**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 20-F**

 

**(MarkOne)**

 

| **o**      | **REGISTRATION STATEMENT PURSUANT  TO SECTION 12(b) OR (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** |
| ** ** | ** **                                                                                                                     |
| **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  4th Floor-A, GeHua Building  No. 1 QinglongHutong, Dongcheng District  Beijing, 100007 People’s Republic of China** |
| (Address of principal executive offices)                                                                                                         |

 

**Julia Huang**

**Chairman, Chief ExecutiveOfficer and Acting Chief Financial Officer**

**ChinaEdu Corporation**

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

**No. 1 QinglongHutong,Dongcheng District**

**Beijing, 100007 People’sRepublic of China**

**Telephone: 86-10-84186655**

**Email: julia@chinaedu.net**

(Name,Telephone, E-mail and/or Facsimile number and Address of Company ContactPerson)

 

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 for trading,but only in connection with the registration of the American Depositary Sharespursuant to requirements of the Securities and Exchange Commission.

 

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

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

 
| SEC  1852 (02-08) | **Persons  who respond to the collection of information contained in this form are not  required to respond unless the form displays a currently valid OMB control  number.** |
|-------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

----

 

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.
|   | 58,434,407  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.

oYes   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 tosuch filing requirements for the past 90 days.

x 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.(Check one):

 

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

 

Indicate by check markwhich basis of accounting the registrant has used to prepare the financialstatements included in this filing:

 

U.S. GAAP x

 

International FinancialReporting 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.

oItem 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).

oYes   x No

 

(APPLICABLEONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Sections 12, 13 or 15(d) of the SecuritiesExchange Act of 1934 subsequent to the distribution of securities under a planconfirmed by a court.

 

oYes   o No

 

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**TABLE OF CONTENTS**

** **
| **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***                                                         | ***28***     |
| ***Item 5.  Operating and Financial Review and Prospects***                                       | ***52***     |
| ***Item 6.  Directors, Senior Management and Employees***                                         | ***81***     |
| ***Item 7.  Major Shareholders and Related Party Transactions***                                  | ***89***     |
| ***Item 8. Financial  Information***                                                              | ***92***     |
| ***Item 9. The Offer  and Listing***                                                              | ***93***     |
| ***Item 10.  Additional Information***                                                            | ***93***     |
| ***Item 11.  Quantitative and Qualitative Disclosures about Market Risk***                        | ***98***     |
| ***Item 12.  Description of Securities Other than Equity Securities***                            | ***100***    |
| *** ***                                                                                      | *** *** |
| **PART II**                                                                                  | **101**      |
| ** **                                                                                        | ** **   |
| ***Item 13. Defaults, Dividend Arrearages and  Delinquencies***                              | ***101***    |
| ***Item 14. Material Modifications to the Rights of  Security Holders and Use of Proceeds*** | ***101***    |
| ***Item 15. Controls and Procedures***                                                            | ***101***    |
| ***Item 16A. Audit Committee Financial Expert***                                             | ***103***    |
| ***Item 16B.  Code of Ethics***                                                              | ***103***    |
| ***Item 16C. Principal Accountant Fees and Services***                                       | ***103***    |
| ***Item 16D. Exemptions from the Listing Standards  for Audit Committees***                  | ***104***    |
| ***Item 16E. Purchases of Equity Securities by the  Issuer and Affiliated Purchasers***      | ***104***    |
| *** ***                                                                                      | *** *** |
| **PART III**                                                                                 | **105**      |
| ** **                                                                                        | ** **   |
| ***Item 17. Financial Statements***                                                          | ***105***    |
| ***Item 18. Financial Statements***                                                          | ***105***    |
| ***Item 19. Exhibits***                                                                      | ***105***    |

 

i

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**INTRODUCTION**

 

Unlessotherwise indicated and except where the context otherwise requires, referencesin this annual 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’s Republic of China, excludingTaiwan, Hong Kong and Macau;

 

·                  “shares” or “common shares” refers to ourcommon 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; and

 

·                  “RMB” or “Renminbi” refers to the legalcurrency of China and “$,” “dollars,” “US$” or “U.S. dollars” refers to thelegal currency of the United States.

 

ii

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**FORWARD-LOOKING STATEMENTS**

 

Thisannual report contains forward-looking statements that involve risks and uncertainties.All statements 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.

 

Youcan identify these forward-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 these forward-looking statements largely on our currentexpectations and projections about future events and financial trends that webelieve may affect our financial condition, results of operations, businessstrategy and financial needs. These forward-looking statements include:

 

·                  our anticipated growth strategies;

 

·                  our future business development, resultsof operations and financial condition;

 

·                  expected changes in our revenues andcertain cost and expense items;

 

·                  our ability to increase studentenrollments and course fees and expand program, service and product offerings;

 

·                  competition in the language training,test preparation, primary and secondary education, educational content,software and other technology development and online education markets;

 

·                  risks associated with our offering of neweducational programs, services and products and the expansion of our geographicreach;

 

·                  the expected increase in expenditures oneducation in China; and

 

·                  PRC laws, regulations and policiesrelating to private education and providers of private educational services.

 

Youshould read thoroughly this annual report and the documents that we refer toherein with the understanding that our actual future results may be materiallydifferent from and/or worse than what we expect. We qualify all of ourforward-looking statements by these cautionary statements. Other sections ofthis annual report include additional factors which could adversely impact ourbusiness and financial performance. Moreover, we operate in an evolvingenvironment. New risk factors emerge from time to time and it is not possiblefor our management to predict all risk factors, nor can we assess the impact ofall factors on our business or the extent to which any factor, or combinationof factors, may cause actual results to differ materially from those containedin any forward-looking statements.

 

Youshould not rely upon forward-looking statements as predictions of futureevents. The forward-looking statements made in this annual report relate onlyto events or information as of the date on which the statements are made inthis annual report. We undertake no obligation to update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

 

iii

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# **PART I**

# ** **

**Item 1.Identity of Directors, Senior Management and Advisers**

 

Not applicable.

 

**Item 2.Offer Statistics and Expected Timetable**

 

Not applicable.

 

**Item 3.Key Information**

 

A.  Selected Financial Data

 

**Selected Condensed Consolidated Financial Data**

 

The following selected condensed consolidatedstatement of operations data for the three years ended December 31, 2005,2006 and 2007 and selected condensed consolidated balance sheet data as of December 31,2006 and 2007 have been derived from our audited consolidated financialstatements included in this annual report. These consolidated financialstatements have been audited by Deloitte Touche Tohmatsu CPA Ltd., anindependent registered public accounting firm. The report of Deloitte ToucheTohmatsu CPA Ltd. on our audited consolidated financial statements for thethree years ended December 31, 2005, 2006 and 2007 and as of December 31,2006 and 2007 is included in this annual report.  The selected condensed consolidated statementof operations data for the year ended December 31, 2004 and selectedconsolidated balance sheet data as of December 31, 2004 and 2005 have beenderived from our audited consolidated financial statements, which are notincluded in this annual report. Our audited consolidated financial statementsare prepared and presented in accordance with generally accepted accountingprinciples in the United States, or U.S. GAAP. The historical results are notnecessarily indicative of results to be expected in any future period**.** The selectedcondensed consolidated financial data should be read in conjunction with, andare qualified in their entirety by reference to, our consolidated financialstatements and related notes and “Item 5. Operating and Financial Review and Prospects—A. OperatingResults” includedelsewhere in this annual report. Selected condensed consolidated financial dataas of December 31, 2003 and for the year ended December 31, 2003 hasbeen omitted because this information could not be provided withoutunreasonable effort or expense.

 

