underlying theabove referenced warrants was 1,933,677.

 

F-44

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**18.****         ****SHAREREPURCHASES**

 

Pursuant to the November 2008 share repurchase agreement withTiger Global (discussed in Note 17), the Company agreed to purchase from TigerGlobal an aggregate of 8,364,634 ordinary shares (2,788,211 ADSs) at US$1.3167per ordinary share (US$3.95 per ADS), for an aggregate purchase price ofRMB75,315 (US$11,014).  The agreementalso stipulated that all warrants held by Tiger Global, which represented theright to purchase an aggregate of 1,768,300 ordinary shares, would becancelled.  Up to December 31, 2008,the Company has repurchased and cancelled 1,518,949 ordinary shares and 321,109warrants for an aggregate consideration of RMB13,668 (US$2,000).  Subsequent to December 31, 2008, theCompany has repurchased and cancelled 6,845,685 ordinary shares and 1,447,191warrants for an aggregate consideration of RMB61,647 (US$9,014) in January 2009.

 

In addition, the Company has in place a share repurchase plan.  Pursuant to this plan, the Companyrepurchased an aggregate of 2,183,634 ordinary shares in open markettransactions conducted between July 2008 and December 2008 for cashconsideration of RMB20,522 (US$3,002). The repurchases were made at an average price of US$1.37 per ordinaryshare (US$4.11 per ADS).

 

**19.****         ****MAINLANDCHINA CONTRIBUTION PLAN AND PROFIT APPROPRIATION**

 

Full time employees of the Group in the PRC participate in agovernment-mandated multi-employer defined contribution plan pursuant to whichcertain pension benefits, medical care, unemployment insurance, employeehousing fund and other welfare benefits are provided to employees.  Chinese labor regulations require the Groupto accrue for these benefits based on certain percentages of the employees’salaries.  Total provisions for suchemployee benefits were RMB8,267, RMB14,659 and RMB20,225 for the years ended December 31,2006, 2007 and 2008, respectively.

 

**20.****         ****COMMITMENTS**

 

(a)           Pursuant to a contract signed between HongchengTechnology and another university, Hongcheng Technology has committed tocontribute RMB35,000 for the use of the university’s education resources.  As of December 31, 2008, the remainingcommitment is approximately RMB5,000, which is expected to be paid within thenext two years.

 

(b)                                 Pursuantto a contract signed between Hongcheng Education and a middle school for theuse of the school’s education resources, Hongcheng Education has committed topay a royalty fee of RMB650 per annum from 2005 to 2007, RMB1,000 per annumfrom 2008 to 2010, and RMB1,200 per annum from 2011 to 2024.  The aggregate of the fees committed through2024 were recognized as expenses on a straight-line basis with the differencebetween the amount paid and the amount recognized reported as deferredcommitment fees.  For the years ended December 31,2007 and 2008, the amounts reported as expenses were RMB1,088 during bothperiods.  The amounts recorded asdeferred commitment fees as of December 31, 2007 and 2008 were RMB1,313and RMB1,400, respectively.

 

F-45

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**20.****                              ****COMMITMENTS - continued**

 

(c)                                  The Groupleases certain office premises under non-cancelable operating leases through2012.  Rent expenses under operatingleases for 2006, 2007, and 2008 were RMB7,264, RMB9,088, and RMB10,814,respectively.

 

Future minimum lease payments under non-cancelable operating leasesagreements are as follows:

 
| **Years ending December 31,** | ** ** | **RMB** | ** ** |
|----------------------------------------------|------------|---------|------------|
|                                         |       |    |       |
| 2009                                         |       | 6,408   |       |
| 2010                                         |       | 3,719   |       |
| 2011                                         |       | 1,422   |       |
| 2012                                         |       | 746     |       |
|                                         |       | 12,295  |       |

 

(d)                                 As of December 31,2008, the Group had commitments totaling RMB102,926 for the expansion of theschools in Anqing and Jingzhou, which included capital commitments for on-goingconstruction in progress of RMB7,704. Since the construction of Jinzhou School is delayed, the Company isunable to make reasonable estimates regarding the timing of capital commitmentsfor Jingzhou School.  The capitalcommitments of Anqing are expected to be paid within the next two years.

 

**21.****         ****SEGMENTAND GEOGRAPHIC INFORMATION**

 

The Group has been organized as four business units:

 

(i)            Online degree program, which enables leadinghigher education institutions in the PRC to operate and grow their onlinedegree-granting programs.  The Groupprovides online education technical and consulting services to theseinstitutions.  In addition, the Groupalso licenses online education technology platform and courseware to them.

 

(ii)           Private primary and secondary schools, whichprovide educational services to the students through traditional classroomeducation.

 

(iii)          Online tutoring program, which provides onlinetutoring services for students to obtain review course help through the onlineprogram.

 

(iv)          International curriculum program, which includesan integrated English language learning service for high schools in the PRC andinternational polytechnic curriculum programs through traditional classroomeducation.

 

The Group’s chief operating decision maker is its chief executiveofficer.  Segment information provided tothe chief operating decision maker is prepared using US GAAP.