1

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| ** **                                                                                | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                | ** ** | **2004**                                    | ** ** | **2005 ** | ** ** | **2006** | ** ** | **2007** | ** ** | **2007** | ** ** |
| ** **                                                                                | ** ** | **RMB**                                     | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **$** | ** ** |
| ** **                                                                                | ** ** | **(In thousands)**                     | ** ** |
| **Condensed Consolidated Statement of  Operations Data:**                                 |       |                                        |       |   |   |   |   |   |   |   |   |
| Net revenue                                                                               |       |                                        |       |   |   |   |   |   |   |   |   |
| Online degree program                                                                     |       | 100,896                                     |       | 98,527 |   | 156,845 |   | 202,185 |   | 27,718 |   |
| International curriculum programs                                                         |       | —                                      |       | 4,854 |   | 28,428 |   | 31,434 |   | 4,309 |   |
| Online tutoring programs                                                                  |       | —                                      |       | 14,390 |   | 17,384 |   | 18,013 |   | 2,469 |   |
| Private primary and secondary schools                                                     |       | —                                      |       | 8,591 |   | 10,874 |   | 13,356 |   | 1,831 |   |
| Net revenue                                                                               |       | 100,896                                     |       | 126,362 |   | 213,531 |   | 264,988 |   | 36,327 |   |
| Cost of revenue                                                                           |       | (38,014                                     | )          | (53,138 | ) | (80,308 | ) | (96,349 | ) | (13,209 | ) |
| Gross profit                                                                              |       | 62,882                                      |       | 73,224 |   | 133,223 |   | 168,639 |   | 23,118 |   |
| Operating expenses                                                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| General and administrative                                                                |       | (26,924                                     | )          | (44,089 | ) | (48,846 | ) | (76,893 | ) | (10,541 | ) |
| Selling and marketing                                                                     |       | (751                                        | )          | (6,116 | ) | (12,893 | ) | (14,277 | ) | (1,957 | ) |
| Research and development                                                                  |       | (12,905                                     | )          | (11,842 | ) | (14,263 | ) | (21,021 | ) | (2,882 | ) |
| Goodwill impairment                                                                       |       | —                                      |       | — |   | — |   | (16,192 | ) | (2,220 | ) |
| Total operating expenses                                                                  |       | (40,580                                     | )          | (62,047 | ) | (76,002 | ) | (128,383 | ) | (17,600 | ) |
| Income from operations                                                                    |       | 22,302                                      |       | 11,177 |   | 57,221 |   | 40,256 |   | 5,518 |   |
| Other income                                                                              |       | —                                      |       | — |   | — |   | 394 |   | 54 |   |
| Interest income                                                                           |       | 266                                         |       | 1,078 |   | 1,172 |   | 4,118 |   | 565 |   |
| Interest expense                                                                          |       | —                                      |       | (1,242 | ) | (2,279 | ) | (2,130 | ) | (292 | ) |
| Income before income tax (benefits)  provisions and minority interest                     |       | 22,568                                      |       | 11,013 |   | 56,114 |   | 42,638 |   | 5,845 |   |
| Income tax (benefits) provisions                                                          |       |                                        |       |   |   |   |   |   |   |   |   |
| Current                                                                                   |       | 1,248                                       |       | 4,849 |   | 9,475 |   | 16,286 |   | 2,233 |   |
| Deferred                                                                                  |       | (2,094                                      | )          | (855 | ) | (2,481 | ) | (1,283 | ) | (176 | ) |
| Total income tax (benefits) provisions                                                    |       | (846                                        | )          | 3,994 |   | 6,994 |   | 15,003 |   | 2,057 |   |
| Income before minority interest                                                           |       | 23,414                                      |       | 7,019 |   | 49,120 |   | 27,635 |   | 3,788 |   |
| Minority interest, net of taxes                                                           |       | (11,465                                     | )          | (9,869 | ) | (23,581 | ) | (25,148 | ) | (3,447 | ) |
| Net income (loss)                                                                         |       | 11,949                                      |       | (2,850 | ) | 25,539 |   | 2,487 |   | 341 |   |
| Deemed dividends on preferred share                                                       |       | (15,959                                     | )          | — |   | — |   | — |   | — |   |
| Net (loss) income attributable to ordinary  shareholders                                  |       | (4,010                                      | )          | (2,850 | ) | 25,539 |   | 2,487 |   | 341 |   |
| Adjusted EBITDA(1)                                                                        |       | 26,962                                      |       | 19,588 |   | 74,190 |   | 74,129 |   | 10,162 |   |
| Net (loss) income per ordinary share—basic                                           |       | (0.34                                       | )          | (0.18 | ) | 0.65 |   | 0.06 |   | 0.01 |   |
| Net income per preferred A share—basic                                               |       | —                                      |       | — |   | 0.65 |   | 0.06 |   | 0.01 |   |
| Net income per preferred B share—basic                                               |       | —                                      |       | — |   | 0.65 |   | 0.06 |   | 0.01 |   |
| Net income per preferred C share—basic                                               |       | —                                      |       | — |   | 0.65 |   | 0.06 |   | 0.01 |   |
| Net income per preferred D share—basic                                               |       | —                                      |       | — |   | — |   | 0.06 |   | 0.01 |   |
| Net (loss) income per ordinary  share—diluted                                        |       | (0.34                                       | )          | (0.18 | ) | 0.60 |   | 0.05 |   | 0.01 |   |
| Net (loss) income per ADS                                                                 |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic—ordinary                                                                       |       | (1.02                                       | )          | (0.54 | ) | 1.95 |   | 0.18 |   | 0.03 |   |
| Diluted—ordinary                                                                     |       | (1.02                                       | )          | (0.54 | ) | 1.80 |   | 0.15 |   | 0.03 |   |
| Weighted average shares used in calculating  basic net (loss) income per ordinary share   |       | 11,673,946                                  |       | 16,243,736 |   | 39,209,606 |   | 42,147,170 |   | 42,147,170 |   |
| Weighted average shares used in calculating  diluted net (loss) income per ordinary share |       | 11,673,946                                  |       | 16,243,736 |   | 42,708,213 |   | 47,322,184 |   | 47,322,184 |   |

 

2

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| ** **                                                                            | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2007** | ** ** |
| ** **                                                                            | ** ** | **RMB**                                     | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **$** | ** ** |
| ** **                                                                            | ** ** | **(In thousands)**                     | ** ** |
| Share-based compensation expense included  in:                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Cost of revenue                                                                       |       | 369                                         |       | 369 |   | 468 |   | 346 |   | 47 |   |
| General and administrative                                                            |       | 2,719                                       |       | 1,965 |   | 1,942 |   | 2,960 |   | 406 |   |
| Selling and marketing                                                                 |       | —                                      |       | — |   | 205 |   | 222 |   | 30 |   |
| Research and development                                                              |       | 44                                          |       | 44 |   | 96 |   | 115 |   | 16 |   |
| Total                                                                                 |       | 3,132                                       |       | 2,378 |   | 2,711 |   | 3,643 |   | 499 |   |
|                                                                                  |       |                                        |       |   |   |   |   |   |   |   |   |
| Amortization of intangible assets acquired  through business combination included in: |       |                                        |       |   |   |   |   |   |   |   |   |
| Cost of revenue                                                                       |       | —                                      |       | 2,097 |   | 4,182 |   | 3,954 |   | 542 |   |
| Selling and marketing                                                                 |       | —                                      |       | 1,125 |   | 3,279 |   | 3,279 |   | 450 |   |
|                                                                                  |       |                                        |       |   |   |   |   |   |   |   |   |
| Total                                                                                 |       | —                                      |       | 3,222 |   | 7,461 |   | 7,233 |   | 992 |   |

 

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(1) AdjustedEBITDA represents net (loss) income attributable to ordinary shareholdersbefore deductions for minority interest, deemed dividend, interest, incometaxes, depreciation, amortization and goodwill impairment. We believe thatadjusted EBITDA is useful to investors as a measure of comparative operatingperformance, as it is less susceptible to variances in actual performanceresulting from depreciation, amortization and goodwill impairment, interest andtax expenses and other non-cash charges 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 operating activitiesas 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** | ** ** | **2007** | ** ** |
| ** **                                               | ** ** | **RMB**                                     | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **$** | ** ** |
| ** **                                               | ** ** | **(In thousands)**                     | ** ** |
| Net (loss) income attributable to ordinary  Shareholders |       | (4,010                                      | )          | (2,850 | ) | 25,539 |   | 2,487 |   | 341 |   |
| Deemed dividends on preferred shares                     |       | 15,959                                      |       | — |   | — |   | — |   | — |   |
| Minority interest, net of taxes                          |       | 11,465                                      |       | 9,869 |   | 23,581 |   | 25,148 |   | 3,447 |   |
| Income tax (benefits) provision                          |       | (846                                        | )          | 3,994 |   | 6,994 |   | 15,003 |   | 2,057 |   |
| Interest expense                                         |       | —                                      |       | 1,242 |   | 2,279 |   | 2,130 |   | 292 |   |
| Interest income                                          |       | (266                                        | )          | (1,078 | ) | (1,172 | ) | (4,118 | ) | (565 | ) |
| Depreciation                                             |       | 4,297                                       |       | 5,023 |   | 8,157 |   | 8,206 |   | 1,125 |   |
| Amortization                                             |       | 363                                         |       | 3,388 |   | 8,812 |   | 9,081 |   | 1,245 |   |
| Goodwill impairment                                      |       | —                                      |       | — |   | — |   | 16,192 |   | 2,220 |   |
| Adjusted EBITDA                                          |       | 26,962                                      |       | 19,588 |   | 74,190 |   | 74,129 |   | 10,162 |   |

 
| ** **                                     | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                     | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2007** | ** ** |
| ** **                                     | ** ** | **RMB**                                     | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **$** | ** ** |
| ** **                                     | ** ** | **(In thousands)**                     | ** ** |
| **Condensed Consolidated Balance Sheet Data:** |       |                                        |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                      |       | 106,936                                     |       | 155,912 |   | 148,315 |   | 497,114 |   | 68,148 |   |
| Total assets                                   |       | 199,182                                     |       | 428,408 |   | 497,210 |   | 980,068 |   | 134,355 |   |
| Total current liabilities                      |       | 41,051                                      |       | 141,706 |   | 132,746 |   | 186,122 |   | 25,515 |   |
| Total liabilities                              |       | 43,881                                      |       | 188,036 |   | 183,568 |   | 243,338 |   | 33,358 |   |
| Convertible notes                              |       | —                                      |       | 29,324 |   | 30,654 |   | — |   | — |   |
| Total shareholders’ equity                |       | 145,698                                     |       | 204,235 |   | 264,319 |   | 678,734 |   | 93,046 |   |

 

**Exchange Rate Information**

 

The following table sets forth the noon buying ratesfor U.S. dollars in effect in The City of New York for cable transfers ofRenminbi as certified for customs purposes by the Federal Reserve Bank of NewYork, for the periods indicated.

 

3

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| ** **                             | ** ** | **Renminbi per U.S. Dollar Noon Buying Rate** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **Average**                                                                 | ** ** | **High** | ** ** | **Low** | ** ** | **Period-End** | ** ** |
| 2003                                   |       | 8.2772                                                                      |       | 8.2765 |   | 8.2800 |   | 8.2767 |   |
| 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 |   |
| December                               |       | 7.3682                                                                      |       | 7.2946 |   | 7.4120 |   | 7.2946 |   |
| 2008                                   |       |                                                                        |       |   |   |   |   |   |   |
| January                                |       | 7.2405                                                                      |       | 7.1818 |   | 7.2946 |   | 7.1818 |   |
| February                               |       | 7.1644                                                                      |       | 7.1100 |   | 7.1973 |   | 7.1115 |   |
| March                                  |       | 7.0722                                                                      |       | 7.0105 |   | 7.1110 |   | 7.0120 |   |
| April                                  |       | 6.9997                                                                      |       | 6.9840 |   | 7.0185 |   | 6.9870 |   |
| May                                    |       | 6.9725                                                                      |       | 6.9377 |   | 7.0000 |   | 6.9400 |   |
| June (through June 23, 2008) |       | 6.9104                                                                      |       | 6.8740 |   | 6.9633 |   | 6.8740 |   |

 

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Source:Federal Reserve Bank of New York

 

On June 23,****2008,****the noon buying rate was RMB6.8740****to$1.00.

 

We publish our financial statements in Renminbi.This annual report contains translations of Renminbi amounts intoU.S. dollars at specified rates solely for the convenience of the reader.Unless otherwise noted, all translations from Renminbi to U.S. dollarswere made at the noon buying rate in The City of New York for cable transfersin Renminbi per U.S. dollar as certified for customs purposes by theFederal Reserve Bank of New York, as of December 31, 2007, which wasRMB7.2946 to $1.00. No representation is made that the Renminbi amountsreferred to in this annual report could have been or could be converted intoU.S. dollars at any particular rate or at all.

 

Since July 2005, the Renminbi is no longerpegged solely to the U.S. dollar. Instead, its value is measured against abasket of currencies, determined by the People’s Bank of China, against whichit can rise or fall by as much as 0.3% each day. The Renminbi may appreciate ordepreciate significantly in value against the U.S. dollar in the future.See “—D. Risk Factors—Risks Related to the People’s Republic ofChina—The fluctuation of the Renminbi may materially and adversely affect yourinvestment.”

 

B.  Capitalization and Indebtedness

 

Not applicable.

 

C.  Reasons for the Offer andUse of Proceeds

 

Not applicable.

 

D.  Risk Factors

 

*Investing in our securities involves a high degree ofrisk. You should carefully consider the risks described below, in conjunctionwith other information and our consolidated financial statements and relatednotes included elsewhere in this annual report, before making an investmentdecision. Our business, financial condition or results of operations could beaffected materially and adversely by any or all of these risks. The tradingprice of our ADSs could decline due to any or all of these risks, and you maylose 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 Chinesegovernment regulates all aspects of the education sector, including licensingof parties to perform various services, pricing of tuition and other fees,curriculum content, standards for the operations of schools and learningcenters associated with online degree programs and foreign participation. Thelaws and regulations applicable to the education sector are in some aspectsvague and uncertain, and often lack detailed implementing regulations. Theselaws and regulations are subject to change, and new laws and regulations may beadopted, some of which may have retroactive 

 

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application or have a negative effect on our business. For example, in2003, the Chinese government adopted a new regulatory framework forChinese-foreign cooperation in education. This new framework may encourageinstitutions with more experience, better reputations, greater technologicalknow-how and larger financial resources than we have to compete against us andlimit our growth. In addition, because the Chinese government and the publicview the conduct of educational institutions as a vital social service, thereis considerable ongoing scrutiny of the education sector and its participants.For a discussion 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 withChina’s extensive regulations on private and foreign participation in theeducation and telecommunication sectors, which has caused us to adopt complexstructural arrangements with our Chinese subsidiaries and Chinese affiliatedentities. If the relevant Chinese authorities decide our structuralarrangements do not comply with these restrictions, we would be precluded fromconducting some or all of our current business.

 

Chinese regulatorshave broad powers to regulate the tuition and other fees charged by schoolsand, as a result, can adversely impact the fees we receive from the schools towhich we provide services, as well as the returns from the private primary andsecondary schools operated by our Chinese affiliated entities. While China’sregulatory framework provides that investors in private schools are entitled toreceive a “reasonable return” on their investment, there is no clear guidancein law as to what this term means.

 

Although ourcorporate structure and business are designed to comply with the limitations onforeign investment and participation in the education and telecommunicationsectors, we cannot assure you that we will not be found to be in violation ofany current or future Chinese laws and regulations. See “Item 3. Key Information—D. Risk Factors—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 foreignownership or participation in the education or telecommunication sectors, therelevant regulatory authorities have broad discretion in dealing with suchviolation, 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 ownership structure or operations of ourChinese subsidiaries or Chinese affiliated entities;

 

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

 

·                  revokingbusiness licenses.

 

Any of these or similar actions could cause significant disruption toour business operations or render us unable to conduct all or a substantialportion of our business operations, and may materially and adversely affect ourbusiness, financial condition and results 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.***

 

78.0% of our netrevenue in 2005, 73.5% of our net revenue in 2006 and 76.3% of our net revenuein the year ended December 31, 2007 were generated by providing servicesto online degree programs of Chinese universities. The continued growth of thisbusiness line depends on our ability to attract new university customers andthe ability of these universities to increase the student enrollment for theironline degree programs. We face many challenges in our online degree programservices business, including:

 

·                  our structure for this line of business, inwhich services are provided to our university customer’s online degree programby one of our Chinese subsidiaries, one of our Chinese affiliated entities or acollaborative alliance we have formed with one of our university partners, maybe found by Chinese regulatory authorities to violate restrictions on entitiesother than universities being responsible for online degree programs;

 

·                  the demand for online degree programs dependson the social acceptance and perceived attractiveness of degrees offered bythese programs, which may decline due to actual or perceived quality problemsat online degree 

 

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programsand the increased availability of alternatives such as traditional degreeprograms, on-the-job training and overseas programs;

 

·                  the universities with online degree programs have primary responsibilityfor these programs and they may have priorities and objectives for the programsthat conflict with our objectives of growing our revenue and profits fromservicing the programs; and

 

·                  each of the universities with online degree programs has been approvedby China’s Ministry of Education, or the MOE, to operate these programs as partof the MOE’s pilot program for online education and there is no assurance thatthe MOE will not restrict, suspend or revoke this program in the future or thatany of the currently approved universities, including our university partners,will continue to qualify for this program.

 

In2005, our revenue from online degree programs declined as a result of declinesin enrollment and increased compensation paid to learning centers by some ofthe online degree programs serviced by us. The decline in enrollment resultedfrom new regulations issued by the MOE in February 2004. The newregulations prohibited universities from recruiting existing full-time studentsof traditional on-campus degree programs and instructed the online degreeprograms to recruit working adults. The new MOE regulations also requiredonline degree programs to tighten their admission criteria and improve thequality of the information included in their recruiting materials. In 2005,these restrictions adversely affected both new student recruitment and totalenrollment for the online degree sector in China. In particular, three of theonline degree programs serviced by us experienced declines in studentenrollment in 2005 compared to 2004 due to these restrictions on recruitment ofnew students. Since our service fees for online degree programs are based oneither tuition revenue or tuition revenue net of certain expenses of ouruniversity customers online degree programs, including compensation paid tolearning centers, any decline in our university partners’ online programenrollment or any increase in learning center expenses and other expensespayable by them to third parties will adversely affect the revenue that wereceive from these programs.

 

Asignificant factor affecting the results of our online degree program servicesbusiness is the fees that our university partners are required to pay toindependent learning centers. The share of tuition revenue that we receive, through the collaborative alliances with our universitypartners, is after the payment of fees to learning centers. As a result, anincrease in the portion of tuition fees paid to the learning centers willresult in a decrease in the portion of tuition fees that we receive as revenue.The portion of tuition fees payable to learning centers has been increasing. 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 2004, 2005, 2006 and 2007, the portion of grosstuition fees that our university partners in aggregate paid to independentlearning centers was approximately 30%, 39%, 39% and 40%, respectively. Thisincrease was attributable mainly to increases in demand by universities forservices provided by a limited number of learning centers. There can be noassurance, however, that the amounts payable to independent learning centers,as a portion of gross tuition fees, will not continue to increase.

 

To the extent any ofthe factors 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, and we may not succeed in attracting additional university onlinedegree programs as customers.***

 

In 2005, 2006, and 2007, 71.4%, 67.3% and 68.2%,respectively, of our net revenue was derived from our services to our fivelargest online degree program customers. Our three largest customers, RenminUniversity of China, China Agricultural University and Dongbei University ofFinance and Economics, accounted for 21.1%, 17.3 % and 14.0%, respectively, ofour net revenue in 2007. We will likely continue to rely on a relatively smallnumber of customers for a significant portion of our revenue for theforeseeable future. If for any reason our revenue from any of our significantcustomers or other online degree programs were to decline or if we were to loseany of our significant customers, our revenue and results of operations wouldbe materially and adversely affected.

 

Although ourstrategy is to increase the number of online degree programs using ourservices, we may not be able to attract additional university customers.Developing and entering into a relationship with a university requiresconsiderable effort on our part, and we may spend considerable time and stillmay not be successful in developing a new customer. Our ability to expand ourservices to online degree programs is dependent on our ability to identifypotential university partners who can provide course offerings that will beattractive to the target market and to develop a mutually acceptablearrangement with the university for the development of a program. Some of theuniversities offering online degree programs that do not utilize our serviceshave developed their own technology platforms, and others have entered into 

 

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service agreements with other service providers. Some of theuniversities we would like to partner with may not have goals and objectivesthat are compatible with ours, may be subject to long-term contracts with otherservice providers, or may have cumbersome decision-making procedures that maydelay or prohibit our entering into a service relationship with them. Inaddition, some of these universities are also being pursued by our competitors.As a result, we cannot predict whether we will be successful in attractingadditional universities to which we can provide services. If we areunsuccessful in establishing new service relationships, our strategic growthobjectives may not be achieved, thereby adversely impacting our prospects andresults 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 31,2007, 76.3% 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 are 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.

 

***In the course of auditing our consolidated financialstatements for the year ended December 31, 2007, we and our auditorsidentified certain material weaknesses, significant deficiencies and othercontrol deficiencies in our internal control over financial reporting; if wefail to maintain an effective system of internal control over financialreporting, we may be unable to accurately report our financial results orprevent fraud, and investor confidence and the market price of our ADSs may beadversely affected.***

 

Our reportingobligations as a public company will place a significant strain on ourmanagement, operational and financial resources and systems for the foreseeablefuture. Prior to our initial public offering in December 2007, we had beena private company and had limited accounting personnel and other resources withwhich to address our internal control over financial reporting. Our independentregistered public accounting firm has not conducted an audit of our internalcontrol over financial reporting.  In thecourse of auditing our consolidated financial statements for the year ended December 31,2007, our independent registered public accounting firm identified andcommunicated to us two material weaknesses and two significant deficiencies, aswell as certain other control deficiencies, in our internal control overfinancial reporting as of December 31, 2007 as defined in AuditingStandard No. 5 of the U.S. Public Company Accounting Oversight Board, orAuditing Standard No. 5. Our management agreed with these findings. If wehad performed a thorough assessment of our internal control over financialreporting or if our independent registered public accounting firm had performedan audit of our internal control over financial reporting, additional materialweaknesses, significant deficiencies or control deficiencies may have beenidentified. As defined in Auditing Standard No. 5, a “material weakness”is a significant deficiency, or combination of significant deficiencies, thatresults in more than a remote likelihood that a material misstatement of theannual or interim financial statements will not be prevented or detected, and a“significant deficiency” is a control deficiency, or combination of controldeficiencies, that adversely affects our ability to initiate, authorize,record, process, or report external financial data reliably in accordance withgenerally accepted accounting principles such that there is more than a remotelikelihood that a misstatement of our annual or interim financial statementsthat is more than inconsequential will not be prevented or detected.