 

F-46

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**21.****                              ****SEGMENT AND GEOGRAPHIC INFORMATION - continued**

 

The following sets forth the relevant information for the Group’soperating segments:

 
| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2007**              | ** ** | **2008** | ** ** |
|                                  |       | **RMB**               | ** ** | **RMB** | ** ** |
| Assets                                |       |                  |       |   |   |
| Online degree program                 |       | 366,200               |       | 516,318 |   |
| Private primary and secondary schools |       | 74,400                |       | 94,920 |   |
| Online tutoring program               |       | 35,390                |       | 44,118 |   |
| International curriculum program      |       | 109,039               |       | 40,949 |   |
| Reconciling amounts                   |       | 395,039               |       | 222,555 |   |
| Total assets                          |       | 980,068               |       | 918,680 |   |
|                                  |       |                  |       |   |   |
| Significant reconciling item:         |       |                  |       |   |   |
| Corporate assets                      |       | 395,039               |       | 222,555 |   |
|                                  |       |                  |       |   |   |
| Liabilities                           |       |                  |       |   |   |
| Online degree program                 |       | 119,426               |       | 101,215 |   |
| Private primary and secondary schools |       | 45,311                |       | 71,596 |   |
| Online tutoring program               |       | 23,237                |       | 30,332 |   |
| International curriculum program      |       | 37,017                |       | 26,992 |   |
| Reconciling amounts                   |       | 18,347                |       | 14,401 |   |
| Total liabilities                     |       | 243,338               |       | 244,536 |   |
|                                  |       |                  |       |   |   |
| Significant reconciling item:         |       |                  |       |   |   |
| Corporate liabilities                 |       | 18,347                |       | 14,401 |   |

 
| ** **                            | ** ** | **Years ended  December 31,** | ** ** |
|---------------------------------------|------------|------------------------------------|------------|
|                                  |       | **2006**                           | ** ** | **2007** | ** ** | **2008** |   |
|                                  |       | **RMB**                            | ** ** | **RMB** | ** ** | **RMB** |   |
|                                  |       |                               |       |   |   |   |   |
| Revenue                               |       |                               |       |   |   |   |   |
| Online degree program                 |       | 156,845                            |       | 202,185 |   | 255,388 |   |
| Private primary and secondary schools |       | 10,874                             |       | 13,356 |   | 19,289 |   |
| Online tutoring program               |       | 17,384                             |       | 18,013 |   | 15,436 |   |
| International curriculum program      |       | 28,428                             |       | 31,434 |   | 27,607 |   |
| Total revenue                         |       | 213,531                            |       | 264,988 |   | 317,720 |   |
|                                  |       |                               |       |   |   |   |   |
| Cost of revenue                       |       |                               |       |   |   |   |   |
| Online degree program                 |       | 51,215                             |       | 58,027 |   | 76,224 |   |
| Private primary and secondary schools |       | 8,429                              |       | 10,944 |   | 17,572 |   |
| Online tutoring program               |       | 3,452                              |       | 3,875 |   | 4,017 |   |
| International curriculum program      |       | 17,212                             |       | 23,503 |   | 19,920 |   |
| Total cost of revenue                 |       | 80,308                             |       | 96,349 |   | 117,733 |   |
|                                  |       |                               |       |   |   |   |   |
| Gross profit                          |       |                               |       |   |   |   |   |
| Online degree program                 |       | 105,630                            |       | 144,158 |   | 179,164 |   |
| Private primary and secondary schools |       | 2,445                              |       | 2,412 |   | 1,717 |   |
| Online tutoring program               |       | 13,932                             |       | 14,138 |   | 11,419 |   |
| International curriculum program      |       | 11,216                             |       | 7,931 |   | 7,687 |   |
| Total gross profit                    |       | 133,223                            |       | 168,639 |   | 199,987 |   |

 

F-47

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**21.****                              ****SEGMENT AND GEOGRAPHIC INFORMATION - continued**

 

The Company does not allocate operating expenses to individual segmentswhen making decisions about allocating resources to such segments and assessingtheir performance.  The Group primarilyoperates in the PRC.  All of the Group’slong-lived assets are located in the PRC.

 

Revenue from each type of services the Group provides was as follows:

 
| ** **                                                       | ** ** | **Years ended  December 31,** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------|------------|
|                                                             |       | **2006**                           | ** ** | **2007** | ** ** | **2008** | ** ** |
|                                                             |       | **RMB**                            | ** ** | **RMB** | ** ** | **RMB** | ** ** |
|                                                             |       |                               |       |   |   |   |   |
| Third parties:                                                   |       |                               |       |   |   |   |   |
| Online education technical and consulting  services              |       | 29,549                             |       | 40,801 |   | 45,618 |   |
| Traditional classroom education services                         |       | 39,301                             |       | 44,790 |   | 46,896 |   |
| Online tutoring services                                         |       | 17,384                             |       | 18,013 |   | 15,436 |   |
| Licensing of online education technology  platformand courseware |       | 2,052                              |       | — |   | — |   |
|                                                             |       | 88,286                             |       | 103,604 |   | 107,950 |   |
| Related parties:                                                 |       |                               |       |   |   |   |   |
| Online education technical and consulting  services              |       | 125,245                            |       | 161,384 |   | 209,770 |   |
| Traditional classroom education services                         |       | —                             |       | — |   | — |   |
| Online tutoring services                                         |       | —                             |       | — |   | — |   |
| Licensing of online education technology  platformand courseware |       | —                             |       | — |   | — |   |
|                                                             |       | 125,245                            |       | 161,384 |   | 209,770 |   |
|                                                             |       | 213,531                            |       | 264,988 |   | 317,720 |   |

 

The carrying amounts of goodwill and intangible assets by operatingsegment were as follows:

 
| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
|                                  |       | **2007**              | ** ** | **2008** | ** ** |
|                                  |       | **RMB**               | ** ** | **RMB** | ** ** |
| Intangible assets, net:               |       |                  |       |   |   |
| Online degree program                 |       | 50,636                |       | 46,313 |   |
| Private primary and secondary schools |       | 3,840                 |       | 3,453 |   |
| Online tutoring program               |       | 3,737                 |       | 4,645 |   |
| International curriculum program      |       | 47,639                |       | 15,966 |   |
|                                  |       | 105,852               |       | 70,377 |   |
| Goodwill:                             |       |                  |       |   |   |
| Online degree program                 |       | 12,860                |       | 12,860 |   |
| Private primary and secondary schools |       | 1,924                 |       | — |   |
| Online tutoring program               |       | 14,926                |       | 20,798 |   |
| International curriculum program      |       | 43,609                |       | 4,497 |   |
|                                  |       | 73,319                |       | 38,155 |   |