 

The materialweaknesses identified by our independent registered public accounting firmwere:

 

·                  Inadequatefinancial reporting and accounting resources with a good understanding of U.S.generally accepted accounting principles, or U.S. GAAP, and Securities andExchange Commission, or SEC, reporting requirements. In particular, ourindependent registered public accounting firm determined that we hadinsufficient resources in the accounting department to properly analyzetransactions and prepare financial statements in accordance with U.S. GAAP. Wehave experienced difficulties obtaining timely and consistent financialinformation from our subsidiaries, and we have limited resources to monitor theaccounting policies and financial activities of each subsidiary. As a result, asignificant number of audit adjustments have been made 

 

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to our management financial statements. Our recentinitial public offering added significant new demands on our accounting andfinance department, including with respect to: external financial reporting incompliance with SEC reporting requirements and U.S. GAAP accounting anddisclosure requirements; and treasury and risk management.

 

·                  The lack of acomprehensive set of accounting policies and procedures in accordance with U.S.GAAP, and our existing accounting personnel do not have adequate guidance as tohow transactions should be accounted for under U.S. GAAP. This has resulted ina significant number of audit adjustments in the past, and can cause materialaccounting and reporting errors not being detected in a timely manner.

 

The significantdeficiencies identified by our independent registered public accounting firmwere that we do not have a qualified internal tax team who can address ourincome tax accounting and compliance matters from a U.S. GAAP perspective, andwe have certain significant deficiencies with respect to our managementinformation systems.

 

Following theidentification of these material weaknesses and significant deficiencies andother control deficiencies, we have taken measures and plan to continue to takemeasures to remediate these weaknesses and deficiencies. However, theimplementation of these measures may not fully address these materialweaknesses and significant deficiencies and other control deficiencies in ourinternal control over financial reporting, and we cannot yet conclude that theyhave been fully remedied. In addition, in March 2008, our Chief FinancialOfficer resigned from his position with the Company and we have not yet found asuitable replacement.  Ms. JuliaHuang, our Chairman and Chief Executive Officer, is serving as interim ChiefFinancial Officer until such replacement is found.  The lack of a permanent Chief FinancialOfficer may hinder our remediation efforts and/or may lead to additionalweaknesses and deficiencies.****Our failure tocorrect these material weaknesses and significant deficiencies and othercontrol deficiencies or our failure to discover and address any other controldeficiencies could result in inaccuracies in our financial statements and couldalso impair our ability to comply with applicable financial reportingrequirements and related regulatory filings on a timely basis. Moreover,effective internal control over financial reporting is important to helpprevent fraud. As a result, our business, financial condition, results ofoperations and prospects, as well as the trading price of our ADSs, may bematerially and adversely affected. See “Item 15. Controls andProcedures—Internal Control over Financial Reporting” in this annual report.

 

We are a publiccompany in the United States and are subject to the Sarbanes-Oxley Act of 2002,or the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act willrequire that we include a report from management on the effectiveness of ourinternal control over financial reporting in our annual report on Form 20-Fbeginning with our annual report for the fiscal year ending December 31, 2008.In addition, beginning at the same time, our auditors must report on theeffectiveness of our internal control over financial reporting. Our managementor our auditors may conclude that our efforts to remediate the problemsidentified above were not successful or that otherwise our internal controlover financial reporting is not effective. This could result in an adversereaction in the financial marketplace due to a loss of investor confidence inthe reliability of our reporting processes, which could adversely impact themarket price of our ADSs. We will need to incur significant costs and usesignificant management and other resources in order to comply with Section 404of the Sarbanes-Oxley Act.

 

***Chinese-foreign cooperative education programs, such as ourinternational curriculum programs, are heavily regulated, and our ability toconduct business in this area is highly dependent on regulatory policies andour compliance with these policies.***

 

Our internationalpost-secondary curriculum, or BCIT, program has recently been restricted in itsability to contract new schools. In April 2007, the MOE issued the *Circular on Further Regulating Chinese-ForeignCooperative Education Programs*. The circular directs the localeducation 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 cooperative educationprograms, the circular emphasizes the regulatory supervision of these programsand advises local education authorities to closely supervise and monitor theexisting programs, especially in recruiting materials, advertisements, andissuance of degrees and diplomas, and directs them to report and remedy anynon-compliance by existing programs of the applicable regulations. As a resultof this circular, our BCIT program has not been able to contract new schoolsfor the program and we do not expect it to until at least 2009. Although thecircular only discusses the suspension of approvals through the end of 2008, wecannot assure you that our BCIT program will be able to contract new schools in2009 or at any time after that. These developments have adversely affected ourresults of operations and the prospects for this business, and other regulatoryactions could have similar adverse effects.

 

Similarly, the schools participating in our English language curriculum,or FEC, program have faced challenges obtaining certain regulatory approvals.In August 2004, the MOE promulgated the *Announcementregarding Re-Approval*

 

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*ofChinese-foreign Cooperative Educational Institutions and Programs*, 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. Nineteen of our 21 contracted schools within the FEC program at thattime were subject to re-approval. So far, seven of our contracted schools haveobtained re-approval from the MOE and the other 12 have submitted theirapplications for re-approval.****If the MOE’sre-approval is not obtained, these schools may have to terminate their FECprograms, which would adversely affect our business, financial condition andresults of operations.

 

***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,and expect 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 morepronounced.

 

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

 

We began operationsin 1999, and only initiated three of our four lines of business in 2005 or 2006through acquisitions. Our limited operating history may not provide ameaningful basis on which to evaluate our business. We incurred net lossesprior to 2004. We cannot assure you that we will maintain our profitability orthat we will not incur net losses in the future. We expect that our operatingexpenses will increase as we expand. Any failure to realize anticipated revenuegrowth could result in operating losses. We will continue to encounter risksand difficulties frequently experienced by companies at a similar stage ofdevelopment. Given our limited operating history and the limited period of timethat our management team has worked together, our operating history may notprovide you with a sufficient basis upon which to evaluate the ability of ourmanagement team to address these risks. If we are not successful in addressingany or all of these risks, our business may be materially and adverselyaffected.

 

***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. Inaddition, 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.

 

We have experiencedregulatory compliance problems resulting from the actions of third parties. Forexample, in 2004, a learning center that was associated with the online degreeprogram of Jiangnan University failed its periodic inspection by the localeducation authority, and in 2005, a learning center associated with the onlinedegree program of Chongqing University also failed a regulatory inspection. Asa result of these inspection failures by the learning centers, the onlinedegree programs for these two universities were not able to recruit newstudents for a one-year period, resulting in a significant decline in theirtuition revenue and, consequently, our service revenue. In the case of JiangnanUniversity, new student enrollment was suspended for the spring and fallsemester of 2004, and the number of registered students declined from 10,008 asof the 2003 calendar year-end to 7,389 as of the 2004 calendar year-end and5,744 as of the 2005 calendar year-end. In the case of Chongqing University,new student enrollment was suspended for the spring and fall semesters of 2005,and the number of registered students declined from 9,807 as of the 2004calendar year-end to 9,249 as of the 2005 calendar year-end. The inability torecruit students for a one-year period has an adverse impact beyond the year ofthe suspension due to the multi-year nature of most online degree programs. Ifother learning centers upon which the online degree programs are dependentencounter similar regulatory compliance issues, our results of operations andour ability to attract and retain university customers will be adverselyaffected.

 

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***Because we face significant competition in several of ourlines of business, we may lose market share, we may need to lower our pricesand our results of operations may be materially and adversely affected.***

 

We currently servenine out of the 67****universitiesthat have been approved to offer online degree programs in China. Our revenuefrom these nine universities depends on the total cash tuition receipts forthese programs. The online degree programs of these nine universities mustcompete with the online degree programs of the other 58 universities approvedto offer online degree programs, as well as other education and trainingprograms that are seeking to enroll students. While we are trying to enter intoagreements with additional universities with respect to their online degreeprograms, we face competition from other service providers and may not succeedin our efforts.

 

Our online tutoringand test 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 international post-secondary education programs compete for students withother Chinese-foreign cooperative education programs, sister school programs,distance learning programs, self-study programs and other vocational andtechnical training programs. Our private primary and secondary schools competefor recruiting students with other schools in their respective areas as well asboarding schools that recruit students on a nationwide basis.

 

There are also manynew entrants 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.

 

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 incooperation with international partners. In addition, as the existingpenetration rates of these lines of business are relatively low in our markets,competitors could acquire significant numbers of clients and establishsignificant market share within a relatively short period. For example, as aresult of increasing competition, we expect the future operating results of ourFEC program to be adversely affected due to lower student numbers and lower perstudent amounts payable to us under our contractual arrangements withparticipating schools. Increased competition could result in loss of marketshare and revenue and lower profit margins, and have a material adverse effecton our business, financial condition and results of operations.

 

***Our strategy to develop a nationwide network of learningcenters will involve substantial costs and may not succeed.***

 

In February 2007,we received 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. We will seek to extend this approval to allow us to operatelearning centers throughout China on a permanent basis, as learning centersplay a critical role in the online degree education business as a result of,for example, their leading role in student recruitment.