 

F-48

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**22.          RELATEDPARTY TRANSACTIONS**

 

The minority shareholders of a number of the Group’s majority ownedsubsidiaries are universities that also purchase exclusive online educationtechnical and consulting services from the Group.  These universities are considered relatedparties of the Group.  Revenue generatedfrom services provided to these universities was as follows:

 
| ** **                                                            | ** ** | **Years ended  December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------|------------|
|                                                                  |       | **2006**                           | ** ** | **2007** | ** ** | **2008** | ** ** |
|                                                                  |       | **RMB**                            | ** ** | **RMB** | ** ** | **RMB** | ** ** |
|                                                                  |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Online education technical and consulting  services:                  |       |                               |       |   |   |   |   |
| Online Education School ofDongbei University of Finance and Economics |       | 32,529                             |       | 34,132 |   | 42,403 |   |
| Online Education School ofRenmin University of China                  |       | 38,124                             |       | 54,743 |   | 70,197 |   |
| Online Education School of Chongqing  University                      |       | 14,887                             |       | 19,391 |   | 28,719 |   |
| Online Education School ofChina Agricultural University               |       | 39,705                             |       | 43,995 |   | 48,315 |   |
| Online Education School ofBeijing Language and Culture University     |       | —                             |       | 9,123 |   | 19,153 |   |
| Online Education School ofCentral University of Finance and Economics |       | —                             |       | — |   | 983 |   |
| Total                                                                 |       | 125,245                            |       | 161,384 |   | 209,770 |   |

 

Deferred revenue associated with services provided to related parties wasas follows:

 
| ** **                                                             | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------|------------|
|                                                                   |       | **2007**              | ** ** | **2008** | ** ** |
|                                                                   |       | **RMB**               | ** ** | **RMB** | ** ** |
|                                                                   |       |                  |       |   |   |
| Online Education School of Dongbei University  ofFinance and Economics |       | 6,345                 |       | 7,657 |   |
| Online Education School of Renmin University  of China                 |       | 13,897                |       | 17,395 |   |
| Online Education School of Chongqing  University                       |       | 7,527                 |       | 8,668 |   |
| Online Education School of China Agricultural  University              |       | 13,732                |       | 11,815 |   |
| Online Education School of Beijing Language  andCulture University     |       | 5,906                 |       | 10,080 |   |
|                                                                   |       | 47,407                |       | 55,615 |   |

 

F-49

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**22.****                              ****RELATED PARTY TRANSACTIONS - continued**

 

As of December 31, 2007 and 2008, the following balances were duefrom related parties:

 
| ** **                                                                    | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------|------------|
|                                                                          |       | **2007**              | ** ** | **2008** |   |
|                                                                          |       | **RMB**               | ** ** | **RMB** |   |
|                                                                          |       | ** **            | ** ** | ** ** |   |
| Schools owned by the minority shareholders ofthe Company’s subsidiaries: |       |                  |       |   |   |
| Online Education School ofDongbei University of Finance and Economics (ii)    |       | 22,290                |       | 28,275 |   |
| Online Education School of Renmin University  of China (ii)                   |       | 33,782                |       | 65,792 |   |
| Online Education School of Chongqing  University (ii)                         |       | 34,340                |       | 30,312 |   |
| Online Education School ofChina Agricultural University of China (ii)         |       | 39                    |       | 3,617 |   |
| Online Education School ofBeijing Language and Culture University (ii)(iii)   |       | 12,258                |       | 20,397 |   |
| Online Education School ofCentral University of Finance and Economics (ii)    |       | —                |       | 49 |   |
| Minority shareholders of the Company’smajority-owned subsidiaries:       |       |                  |       |   |   |
| Shanghai Guangdian Communication Network Co.,  Ltd. (i)                       |       | 1,100                 |       | 1,000 |   |
| Company owned by shareholder or management:                                   |       |                  |       |   |   |
| Wellent Institute of Education International  (Asia) Limited (i)              |       | 1,000                 |       | 1,000 |   |
| Equity owners of the Company’s subsidiaries:                             |       |                  |       |   |   |
| Wu Jiayong (i)                                                                |       | —                |       | 30 |   |
| Liu Xin                                                                       |       | 713                   |       | — |   |
|                                                                          |       | 105,522               |       | 150,472 |   |

 

----

(i)                                     Theamounts represent cash advances that are expected to be collected in 2009.

 

(ii)                                  The feesfor services provided to the online schools are collected on a periodicbasis.  The excess amount of revenuerecognized over the cash collection is recorded as amounts due from relatedparties.

 

(iii)                               In 2007,the Group wrote off RMB2,918 in uncollectible amounts due to a dispute withBeijing Language and Culture University.

 

All of the amounts due from related parties are unsecured andnon-interest bearing.  The Group expectsthe amounts to be received within the next 12 months.

 

F-50

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**22.          RELATEDPARTY TRANSACTIONS - continued**

 

As of December 31, 2007 and 2008, the following balances were dueto related parties:

 
| ** **                                                                    | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------|------------|
|                                                                          |       | **2007**              | ** ** | **2008** | ** ** |
|                                                                          |       | **RMB**               | ** ** | **RMB** | ** ** |
| Former owner of an entity consolidated by the  Company:                       |       |                  |       |   |   |
| Fourth Middle School of Anqing (ii)                                           |       | 2,442                 |       | 3,632 |   |
| Schools owned by the minority shareholders ofthe Company’s subsidiaries: |       |                  |       |   |   |
| Online Education School of Dongbei University  ofFinance and Economics  (i)   |       | 25,826                |       | 22,018 |   |
| Online Education School of Chongqing  University (i)                          |       | 48                    |       | 79 |   |
| Online Education School of Central University  ofFinance and Economics  (i)   |       | —                |       | 40 |   |
|                                                                          |       | 28,316                |       | 25,769 |   |

 

----

(i)                                     Theamounts represented cash collected on behalf of the related parties.

 

(ii)                                  The amountprimarily represents service fees to be paid for utilizing the school’steaching resources.

 

All the amounts due to related parties are non-interest bearing andunsecured.  The Group expects the amountsto be repaid within one year.

 

**23.          STATUTORYRESERVES**

 

PRC legal restrictions permit payments of dividends by the Company’sPRC subsidiaries only out of their retained earnings, if any, determined inaccordance with PRC accounting standards and regulations.  Prior to payment of dividends, pursuant tothe laws applicable to the PRC’s Foreign Investment Enterprises, the Company’ssubsidiaries and variable interest entities in the PRC must make appropriationsfrom after-tax profit to non-distributable reserve funds as determined by theBoard of Directors of each company. These reserves include (i) general reserve, (ii) enterpriseexpansion reserve, and (iii) a staff bonus and welfare reserve.

 

Subject to certain cumulative limits, the general reserve requiresannual appropriations of 10% of after-tax profits (as determined undergenerally accepted accounting principles in the PRC (“PRC GAAP”) at eachyear-end); the other reserve appropriations are at the Company’sdiscretion.  These reserves can only beused for specific purposes of enterprise expansion and are not distributable ascash dividends.  For the years ended December 31,2006, 2007 and 2008, the Company’s PRC subsidiaries and variable interestentities made appropriations to the general reserve of RMB nil, RMB7,540 andRMB2,700 respectively. For the year ended December 31, 2008, generalreserve of RMB5,264 was used as additional capital injection into one of theGroup’s subsidiaries, as permitted by PRC law.

 

The PRC subsidiaries and variable interest entities elected not to makeany appropriations to the enterprise expansion reserve in any of the yearspresented.  As a result of these PRC lawsand regulations, the PRC subsidiaries are restricted from transferring aportion of their net assets to the Company.

 

F-51

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** **

**CHINAEDU CORPORATION**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(In thousands, except share-related data)**

 

**24.          RESTRICTEDNET ASSETS**

 

Relevant PRC statutory laws and regulations restrict the payments ofdividends by the Company’s PRC subsidiaries and variable interest entities fromtheir retained earnings, if any, as determined in accordance with PRCaccounting standards and regulations.  Inaddition, general reserve (see Note 23) requires annual appropriations of 10%of after-tax profit should be set aside prior to the payment of dividends.  As a result of these PRC laws andregulations, the Company’s PRC subsidiaries and variable interest entities arerestricted in their ability to transfer a portion of their net assets to theCompany.  As of December 31, 2007and 2008, the amounts of restricted net assets were approximately RMB227,995and RMB341,505, respectively.

 

**25.          SUBSEQUENTEVENTS**

 

a.                                       Formationof Subsidiary with Guangxi Radio and TV University

 

To further expand its online education services, in February 2009,the Company, through Hongcheng Technology, entered into an exclusive 10-yearjoint venture agreement with Guangxi Radio and TV University (“GRTU”) toprovide online education services to GRTU. Under the agreement, the Company holds a 51% equity interest and willprovide the development and delivery of online education services to GRTU’sstudents beginning in the spring semester of 2009.

 

b.                                      EquityIncentive Plan amendment

 

The Company’s shareholders approved certain amendments to its EquityIncentive Plan (as amended, the “Amended Equity Incentive Plan”) at theExtraordinary General Meeting held on March 6, 2009.  The amendments (i) provide for theadministration of the Amended Equity Incentive Plan by the CompensationCommittee of the Company’s Board of Directors; (ii) delegate to theCompensation Committee authority to, among other things, amend or modifyoutstanding awards under the Amended Equity Incentive Plan, including therepricing of “underwater” options; and (iii) eliminate the requirementthat subsequent amendments to the Amended Equity Incentive Plan be submittedfor shareholder approval.

 

c.                                       OptionRe-pricing

 

On May 18, 2009, the Compensation Committee authorized the Companyto reprice 1,255,500 “underwater” options at the fair market value on theapproval date.  The CompensationCommittee authorized this in order to enhance the Company’s ability to retainand incentivize its employees, directors and consultants.

 