 

Our strategy tooperate learning centers involves various risks and may not succeed. Theserisks include those related to operating a new business in which we do not haveexperience. To be successful in operating learning centers we will have toobtain new contracts on acceptable terms with the university online degreeprograms, 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, which currently applies to only fourprovinces and permits us to operate only 10 learning centers, to a nationalscope with an unlimited number of learning centers and to convert it from aprovisional license to a permanent approval. Moreover, even though we haveobtained MOE approval for the initial 10 learning centers, we will still needto obtain approval from the relevant provincial level education authoritiesbefore we establish any learning center, and there are risks relating to ourability to obtain these provincial level approvals. As of the date of thisannual report, we have only received this approval from the Beijing educationauthorities. Any one of these risks could cause our entry into the learningcenter business to be unsuccessful and adversely affect our business, financialcondition and results of operations.

 

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***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 continueto provide high quality services to our existing customers to maintain andenhance our reputation, and we also need to attract and retain customers forour various lines of business. All of our business lines are highly dependenton existing 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 successis highly dependent on the ongoing efforts of our senior management and otherkey personnel. 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. For example, in March 2008, Mr. Michael Xu,our Chief Financial Officer, resigned from his position with the Company, andwe have not yet found a suitable replacement. Ms. Julia Huang, ourChairman and Chief Executive Officer, is serving as interim Chief FinancialOfficer until such replacement is found. We can provide no assurance that ourinterim Chief Financial Officer will be able to manage our business effectivelyor that we will be able to hire a new officer for this position within areasonable period of time.

 

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.

 

***We may not be able to successfully execute futureacquisitions or efficiently manage the businesses we have acquired or may acquirein 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:

 

·                  ourability to identify and acquire businesses on a cost-effective basis;

 

·                  ourability to integrate acquired personnel, operations, products and technologiesinto our organization effectively;

 

·                  ourability to retain and motivate key personnel and to retain the customers of theacquired businesses;

 

·                  unanticipatedproblems or legal liabilities of the acquired businesses; and

 

·                  taxor accounting issues relating to the acquired 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 has required us to invest significant amounts for theacquisition of the rights to operate these schools and for expanding facilitiesand upgrading the services offered by these schools. In the case of the AnqingForeign Language School, or the Anqing School, we are building a new campus forthe school to accommodate a larger student population, which we expect torequire additional capital expenditures of approximately RMB65.0 million. Inthe case of the Jingzhou School (Southern Campus), our business plan depends onthe completion of the construction of a new campus, which we expect to requireadditional capital expenditures of approximately RMB76.0 million. While we hadinitially planned to complete construction of the new campus by the Fall 2006recruiting season, we have encountered delays in obtaining the land-use rightsfor the new campus site, as well as delays due to inclement weather in February 2008,and while we expect to begin to recruit for this school in the Fall 2009season, we cannot assure you that we will begin then, or at all. Delays incompleting the new campus will adversely affect the revenue from this investment.

 

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Ifwe are unable to effectively execute our acquisition strategy or integrate anyacquired business, our business, financial condition and results of operationsmay be materially and adversely affected. In addition, if we use our equitysecurities as consideration for acquisitions, we may dilute the value of yourordinary shares or ADSs.

 

***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 the differentiatingfactor between our programs and those of the traditional education sector inChina, rely significantly on the quality of the educators we are able toattract to such programs. For example:

 

·                  theonline degree programs that we serve rely to a significant degree on professorsto prepare the online courseware;

 

·                  ourinternational post-secondary programs rely on capable instructors withinparticipating colleges to take part in the training by the overseaspost-secondary institutions;

 

·                  ouronline tutoring program needs to attract tutors who are perceived to besuccessful in preparing students for examinations;

 

·                  ourprivate primary and secondary schools need to attract qualified and experiencedteachers and administrators; and

 

·                  weneed to find well-qualified native English speakers to teach in the Englishlanguage programs and the international post-secondary programs that we supportand the private primary and secondary schools operated by our Chineseaffiliated entities.

 

There areconsiderable challenges in locating and attracting the personnel we need. Thereis considerable competition in China to attract strong educators. To the extentwe have 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 adverselyaffected.***

 

The market forproviding services to educational institutions for their online degree programsand the market for online tutoring services are relatively new. These marketsare characterized 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.

 

***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 considerableinvestment of time and resources to develop and, in many cases, require us tomake substantial investments in collaborative alliances or to provide advancepayments to the universities to attract university partners. The profitabilityof these programs for us depends on the ability of the programs 

 

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to attract students. Similarly, our revenue from our online tutoringprograms, international programs, and private primary and secondary schoolsdepends on our attracting enough students on an ongoing basis. If the programsor schools are unable to recruit enough students to offset the development andoperating costs, our results of operations will be adversely affected.

 

***The demand for our online tutoring services may be adverselyaffected by parental concern of children spending too much time on onlinegaming and other non-educational online activities.***

 

Parents andgovernment officials in China have expressed concern that school age childrenare spending too much time on the Internet playing online games and engaging inother non-productive online activities. As a result, parents may not besupportive of buying computers and other computer resources or Internet accessfor their children, and this could adversely affect online education programssuch as our online tutoring programs. This attitude could adversely affect ourability to expand enrollment in our online tutoring programs and therebyadversely affect our 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 intellectualproperty has been and will continue to be subject to various forms ofinfringement, theft and misappropriation. We are also susceptible to otherscopying our business model and methods. Our courseware and course materialshave significant value and could be copied. We devote substantial resources tothe development of platform support and courseware for online degree programs,the course materials and systems support for our online tutoring program, andimplementation of the international post-secondary education programs and theEnglish language programs we support. The legal protection of intellectualproperty in China is significantly more limited than in the United States andmany other countries and may afford us little or no effective protection.

 

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 universityonline degree programs require students to pre-pay for a set number of coursesat the outset of their enrollment; however, these students may not enroll inall of these 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 2007, 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 ourstrategic objectives and to remain competitive, we must continue to develop andenhance our technology and our use of information that is available within ouronline systems. This may require us to acquire additional equipment andsoftware and to develop new applications within our online systems. Our successin the development of new service offerings, such as community features andimproved student management systems, depends in large part upon our ability tostore, retrieve, process and manage substantial amounts of information. Ouronline systems and the technology platform upon which online degree programsoperate, and our other databases, products and systems could contain undetectederrors or “bugs” that could adversely affect their performance. In addition,our systems 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, andmaterially and adversely affect our business.

 

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

 

Our services toonline degree programs and our online tutoring program depends on theperformance and reliability of China’s Internet infrastructure. In China, almostall access to the Internet is maintained through state-owned telecommunicationoperators under the administrative control and regulatory supervision of China’sMinistry of Information Industry, or the MII. In addition, the nationalnetworks in China are connected to the Internet through international gatewayscontrolled by the Chinese government. These international gateways are the onlychannels through which a user in China can connect to the Internet. We cannotassure you that a more sophisticated Internet infrastructure will be developedin China. We may not have access to alternative networks in the event ofdisruptions, failures or other problems with China’s Internet infrastructure.In addition, China’s Internet infrastructure may not support the demandsassociated with continued 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, ourprofitability could be adversely affected. In addition, if Internet access feesor other charges to Internet users increase, the users of our online tutoringservices may find our services less affordable, which may in turn reduce ourrevenue.

 

***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 degreeprogram platforms contain substantial information about students, theirattendance and performance, and the administration of the entire student lifecycle from enrollment to graduation. As such, these online systems and recordsmay become attractive targets for either dissatisfied students, or hackers ingeneral, who seek to access and modify records maintained on these systems, orto disrupt the 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 viruses could resultin significant 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 hacking affectsour systems and is highly publicized, our reputation could be materiallydamaged and usage of our services may decrease.

 

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

 

As a public company,we incur significant legal, accounting and other expenses that we did not incuras a private company prior to our initial public offering in December 2007.Moreover, the Sarbanes-Oxley Act, as well as new rules subsequentlyimplemented by the SEC and Nasdaq have imposed additional requirements on corporategovernance practices of public companies, including Section 404 relatingto internal controls over financial reporting. These new rules andregulations increase our legal and financial compliance costs and to makecertain corporate activities more time-consuming and costly. For example, weincur additional costs associated with our public company reportingrequirements. It may also be difficult for us to attract and retain qualifiedpersons to serve on our board of directors due to increased risks of liabilityto our directors under the new rules and regulations.

 

Although our resultsof operations, 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.

 

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**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 developmentswould adversely affect our business, financial condition and results ofoperations.

 

***Our previous contractual arrangement with East ChinaUniversity of Science and Technology, one of our online degree programcustomers, may not have been compliant with relevant restrictions on foreignparticipation in the operation of an online degree program; we may face regulatoryfines and other sanctions in respect of this arrangement.***

 

Our relationshipwith East China University of Science and Technology’s online degree programwas originally structured as a cooperative agreement between the university andour subsidiary, Hongcheng Technology, under which Hongcheng Technology and theuniversity jointly established a management committee for the online degreeprogram. However, the rights we had with regard to participation on themanagement committee of the program might be construed by the Chinesegovernment as improper involvement by an FIE in running a school. Because ofthis concern, in 2006 we transferred the contractual rights related to thisprogram to Hongcheng Education, one of our Chinese affiliated entities, which isnot an FIE. Our service revenue from this program accounted for 8.3% of our netrevenue in 2007. There can be no assurance that the Chinese government will notdetermine that our previous arrangement for the program violated the law. Anysuch determination could result in the Chinese government imposing fines andother sanctions on us, which could have an adverse effect on our results ofoperations.

 

***If Gotop Electronic’s ICP license for the operation of thewebsite for our online tutoring business is suspended or revoked by the MII dueto non-compliance with its requirements, we may have to shut down our 101Online School’s website, which would have a material adverse effect on ourbusiness, financial condition and results of operations.***

 

In July 2006,the MII, issued 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 foreign investors operating in violation ofrestrictions on foreign investment. The notice requires that Chinese ICPs mustdirectly own the trademarks and domain names for websites operated by them, aswell as servers and other infrastructure used to support these websites. Thenotice also requires Chinese ICPs to evaluate their compliance with the noticeby November 1, 2006 and correct any non-compliance. A Chinese ICP’sfailure to complete the procedures by November 1, 2006 could be the basisfor revocation of its ICP license. Due to a lack of interpretative materialsfrom the MII, the impact of this circular on us is unclear. We currentlyoperate *www.chinaedu.com*, theoperating website for our 101 Online School, through Gotop Electronic, a 

 

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subsidiary of Xiandai Technology, our Chinese affiliated entity. GotopElectronic holds the ICP license for this website. We have not transferred thedomain name and trademark for this website to Gotop Electronic. We may berequired to make these transfers in the future and, if we are unable to do so,the ICP license held by Gotop Electronic may be suspended or revoked by MII. In2007, Gotop Electronic, which operates our online tutoring business, accountedfor 6.8%****of our net revenue. If GotopElectronic’s ICP license is suspended or revoked by MII, we would have to shutdown our 101 Online School’s website, which would have a material adverseeffect on our business, financial condition and results of operations.

 

***Our universities partners for online degree programs may nothave received all 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 theironline degree programs. If our university partners fail to make these filings,or obtain these licenses or other approvals, their online degree programs maybe sanctioned 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 Chinese regulations; we may faceregulatory challenges, including fines and other sanctions, in respect of thisbusiness.***

 

Although aftercertain restructuring activities and our recent acquisition we now hold 100% ofthe equity interest in Gotop Electronic, the entity that provides our onlinetutoring services and the ICP services related to such online tutoringservices, through one of our Chinese affiliated entities, Hongcheng Education,the initial 80% equity interest in Gotop Electronic was originally acquiredthrough our subsidiary, Hongcheng Liye. That acquisition required approvalsfrom the MII, the MOE and the Ministry of Commerce, and these approvals werenot obtained. If the Chinese government challenges this acquisition or imposesany sanction on us for our activities before the restructuring, our results ofoperations could be adversely affected. In 2007, our online tutoring businessaccounted for 6.8% 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 GotopElectronic, our Chinese affiliated entity that holds the ICP license for ouronline tutoring business, was approved by relevant Chinese authorities toengage in the ICP business, its registered capital did not meet the minimumrequirement specified under Chinese law for ICP license holders. We haveincreased the registered capital of Gotop Electronic to satisfy this requirement.See “Item 4. Information on the Company—B. BusinessOverview—Regulation—Regulations on Internet Information Services.” In addition,two of our Chinese subsidiaries, Gotop Hongcheng and Xuezhi Shidai, werepreviously engaged in the sale of products and services for our online tutoringprogram which exceeded the scope of their business licenses. We havesubsequently transferred the sales activities to third party distributors andour sales centers which have the required business licenses. There is no assurancethat we will not be sanctioned for our non-compliance before these correctivemeasures were taken. These sanctions can range from monetary fines andpenalties to suspension of our licenses or services that we provide to ourcustomers.

 

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 changesin position 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.

 

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***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 ofour Chinese 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 ourwebsites. Hongcheng Education and Xiandai Technology are each owned by Chinesecitizens with whom we have entered into contractual arrangements to provide uswith control over and substantially all the economic benefits from theseentities. These entities are our variable interest entities, but we have nodirect ownership interest in either of them. Our contractual arrangements withthese Chinese affiliated entities and the shareholders of these Chineseaffiliated entities include technical consulting and services agreements, loanagreements, shareholder voting rights entrustment agreements, call optionagreements, equity pledge agreements and powers of attorney. For a descriptionof these contractual arrangements, see “Item 4. Information on the Company—C.Organizational Structure—Our Corporate Structure and Contractual Arrangements.”There are considerable uncertainties regarding the interpretation andapplication of Chinese laws and regulations governing these contractual arrangements.Accordingly, we cannot guarantee that these arrangements will not be challengedby Chinese regulatory authorities or found to violate existing Chinese laws orregulations or new laws and regulations that may be adopted in the future. Inaddition, under SAFE regulations, all foreign denominated loans are required tobe registered with the State Administration of Foreign Exchange, or SAFE. OurU.S. dollar loans to the shareholders of Hongcheng Education to fund theregistered capital requirements of Hongcheng Education were not registered withthe SAFE at the time they were made. As a result, we could be subject tosanctions for these loans and these loans may not be enforceable under Chineselaws.

 

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 equitypledge agreements, the shareholders of the Chinese affiliated entities pledgedtheir equity 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 ofHongcheng Education are Mr. Changqing Xie, one of our officers, and Mr. XueshanYang, our former director. The shareholders of Xiandai Technology are Mr. GongquanWang and Mr. Xueshan Yang, both our former directors. In the case of Mr. ChangqingXie, conflicts of interests between his duties to our company and to Hongcheng 

 

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Education may arise. In addition, in the case of Mr. Gongquan Wangand Mr. Xueshan Yang, both former directors of our company, they do notowe any fiduciary duty to our company, they have not entered into anynon-competition or employment agreements with our company and they do not haveany relationship with us or our business except through these contractualarrangements and they are not our shareholders. These individuals may breach orcause our Chinese affiliated entities and their subsidiaries to breach orrefuse to renew the existing contractual arrangements that allow us toeffectively control our Chinese affiliated entities and their subsidiaries, andreceive economic benefits from them. Currently, we do not have existingarrangements to address potential conflicts of interest between theseindividuals and our company. We cannot assure you that any or all of theseindividuals will act in the best interests of our company or that conflicts ofinterests will be resolved in our favor. If we cannot resolve any conflicts ofinterest or disputes between us and the owners of our Chinese affiliatedentities, we would have to rely on legal proceedings, which could result indisruption of our business and substantial uncertainty as to the outcome of anysuch 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 Chineselaws and regulations applicable to private schools, a private school is onethat does not require reasonable return unless it elects to be treated as aschool that requires reasonable returns. At the end of each fiscal year, everyprivate school is required to allocate a certain amount to its development fundfor the construction or maintenance of the school or procurement or upgrade ofeducational equipment. For a private school that requires reasonable returns,this amount must be at least 25% of the school’s annual net income, and forother private schools this amount must be at least 25% of the school’s annualincrease in its net assets, if any. Private schools that require reasonablereturns must publicly disclose their election of that status and provideadditional information required under the regulations such as the school’stuition and other fees and admission standards. A private school is required toconsider factors such as the school’s tuition, ratio of the funds used foreducation-related activities to the course fees collected, admission standardsand educational quality when determining the percentage of the school’s netincome to be distributed to investors as reasonable returns. However, none ofthe current Chinese laws and regulations provides a formula or guidelines fordetermining “reasonable returns.” When the formula or the guidelines fordetermining “reasonable returns” are issued by the relevant authorities, theymay not permit returns to us that will be commercially reasonable and may limitour expected return on investment in our schools.

 

Private schools thathave not elected to require reasonable returns are entitled to the samepreferential tax treatment as public schools, while preferential tax treatmentpolicies applicable to private schools requiring reasonable returns are to beseparately formulated by the relevant authorities. To date, however, noseparate regulations or policies have been promulgated in this regard. As aresult, our private primary and secondary schools are subject to the specificrequirements of their respective local tax authorities, which vary fromlocation to location. Our Anqing School was established as a school thatrequires reasonable returns. We are in the process of adopting articles ofassociation for the Pingdingshan School to designate it as a school thatrequires reasonable returns. After the completion of the construction of thenew campus for our Jingzhou School (Southern Campus), we plan to adopt articlesof association to designate it 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 ofour schools to operate their business, charge course fees or make payments torelated parties for services received, (ii) specify the formula forcalculating “reasonable returns” or (iii) change the preferential taxtreatment policies applicable to private schools. We cannot predict the timingand effects of amendments or new laws and regulations. Changes in Chinese lawsand regulations governing private education or otherwise affecting our Chineseaffiliated entities’ and their subsidiaries’ operations could materially andadversely affect 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 

 

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things, result in a reduction, for Chinese tax purposes, of expensedeductions recorded by our Chinese affiliated entities or any of theirsubsidiaries, which could in turn increase their tax liabilities. The Chinesetax authorities could also impose late payment fees and other penalties on ourChinese affiliated entities for under-paid taxes. In addition, any challenge bythe Chinese tax authorities may limit the ability of our Chinese affiliatedentities to maintain any preferential tax treatments and other financialincentives they currently enjoy. Our consolidated net income may be materiallyand adversely affected if our Chinese affiliated entities’ tax liabilitiesincrease or if they are found to be subject to late payment fees or otherpenalties.

 

***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 rely on dividends and other distributions on equitypaid by our Chinese subsidiaries to fund any cash and financing requirements wemay have, and any limitation on the ability of our Chinese subsidiaries andChinese affiliated entities to make payments to us could have a materialadverse effect on our ability to conduct our business.***

 

We are a holdingcompany, and we may rely 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 andregulations. In addition, each of our Chinese subsidiaries and Chineseaffiliated entities (other than our schools, which are subject to different regulations)in China is required to set aside at least 10% of its after-tax profits eachyear, if any, to fund a statutory reserve until such reserve reaches 50% of itsregistered capital. These reserves are not distributable as cash dividends.Currently, all of our Chinese subsidiaries have to comply with this reserverequirement since none of their statutory reserves have reached 50% of theirregistered capital. Furthermore, if our Chinese subsidiaries and Chineseaffiliated entities incur debt on their own behalf in the future, the terms ofthat debt may restrict their ability to pay dividends or make other payments tous. Moreover, at the end of each fiscal year, every private school in China isrequired to allocate a certain amount to its development fund for theconstruction or maintenance of the school or procurement or upgrade ofeducational equipment. For private schools that require reasonable returns,this amount must be at least 25% of the annual net income of the school, ifany. As a result, our return on investment in our private schools will belimited by this reserve requirement. See “—Our Chinese affiliated entities and their subsidiaries may besubject to significant limitations on their ability to operate private schoolsor make payments to related parties or otherwise be materially and adverselyaffected by changes in Chinese laws and regulations.” Any limitation on theability of our Chinese subsidiaries and Chinese affiliated entities todistribute dividends or other payments to us 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.