F-52

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**ADDITIONALINFORMATION — FINANCIAL STATEMENT SCHEDULE I**

**CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY**

**BALANCE SHEETS**

**(In thousands, except share-related data)**

 
| ** **                                                                                                                                                                       | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
|                                                                                                                                                                             |       | **2007**              | ** ** | **2008** | ** ** | **2008** |   |
|                                                                                                                                                                             |       | **RMB**               | ** ** | **RMB** | ** ** | **US$** |   |
| Assets                                                                                                                                                                           |       |                  |       |   |   |   |   |
|                                                                                                                                                                             |       |                  |       |   |   |   |   |
| Current assets:                                                                                                                                                                  |       |                  |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                        |       | 331,325               |       | 150,578 |   | 22,071 |   |
| Prepaid expenses and other current assets                                                                                                                                        |       | 435                   |       | 1,258 |   | 184 |   |
| Amounts due from related parties                                                                                                                                                 |       | 63,279                |       | 70,720 |   | 10,366 |   |
| Total current assets                                                                                                                                                             |       | 395,039               |       | 222,556 |   | 32,621 |   |
| Investments in subsidiaries and variable  interest entities                                                                                                                      |       | 302,042               |       | 381,674 |   | 55,942 |   |
| Total assets                                                                                                                                                                     |       | 697,081               |       | 604,230 |   | 88,563 |   |
|                                                                                                                                                                             |       |                  |       |   |   |   |   |
| Liabilities and shareholders’ equity                                                                                                                                        |       |                  |       |   |   |   |   |
|                                                                                                                                                                             |       |                  |       |   |   |   |   |
| Current liabilities:                                                                                                                                                             |       |                  |       |   |   |   |   |
| Accrued expenses and other current  liabilities                                                                                                                                  |       | 13,118                |       | 5,654 |   | 829 |   |
| Amount due to related parties                                                                                                                                                    |       | 5,229                 |       | 5,321 |   | 780 |   |
| Total current liabilities                                                                                                                                                        |       | 18,347                |       | 10,975 |   | 1,609 |   |
| Deferred other income                                                                                                                                                            |       | —                |       | 3,426 |   | 502 |   |
| Total liabilities                                                                                                                                                                |       | 18,347                |       | 14,401 |   | 2,111 |   |
|                                                                                                                                                                             |       |                  |       |   |   |   |   |
| Shareholders’ equity:                                                                                                                                                       |       |                  |       |   |   |   |   |
| Ordinary shares (RMB0.08 (US$0.01) par value;100,000,000 shares authorized; 58,434,407 shares issued and  outstanding in 2007; 63,076,129 shares issued and outstanding in 2008) |       | 4,805                 |       | 4,573 |   | 670 |   |
| Additional paid-in capital                                                                                                                                                       |       | 760,858               |       | 734,733 |   | 107,693 |   |
| Warrants                                                                                                                                                                         |       | 6,370                 |       | 5,555 |   | 814 |   |
| Accumulated deficits                                                                                                                                                             |       | (91,093               | )          | (134,112 | ) | (19,657 | ) |
| Accumulated other comprehensive loss                                                                                                                                             |       | (2,206                | )          | (20,920 | ) | (3,068 | ) |
| Total shareholders’ equity                                                                                                                                                  |       | 678,734               |       | 589,829 |   | 86,452 |   |
| Total liabilities and shareholders’ equity                                                                                                                                  |       | 697,081               |       | 604,230 |   | 88,563 |   |

 

F-53

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Table of Contents

 

**CHINAEDU CORPORATION**

 

**ADDITIONAL INFORMATION — FINANCIAL STATEMENT SCHEDULEI**

**CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY**

**STATEMENTS OF OPERATIONS**

**(In thousands, except share-related data)**

 
| ** **                                                                                                                                                                      | ** ** | **Years  ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
|                                                                                                                                                                            |       | **2006**                           | ** ** | **2007** | ** ** | **2008** | ** ** | **2008** | ** ** |
|                                                                                                                                                                            |       | **RMB**                            | ** ** | **RMB** | ** ** | **RMB** | ** ** | **US$** | ** ** |
| Operating expenses:                                                                                                                                                             |       |                               |       |   |   |   |   |   |   |
| General and administrative (including  share-based compensationof  RMB2,586, RMB1,225, and RMB2,603 for 2006, 2007 and 2008, respectively)                                      |       | (6,570                             | )          | (8,176 | ) | (15,016 | ) | (2,201 | ) |
| Loss from operations                                                                                                                                                            |       | (6,570                             | )          | (8,176 | ) | (15,016 | ) | (2,201 | ) |
| Other income                                                                                                                                                                    |       | —                             |       | 394 |   | 562 |   | 82 |   |
| Interest income                                                                                                                                                                 |       | 161                                |       | 1,179 |   | 6,879 |   | 1,008 |   |
| Interest expense                                                                                                                                                                |       | (2,279                             | )          | (1,715 | ) | — |   | — |   |
| Equity in earnings of subsidiaries and  variable interest entities(including  share-based compensation of RMB125, RMB2,418 and RMB2,628 for 2006, 2007 and  2008, respectively) |       | 34,227                             |       | 10,805 |   | (35,444 | ) | (5,195 | ) |
| Net income (loss)                                                                                                                                                               |       | 25,539                             |       | 2,487 |   | (43,019 | ) | (6,306 | ) |

 

F-54

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Table of Contents

 

**CHINAEDU CORPORATION**

** **

**ADDITIONAL INFORMATION — FINANCIAL STATEMENT SCHEDULEI**

**CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY**

**STATEMENTS OF SHAREHOLDERS’ DEFICIENCY ANDCOMPREHENSIVE INCOME (LOSS)**

**(In thousands, except share-related data)**

 
| ** **                                                                  | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **          | ** ** | ** **  | ** ** | ** **       | ** ** | ** ** | ** ** | ** **      | ** ** | ** **        | ** ** | ** **  | ** ** | ** **        | ** ** | ** **   | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** ** | ** ** | ** **        | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------------|------------|---------------------|------------|-------------|------------|------------------|------------|------------|------------|-----------------|------------|-------------------|------------|-------------|------------|-------------------|------------|--------------|------------|--------------|------------|-------------------|------------|------------|------------|-------------------|------------|
| ** **                                                                  | ** ** | **Series A convertible** | ** ** | **Series B convertible** | ** ** | **Series C convertible** | ** ** | **Series D convertible** | ** ** | ** **          | ** ** | ** **  | ** ** | **Additional**   | ** ** | ** ** | ** ** | ** **      | ** ** | ** **        | ** ** | **other**   | ** ** | ** **        | ** ** | ** **   | ** ** |
| ** **                                                                  | ** ** | **preferred shares**          | ** ** | **preferred shares**          | ** ** | **preferred shares**          | ** ** | **preferred shares**          | ** ** | **Ordinary shares** | ** ** | **paid-in** | ** ** | **Subscription** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | **comprehensive** | ** ** | ** **  | ** ** | **Comprehensive** | ** ** |
| ** **                                                                  | ** ** | **Shares**                    | ** ** | **Amount**                    | ** ** | **Shares**                    | ** ** | **Amount**                    | ** ** | **Shares**          | ** ** | **Amount**  | ** ** | **Shares**       | ** ** | **Amount** | ** ** | **Shares**      | ** ** | **Amount**        | ** ** | **capital** | ** ** | **receivable**    | ** ** | **Warrants** | ** ** | **deficits** | ** ** | **income (loss)** | ** ** | **Total**  | ** ** | **income (loss)** | ** ** |
| ** **                                                                  | ** ** | ** **                    | ** ** | **RMB**                       | ** ** | ** **                    | ** ** | **RMB**                       | ** ** | ** **          | ** ** | **RMB**     | ** ** | ** **       | ** ** | **RMB**    | ** ** | ** **      | ** ** | **RMB**           | ** ** | **RMB**     | ** ** | **RMB**           | ** ** | **RMB**      | ** ** | **RMB**      | ** ** | **RMB**           | ** ** | **RMB**    | ** ** | **RMB**           | ** ** |
| ** **                                                                  | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **          | ** ** | ** **  | ** ** | ** **       | ** ** | ** ** | ** ** | ** **      | ** ** | ** **        | ** ** | ** **  | ** ** | ** **        | ** ** | ** **   | ** ** | ** **   | ** ** | ** **        | ** ** | ** ** | ** ** | ** **        | ** ** |
| Balance at January 1, 2006                                             |       | 5,150,000                     |       | 426                           |       | 12,140,495                    |       | 1,005                         |       | 3,378,379           |       | 272         |       | —           |       | —     |       | 16,432,347      |       | 1,503             |       | 309,388     |       | —            |       | 8,076        |       | (115,375     | )          | (1,060            | )          | 204,235    |       | (3,610            | )          |
| Issuance of ordinary shares for purchase of a  subsidiary                   |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       | 2,025,061       |       | 163               |       | 29,995      |       | —            |       | —       |       | —       |       | —            |       | 30,158     |       |              |       |
| Exercise of share options                                                   |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       |        |       | —           |       | —     |       | 550,000         |       | 44                |       | 1,073       |       | (1,117            | )          | —       |       | —       |       | —            |       | —     |       |              |       |
| Amortization of share-based compensation                                    |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       | —          |       | —            |       | 2,711       |       | —            |       | —       |       | —       |       | —            |       | 2,711      |       |              |       |
| Foreign currency translation adjustments                                    |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       | —          |       | —            |       | —      |       | —            |       | —       |       | —       |       | 1,676             |       | 1,676      |       | 1,676             |       |
| Net income                                                                  |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       | —          |       | —            |       | —      |       | —            |       | —       |       | 25,539       |       | —            |       | 25,539     |       | 25,539            |       |
|                                                                        |       |                          |       |                          |       |                          |       |                          |       |                |       |        |       |             |       |       |       |            |       |              |       |        |       |              |       |         |       |         |       |              |       |       |       |              |       |
| Balance at December 31, 2006                                           |       | 5,150,000                     |       | 426                           |       | 12,140,495                    |       | 1,005                         |       | 3,378,379           |       | 272         |       | —           |       |       |       | 19,007,408      |       | 1,710             |       | 343,167     |       | (1,117            | )          | 8,076        |       | (89,836      | )          | 616               |       | 264,319    |       | 27,215            |       |
|                                                                        |       |                          |       |                          |       |                          |       |                          |       |                |       |        |       |             |       |       |       |            |       |              |       |        |       |              |       |         |       |         |       |              |       |       |       |              |       |
| Issuance of Series D convertible  preferred shares                     |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | 2,598,503        |       | 200        |       | —          |       | —            |       | 74,322      |       | —            |       | —       |       | —       |       | —            |       | 74,522     |       |              |       |
| Repurchase of ordinary share as treasury  stock                             |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       | (2,300,000      | )          | (178              | )          | (49,869     | )          | —            |       | —       |       | —       |       | —            |       | (50,047    | )          |              |       |
| Issuance of treasury shares to new  shareholders                            |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       | 2,300,000       |       | 178               |       | 49,869      |       | —            |       | —       |       | —       |       | —            |       | 50,047     |       |              |       |
| Collection of subscriptions receivable                                      |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       | —          |       | —            |       | —      |       | 1,117             |       | —       |       | —       |       | —            |       | 1,117      |       |              |       |
| Amortization of share-based compensation                                    |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       | —          |       | —            |       | 3,643       |       | —            |       | —       |       | —       |       | —            |       | 3,643      |       |              |       |