 

Pursuant to the newChinese enterprise income tax law, which became effective on January 1,2008, dividends payable by an FIE to its foreign investors are subject to a 10%withholding tax, unless the foreign investor’s jurisdiction of incorporationhas a tax treaty with China that provides for a different withholding arrangement.The Cayman Islands, where we are incorporated, does not have a tax treaty withChina. Although the new tax law contemplates the possibility of exemptions fromwithholding taxes for China-sourced income of FIEs, the Chinese tax authoritieshave not promulgated any related implementation rules and it remainsunclear whether we would be able to obtain exemptions from Chinese withholdingtaxes for dividends distributed to us by our Chinese subsidiaries.

 

***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***

 

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***Chinese subsidiaries and Chinese affiliated entities, whichcould materially and adversely affect our liquidity and our ability to fund andexpand our business.***

 

Since we are anoffshore holding company for our Chinese subsidiaries and Chinese affiliatedentities, we may make loans to our Chinese subsidiaries and Chinese affiliatedentities, or we may make additional capital contributions to our Chinesesubsidiaries. Any loans we make to our Chinese subsidiaries or our Chineseaffiliated entities are subject to Chinese regulations and approvals. Forexample:

 

·                  loansby us to any of our Chinese subsidiaries, each of which is a FIE, to financetheir activities cannot exceed the difference between the total investmentamount and the registered capital of the Chinese subsidiary, each as set forthin its articles of association, and must be registered with the SAFE; and

 

·                  loansby us to our Chinese affiliated entities or their subsidiaries must be approvedby the relevant government authorities including, the SAFE and the NDRC, andmust also be registered with the SAFE.

 

We may also decideto finance 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 becomes 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 withChinese laws and regulations relating to foreign ownership in the education andtelecommunications sectors, we currently conduct our operations in China throughcontractual 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 ofour assets 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 economyhas been transitioning from a planned economy to a more market-orientedeconomy. Although the Chinese government has implemented measures since thelate 1970s emphasizing the utilization of market forces for economic reform,the reduction of state ownership of productive assets and the establishment ofimproved corporate governance in business enterprises, a substantial portion ofproductive assets in China is still owned by the Chinese government. TheChinese government also exercises significant control over China’s economicgrowth through 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, whichin turn is affected by the condition of the 

 

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Chinese economy, the foregoing actions, as well as future actions andpolicies of the Chinese government, could materially affect the demand for ourservices, our prospects and results of operations.

 

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

 

Pursuant to theChinese tax laws, Chinese companies are generally subject to central governmentimposed enterprise income tax, or EIT, at a statutory rate of 33%. However,companies that satisfy certain conditions enjoy certain preferential taxtreatments. For example, a company qualified as a “high and new technologyenterprise” located in a designated high-tech zone in China is entitled to areduced EIT rate of 15% and is also entitled to an EIT exemption for the firsttwo or three years (depending on the local rules) of its operations and a 50%reduction of its applicable EIT rate for the succeeding three years. Eight ofour Chinese subsidiaries and one of our Chinese affiliated entities arequalified as “high and new technology enterprises” located in high-tech zonesand enjoy preferential tax treatments as a result of this status. Each of theseentities is entitled to EIT exemption for the first two or three years of itsoperations, is subject to a 7.5% EIT rate for the succeeding three years, andis subject to a 15% EIT rate thereafter. See “Item 5. Operating and FinancialReview and Prospects—A. Operating Results—Taxation” for a detailed discussionof the preferential tax treatments available to these entities. However, thequalifications for “high and new technology enterprises” are subject to anannual or biennial assessment by the relevant government authority in China.There is no assurance that any of the entities currently enjoying preferentialtax treatments will continue to meet the qualifications or that the relevantgovernment authority will not revoke its “high and new technology enterprise”status. In addition, the expiration of the EIT exemption or the 7.5% reducedEIT rate for these entities will cause our effective tax rate to increase inthe future.

 

On March 16,2007, the National People’s Congress of China enacted a new enterprise incometax law, under which FIEs, such as our Chinese subsidiaries, and domesticcompanies are both subject to a uniform EIT rate of 25%. Preferential taxtreatments will continue to be granted to entities that are classified as “highand new technology enterprises strongly supported by the State”****or to entities that conduct business in encouraged sectors,whether FIEs or domestic companies. Pursuant to Circular 172, which was issuedon April 14, 2008, in order for applicant enterprises to be classified as “highand new technology enterprises strongly supported by the State” certainrequirements must be met, such as ownership of the core intellectual property,products or services within “State-Encouraged High Technology Areas”. Under thenew income tax law and regulations thereunder, enterprises that wereestablished before March 6, 2007 and were enjoying preferential tax ratesaccording to previous tax laws, administrative regulations, and other circularswith equivalent effect, will have their preferential tax rates graduallytransitioned to the new uniform tax rate over a five-year period starting from January 1,2008. Enterprises that were also enjoying preferential tax exemption and/orreduction for a specified term, however, will continue to enjoy thoseexemptions and/or reductions at their current applicable rates until theexpiration of the applicable term and in accordance with the implementation oftransitional preferential tax policies for enterprise income tax. However, asthe procedures for obtaining classification as “high and new technologyenterprises strongly supported by the State” have not yet been finalized, wecannot assure you that any of our subsidiaries or affiliated companiescurrently enjoying preferential tax rates will be approved as “high and newtechnology enterprises strongly supported by the State” entitled topreferential tax treatments.

 

Under applicableaccounting rules, until our Chinese subsidiaries and Chinese affiliatedentities receive official approval as “high and new technology enterprisesstrongly supported by the State,” they must now use the uniform EIT rate of 25%in the calculation of their deferred tax liabilities. This resulted in anincrease in our deferred tax expense for the year ended December 31, 2007of RMB4.9 million ($0.7 million).

 

In addition topreferential treatment under national tax laws, some of our Chinesesubsidiaries and Chinese affiliated entities have been exempted by the localtax authorities from business tax of up to 5.5% on the revenue generated fromcertain of our service contracts with our university partners, and this revenueamounted to approximately RMB77.6 million ($10.6 million) in 2007. Theseexemptions are determined annually on a case-by-case basis and at the solediscretion of the local tax authorities. Loss of these preferential taxtreatments may have a material adverse effect on our operating results.

 

***We may be treated as a resident enterprise for Chinese taxpurposes due to the new enterprise income tax law that became  effective on January 1, 2008, which maysubject us to Chinese income tax for any dividends we receive from oursubsidiaries.***

 

Under the newenterprise income tax law, enterprises organized under the laws ofjurisdictions outside China with their de facto management bodies locatedwithin China may be considered Chinese resident enterprises and thereforesubject to Chinese enterprise income tax at the rate of 25% on their worldwideincome. The new tax law, however, does not define the term “de facto managementbodies.” If the Chinese tax authorities determine that we are a Chineseresident enterprise after the effective date of the new tax law, we will besubject to the Chinese income tax at the rate of 25% on our 

 

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worldwide income, which will include any dividend income we receive fromour Chinese subsidiaries. If we are required under the new tax law to payincome tax for any dividends we receive from our Chinese subsidiaries, ourresults of operations and the amount of dividends we may pay to ourshareholders and ADS holders would be materially and adversely affected.

 

In addition, underthe previous Chinese tax law, dividend payments to foreign investors made byFIEs were exempt from Chinese withholding tax. Pursuant to the newChinese enterprise income tax law that became effective on January 1,2008, dividends payable by an FIE to its foreign investors became subject to a20% withholding tax. However, pursuant to subsequently issued implementation rules anda related circular, the withholding tax rate was reduced to 10% and dividendsdeclared from earnings through December 31, 2007 were exempted from Chinesewithholding tax. With respect to dividends declared from earnings after January 1,2008, the withholding tax will be levied at 10% unless theforeign investor’s jurisdiction of incorporation has a tax treaty with Chinathat provides for a lower withholding rate.****The CaymanIslands, where we are incorporated, does not have a tax treaty with China.Although the new tax law contemplates the possibility of exemptions fromwithholding taxes for China-sourced income of FIEs, the Chinese tax authoritieshave not promulgated any related implementation rules and it remains unclearwhether we would be able to obtain exemptions from Chinese withholding taxesfor dividends distributed to us by our Chinese subsidiaries.

 

***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 theseagreements are expected to be decided by arbitration in China.

 

China’s legal systemis based upon written statutes. Prior court decisions may be cited forreference but are not binding on subsequent cases and have limited value asprecedents. Since 1979, the Chinese legislative bodies have promulgated lawsand regulations dealing with economic and other matters such as foreigninvestment, corporate organization and governance, commerce, taxation, tradeand education. However, China has not developed a fully integrated legal systemand the array of new laws and regulations may not be sufficient to cover allaspects of economic and other activities in China. In particular, because theselaws and regulations are relatively new, and because of the limited volume ofpublished decisions and their non-binding nature, the interpretation andenforcement of these laws and regulations involve uncertainties. In addition,published governmental policies and internal rules may have retroactiveeffect and, in some cases, the policies and rules are not published atall. As a result, we may be unaware of our violation of these policies and rules untilsome time later. 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 Chinesegovernment has adopted regulations governing Internet access and thedistribution of news and other information over the Internet. Under theseregulations, ICPs and Internet publishers are prohibited from posting ordisplaying over the Internet content that, among other things, violates Chineselaws 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 

 

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secrets or failing to meet the relevant regulations relating to theprotection of state secrets in the dissemination of online information.

 

If Chineseregulatory authorities determine that any of our websites or the websites ofour university customers providing online degree programs is in violation oflaw or policy and takes action to close any such website or impose othersanctions, our business, financial condition and results of operations would bematerially and adversely affected.

 

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

 

The insuranceindustry in China is still at an early stage of development. Insurancecompanies in China offer limited business insurance products and do not, to ourknowledge, offer business liability insurance or coverage for businessinterruption. As a result, we do not have any business liability, loss of dataor business interruption insurance coverage for our operations in China. If anyclaims for injury are brought against us, or if we experience any businessdisruption, litigation or natural disaster, we might incur substantial costsand diversion of resources.