| Accumulated adjustment of unrecognized tax  benefit                         |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       | —          |       | —            |       | —      |       | —            |       | —       |       | (3,744       | )          | —            |       | (3,744     | )          |              |       |
| Repurchase and cancellation of ordinary  shares                             |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       | (600,000        | )          | (46               | )          | (12,767     | )          | —            |       | —       |       | —       |       | —            |       | (12,813    | )          |              |       |
| Repurchase and cancellation of Series B  convertible preferred shares  |       | —                        |       | —                        |       | (30,000                       | )          | (2                            | )          | —              |       | —      |       | —           |       | —     |       | —          |       | —            |       | (638        | )          | —            |       | —       |       | —       |       | —            |       | (640       | )          |              |       |
| Exercise of warrants for Series A  convertible preferred shares        |       | 300,000                       |       | 23                            |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       | —          |       | —            |       | 3,386       |       | —            |       | (1,235       | )          | —       |       | —            |       | 2,174      |       |              |       |
| Exercise warrants for ordinary shares                                       |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       | 121,622         |       | 9                 |       | 2,126       |       | —            |       | (471         | )          | —       |       | —            |       | 1,664      |       |              |       |
| Conversion of series A, B, C, D preferred  shares                           |       | (5,450,000                    | )          | (449                          | )          | (12,110,495                   | )          | (1,003                        | )          | (3,378,379          | )          | (272        | )          | (2,598,503       | )          | (200       | )          | 23,537,377      |       | 1,924             |       | —      |       | —            |       | —       |       | —       |       | —            |       | —     |       |              |       |
| Issuance of ordinary shares on IPO (net of  insurance cost of RMB25,665)    |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       | 16,368,000      |       | 1,208             |       | 347,619     |       | —            |       | —       |       | —       |       | —            |       | 348,827    |       |              |       |
| Foreign currency translation adjustments                                    |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       | —          |       | —            |       | —      |       | —            |       | —       |       | —       |       | (2,822            | )          | (2,822     | )          | (2,822            | )          |
| Net income                                                                  |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       | —          |       | —            |       | —      |       | —            |       | —       |       | 2,487        |       | —            |       | 2,487      |       | 2,487             |       |
|                                                                        |       |                          |       |                          |       |                          |       |                          |       |                |       |        |       |             |       |       |       |            |       |              |       |        |       |              |       |         |       |         |       |              |       |       |       |              |       |
| Balance at December 31, 2007                                           |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       | 58,434,407      |       | 4,805             |       | 760,858     |       | —            |       | 6,370        |       | (91,093      | )          | (2,206            | )          | 678,734    |       | (335              | )          |
|                                                                        |       |                          |       |                          |       |                          |       |                          |       |                |       |        |       |             |       |       |       |            |       |              |       |        |       |              |       |         |       |         |       |              |       |       |       |              |       |
| Common shares converted to ADS shares for  future exercise of share options |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       | 8,344,305       |       | —            |       | —      |       | —            |       | —       |       | —       |       | —            |       | —     |       |              |       |
| Amortization of share-based compensation                                    |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       | —          |       | —            |       | 5,231       |       | —            |       | —       |       | —       |       | —            |       | 5,231      |       |              |       |
| Repurchase of ordinary shares and forfeiture  of warrants                   |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       | (3,702,583      | )          | (253              | )          | (33,122     | )          | —            |       | (815         | )          | —       |       | —            |       | (34,190    | )          |              |       |
| Excise of share options                                                     |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       |            |       | 21                |       | 1,766       |       | —            |       | —       |       | —       |       | —            |       | 1,787      |       |              |       |
| Foreign currency translation adjustments                                    |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       | —          |       | —            |       | —      |       | —            |       | —       |       | —       |       | (18,714           | )          | (18,714    | )          | (18,714           | )          |
| Net loss                                                                    |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       | —          |       | —            |       | —      |       | —            |       | —       |       | (43,019      | )          | —            |       | (43,019    | )          | (43,019           | )          |
|                                                                        |       |                          |       |                          |       |                          |       |                          |       |                |       |        |       |             |       |       |       |            |       |              |       |        |       |              |       |         |       |         |       |              |       |       |       |              |       |
| Balance at December 31, 2008                                           |       | —                        |       | —                        |       | —                        |       | —                        |       | —              |       | —      |       | —           |       | —     |       | 63,076,129      |       | 4,573             |       | 734,733     |       | —            |       | 5,555        |       | (134,112     | )          | (20,920           | )          | 589,829    |       | (61,733           | )          |
|                                                                        |       |                          |       |                          |       |                          |       |                          |       |                |       |        |       |             |       |       |       |            |       | US$               | 670        |        | US$        | 107,693           |       |         |       | US$          | 814        |              | US$        | (19,657    | )          | US$               | (3,068     | ) | US$ | 86,452 |   |   |   |
|                                                                             |            |                               |            |                               |            |                               |            |                               |            |                     |            |             |            |                  |            |            |            |                 |            |                   |            |             |            |                   |            |              |            |              |            |                   |            |            |            |                   |            |  |  |  |  |  |  |

 

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Table of Contents

 

**CHINAEDU CORPORATION**

** **

**ADDITIONAL INFORMATION — FINANCIAL STATEMENT SCHEDULEI**

**CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY**

**STATEMENTS OF CASH FLOWS**

**(In thousands, except share-related data)**

 
| ** **                                                                                               | ** ** | **Years ended  December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                               | ** ** | **2006**                           | ** ** | **2007** | ** ** | **2008** | ** ** | **2008** | ** ** |
| ** **                                                                                               | ** ** | **RMB**                            | ** ** | **RMB** | ** ** | **RMB** | ** ** | **US$** | ** ** |
| Cash flows from operating activities:                                                                    |       |                               |       |   |   |   |   |   |   |
| Net income (loss)                                                                                        |       | 25,539                             |       | 2,487 |   | (43,019 | ) | (6,305 | ) |
| Adjustments to reconcile net income (loss) to  net cash usedin  operating activities:                    |       |                               |       |   |   |   |   |   |   |
| Share based compensation                                                                                 |       | 2,586                              |       | 1,225 |   | 2,603 |   | 382 |   |
| Gain on conversion of warrants of series D  convertiblepreferred  shares                                 |       | —                             |       | (394 | ) | — |   | — |   |
| Interest expense                                                                                         |       | 2,279                              |       | 1,715 |   | — |   | — |   |
| Equity in earnings of subsidiaries and  variable interest entities                                       |       | (34,227                            | )          | (10,805 | ) | 35,444 |   | 5,195 |   |
| Changes in assets and liabilities:                                                                       |       |                               |       |   |   |   |   |   |   |
| Prepaid expenses and other current assets                                                                |       | (5,301                             | )          | 717 |   | (861 | ) | (126 | ) |
| Amounts due from related parties                                                                         |       | —                             |       | (1,302 | ) | (3,929 | ) | (576 | ) |
| Accrued expense and other liabilities                                                                    |       | (3,796                             | )          | 7,767 |   | (6,985 | ) | (1,024 | ) |
| Amount due to a related party                                                                            |       | —                             |       | 1,479 |   | 821 |   | 120 |   |
| Deferred revenue                                                                                         |       | —                             |       | — |   | 3,435 |   | 503 |   |
|                                                                                                     |       |                               |       |   |   |   |   |   |   |
| Net cash used in operating activities                                                                    |       | (12,920                            | )          | 2,889 |   | (12,491 | ) | (1,831 | ) |
|                                                                                                     |       |                               |       |   |   |   |   |   |   |
| Cash flows from investing activities:                                                                    |       |                               |       |   |   |   |   |   |   |
| Investments in subsidiaries and variable  interest entities                                              |       | —                             |       | (62,505 | ) | (116,671 | ) | (17,098 | ) |
|                                                                                                     |       |                               |       |   |   |   |   |   |   |
| Net cash used in investing activities                                                                    |       | —                             |       | (62,505 | ) | (116,671 | ) | (17,098 | ) |
|                                                                                                     |       |                               |       |   |   |   |   |   |   |
| Cash flows from financing activities:                                                                    |       |                               |       |   |   |   |   |   |   |
| Proceeds from IPO (net of issuance cost of  RMB25,665)                                                   |       | —                             |       | 348,827 |   | — |   | — |   |
| Proceeds from issuance of Series D  convertible preferred shares(net of issuance costs of RMB2,598) |       | —                             |       | 72,033 |   | — |   | — |   |
| Proceeds from exercise of warrants                                                                       |       | —                             |       | 3,838 |   | — |   | — |   |
| Repurchase of Series B convertible  preferred shares                                                |       | —                             |       | (640 | ) | — |   | — |   |
| Repurchase of ordinary shares                                                                            |       | —                             |       | (12,813 | ) | (34,190 | ) | (5,011 | ) |
| Repayment of convertible notes                                                                           |       | —                             |       | (27,783 | ) | — |   | — |   |
| Collection of subscription receivable                                                                    |       | —                             |       | 1,117 |   | — |   | — |   |
| Exercise of share options                                                                                |       | —                             |       | — |   | 1,787 |   | 262 |   |
|                                                                                                     |       |                               |       |   |   |   |   |   |   |
| Net cash used in financing activities                                                                    |       | —                             |       | 384,579 |   | (32,403 | ) | (4,749 | ) |
|                                                                                                     |       |                               |       |   |   |   |   |   |   |
| Effect of exchange rate changes                                                                          |       | (811                               | )          | (4,930 | ) | (19,182 | ) | (2,815 | ) |
|                                                                                                     |       |                               |       |   |   |   |   |   |   |
| Net (decrease) increase in cash and cash  equivalents                                                    |       | (13,731                            | )          | 320,033 |   | (180,747 | ) | (26,493 | ) |
| Cash and cash equivalents, beginning of year                                                             |       | 25,023                             |       | 11,292 |   | 331,325 |   | 48,564 |   |
|                                                                                                     |       |                               |       |   |   |   |   |   |   |
| Cash and cash equivalents, end of year                                                                   |       | 11,292                             |       | 331,325 |   | 150,578 |   | 22,071 |   |
|                                                                                                     |       |                               |       |   |   |   |   |   |   |
| Supplemental disclosure of non-cash financing  activities:                                               |       |                               |       |   |   |   |   |   |   |
| Conversion of convertible notes into  Series B preferred shares                                     |       | —                             |       | — |   | — |   | — |   |
| Receivable for the issuance of ordinary  shares upon exerciseof share  options by employees              |       | 1,117                              |       | — |   | — |   | — |   |
| Issuance of ordinary shares for purchases of  subsidiaries                                               |       | 30,158                             |       | — |   | — |   | — |   |
| Conversion of convertible notes into  Series D preferred shares                                     |       | —                             |       | 2,489 |   | — |   | — |   |
| Conversion of Series A,B,C,D preferred  sharesinto ordinary shares                                  |       | —                             |       | 1,924 |   | — |   | — |   |

 

F-56

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Table of Contents

 

**CHINAEDU CORPORATION**

** **

**NOTES TO ADDITIONAL INFORMATION — FINANCIAL STATEMENTSCHEDULE I**

**CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY**

**(In thousands, except share-related data)**

 

**1.****                                     ****BASIS FOR PREPARATION**

 

The condensed financial information of the Company has been preparedusing the same accounting policies as set out in the Company’s consolidatedfinancial statements, except that the Company used the equity method to accountfor investments in its subsidiaries and variable interest entities.

 

**2.****                                     ****INVESTMENTS IN SUBSIDIARIES AND VARIABLE INTEREST ENTITIES**

 

The Company and its subsidiaries and variable interest entities are includedin the consolidated financial statements where the inter-company balances andtransactions are eliminated upon consolidation. For the purpose of the Company’s stand-alone financial statements, itsinvestments in subsidiaries and variable interest entities are reported usingthe equity method of accounting.  TheCompany’s share of income and losses from its subsidiaries and variableinterest entities is reported as earnings from subsidiaries and variableinterest entities in the accompanying condensed financial information of theparent company.

 

**3.****                                     ****INCOME TAXES**

 

The Company is a Cayman Islands company, and therefore is not subjectto income taxes for all the years presented.

 

**4.****                                     ****RELATED PARTY TRANSACTIONS**

 

The following represents related party balances as of December 31,2007 and 2008:

 
| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2007**              | ** ** | **2008** | ** ** |
| ** **                        | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
| Amounts due from related parties: |       |                  |       |   |   |
| Former director-Yan Xueshan (i)   |       | 14,840                |       | 14,840 |   |
| Vice President-Xie Changqing (i)  |       | 39,360                |       | 39,360 |   |
| CMR (ii)                          |       | 7,777                 |       | 12,026 |   |
| Hongcheng Liye                    |       | —                |       | 2,754 |   |
| Others                            |       | 1,302                 |       | 1,740 |   |
|                              |       |                  |       |   |   |
|                              |       | 63,279                |       | 70,720 |   |
|                              |       |                  |       |   |   |
| Amount due to related parties:    |       |                  |       |   |   |
| Hongcheng Technology              |       | 5,029                 |       | 5,121 |   |
| Others                            |       | 200                   |       | 200 |   |
|                              |       |                  |       |   |   |
|                              |       | 5,229                 |       | 5,321 |   |

 

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(i)                                     Theamounts represent loans to the two equity owners of Hongcheng Education.

(ii)                                  The amountrepresents the receivable of profit distribution from a subsidiary company.

 

F-57

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