 

***You may experience difficulties in effecting service of legalprocess, enforcing foreign judgments or bringing original actions in Chinabased on United States or other foreign laws against us, our management or theexperts named in this annual report.***

 

We conductsubstantially all of our operations in China and substantially all of ourassets are located in China. In addition, the majority of our directors andexecutive officers and some of the experts named in this annual report residewithin China. As a result, it may not be possible to effect service of processwithin the United States or elsewhere outside China upon us, our directors orexecutive officers or upon some of the experts named in the annual report. Inaddition, you may find it difficult or impossible to bring an original actionagainst us or our directors or executive officers in a Chinese court if youbelieve your rights have been infringed under the U.S. federal securities lawor otherwise. Moreover, our Chinese counsel has advised us that China does nothave treaties with the United States or many other countries providing for thereciprocal recognition and enforcement of judgment of courts.

 

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

 

The Chinesegovernment imposes controls on the convertibility of the Renminbi into foreigncurrencies and, in certain cases, the remittance of currency out of China.Substantially all of our revenue and expenses are denominated in Renminbi,which is currently not freely convertible to the extent of capital accountitems, such as direct equity investments, loans and repatriation of investment.Under our current structure, substantially all of our income will be derivedfrom dividend payments from our Chinese subsidiaries. Shortages in theavailability of foreign currency may restrict the ability of our Chinesesubsidiaries to remit sufficient foreign currency to pay dividends to us, orotherwise satisfy their foreign currency dominated obligations. Under existingChinese foreign exchange regulations, payments of current account items,including profit distributions and interest payments, can be made in foreigncurrencies without prior approval from SAFE by complying with certainprocedural requirements. However, the Chinese government may in the futurerestrict access to foreign currencies for current account transactions. If weare unable to obtain sufficient foreign currency under the Chinese foreignexchange control system to satisfy our currency demands, we may not be able topay dividends in foreign currencies to our shareholders, including holders ofour 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, against which it can rise or fall by as much as 0.3% each day. Forexample, on July 21, 2005 the Renminbi appreciated against theU.S. dollar to approximately RMB8.11 to the U.S. dollar, representingan upward revaluation of 2.1% of the Renminbi 

 

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against the U.S. dollar, as compared to the exchange rate on theprevious day. The Renminbi may appreciate or depreciate significantly in valueagainst the U.S. dollar in the future. As of****June 23,2008, the Renminbi had continued to appreciate, reaching RMB6.8740****to the U.S. dollar. Fluctuations in the exchange rate willalso affect the relative value of any dividend we may issue, which will beexchanged into U.S. dollars, and earnings from and the value of anyU.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 and we are vulnerable to terrorist attacks, natural disasters andother calamities.***

 

Our business couldbe adversely affected by the effects of Severe Acute Respiratory Syndrome, orSARS, or an outbreak of a similarly contagious disease, such as the H5N1 strainof avian flu. During the spring of 2003, China experienced outbreaks of SARSthat resulted in the closure of schools, Internet cafes, and many officebuildings and caused a general slowdown of business activity and the economy.China also reported a number of cases of SARS in April 2004. In addition,there have been recently reported deaths in China from avian flu. There arecontinued concerns that a pandemic could develop rapidly if the avian fluspreads broadly within humans. A reoccurrence of SARS or 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 orother contagious diseases, which would require that a certain number of ouremployees be quarantined and/or our offices be disinfected. In addition, ourresults of operations could be adversely affected to the extent that anoutbreak of SARS, the avian flu or other contagious diseases harms the Chineseeconomy in general.

 

All of the serversused to support our business operations are currently hosted in the samelocation in Beijing. We do not have a backup location, so we cannot assure youthat we will be able to operate if our server location suffers from the effectsof fire, floods, typhoons, earthquakes, power loss, telecommunicationsfailures, break-ins, war, terrorist acts or similar events. Any of these eventscould give rise to server interruptions, breakdowns, system failures,technology platform failures and Internet failures, which could cause the lossor corruption 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.”

 

***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 October 2005,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 the purpose of financing that offshore company with their ownershipinterests in the assets of or their interests in any Chinese enterprise. Inaddition, a Chinese resident that is a shareholder of an offshore specialpurpose company is required to amend its SAFE registration with the local SAFEbranch with respect to that offshore special purpose company in connection withthe injection of equity interests or assets of a Chinese enterprise in theoffshore company or overseas fund raising by the offshore company, or any othermaterial change in the capital of the offshore company, including any increaseor decrease 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 

 

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result of any illegal action of this type, both the onshore entity andits actual controlling person(s) can be fined. In addition, failure tocomply with the registration procedures may result in restrictions on the relevantonshore entity, 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. Our Chinese counsel, Jun He Law Offices, has advised us thatit is unclear under the SAFE Rules whether these optionholders would bedeemed to be beneficial owners of our company for purposes of these rules asa result of holding these options. 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, limit our Chinese subsidiaries’ ability to pay dividendsto us, repay shareholder loans or otherwise distribute profits or proceeds fromany reduction in capital, share transfer or liquidation to us, or otherwiseadversely 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 stockoptions granted by offshore listed companies to Chinese citizens.***

 

On March 28,2007, the SAFE issued the *ApplicationProcedure of Foreign Exchange Administration for Domestic IndividualsParticipating in Employee Stock Holding Plan or Stock Option Plan ofOverseas-Listed Company*, or the Stock Option Rule. Under the StockOption Rule, Chinese citizens who are granted stock options by an offshorelisted company are required, through a Chinese agent or Chinese subsidiary ofthe offshore listed company, to register with the SAFE and complete certainother procedures. We and our Chinese employees who have been granted stockoptions will be subject to the Stock Option Rule when our company becomesan offshore listed company. If we or our Chinese employees fail to comply withthese regulations, we or our Chinese employees may be subject to fines andlegal sanctions imposed by the SAFE or other Chinese government authorities.See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation ofForeign Currency Exchange and Dividend Distribution—SAFE regulations on overseas investment of Chinese residents andemployee stock options.”

 

**Risks Related to Our ADSs**

 

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

 

Themarket price for our ADSs is highly volatile and may be subject to widefluctuations in response to factors including the following:

 

·                  actualor anticipated fluctuations in our quarterly operating results;

 

·                  announcementsof new services by us or our competitors;

 

·                  changesin financial estimates by securities analysts;

 

·                  changesin the business, regulatory and other conditions in the education servicesmarket in China;

 

·                  significantacquisitions, strategic partnerships, joint ventures or capital commitments byus or our competitors;

 

·                  additionsor departures of key personnel;

 

·                  terminationor release of lock-up or other transfer restrictions on our outstanding ADSs orordinary shares or sales of additional ordinary shares or ADSs;

 

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·                  potential litigation or regulatoryinvestigations;

 

·                  generaleconomic or political conditions in China; and

 

·                  price fluctuations of publicly traded securities of other China-based companies engaging in similarbusinesses.

 

In addition, anumber of Chinese companies and companies with substantial operations in Chinathat offered and sold securities in the United States have recently experiencedsignificant volatility in their share prices after their initial publicofferings due to market fluctuations and other issues. Furthermore, thesecurities market has from time to time experienced significant price andvolume fluctuations that are not related to the operating performance ofparticular companies. These market fluctuations may also materially and adverselyaffect the market price of our ADSs. We cannot assure you that the market priceof our ADSs will not decline below the initial public offering price. As aresult, you may not be able to resell your shares above the initial publicoffering price and you may suffer a loss on your investment.

 

***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 shareholderssell, or are perceived as intending to sell, substantial amounts of ourordinary shares or ADSs, including those issued upon the exercise ofoutstanding options, the market price of our ADSs could fall. Such sales, orperceived potential sales, also might make it more difficult for us to sellequity or equity related securities in the future at a time and price that wedeem appropriate. The 20,460,000 ordinary shares represented by 6,820,000 ADSsoffered pursuant to our initial public offering in December 2007 (otherthan those held by our affiliates) were eligible for immediate resale in thepublic market without restrictions. Ordinary shares held by our existingshareholders and any ADSs held by our affiliates may also be sold in the publicmarket in the future under, and subject to the restrictions contained in, Rule 144and Rule 701 under the U.S. Securities Act of 1933, as amended, orthe Securities Act, and applicable 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 couldcause the 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 totime distribute rights to our shareholders, including rights to acquire oursecurities. Under the deposit agreement, the depositary bank will not offer youthose rights 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 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 flow from operations andthe proceeds from our initial public offering will be sufficient to meet ourpresently anticipated cash needs through the end of 2008.****Wemay, however, require additional cash resources due to changed business conditionsor other future developments, including any investments or acquisitions we maydecide to pursue. If these resources are insufficient to satisfy our cashrequirements, we may seek to sell additional equity or debt securities orobtain a credit facility. The sale of additional equity securities could resultin additional dilution to our shareholders. The incurrence of indebtednesswould result in increased debt service obligations and could result inoperating and financing covenants that would restrict our operations. We cannotassure you that financing will be available in amounts or on terms acceptableto us, if at all.

 

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

 

As a holder of ADSs,you may only exercise voting rights with respect to the underlying ordinaryshares in accordance with the provisions of the deposit agreement between usand The Bank of New York, the depositary of our ADSs. Under the depositagreement, you must vote by giving voting instructions to the depositary. Uponreceipt of your voting instructions, the depositary will vote the underlyingordinary shares in accordance with your instructions. Otherwise, you will notbe able to exercise your right to vote unless you withdraw the shares from thedepositary. Under our fifth amended and restated memorandum and articles ofassociation, the minimum notice period required for convening general 

 

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shareholders’ meetings is 10 days. When a general shareholders’meeting is convened, you may not receive sufficient advance notice to withdrawthe shares to allow you to vote with respect to any specific matter. If we askfor your instructions, the depositary will notify you of the upcoming vote andwill arrange to deliver our voting materials to you. We cannot assure you thatyou will receive the voting materials in time to ensure that you can instructthe depositary to vote your shares. In addition, the depositary and its agentsare not responsible for failing to carry out voting instructions or for themanner of carrying out voting instructions. This means that you may not be ableto exercise your right to vote and the shares underlying your ADSs may not bevoted 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 ofour ADSs has agreed to pay to you the cash dividends or other distributions itor the 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, rightsor other securities received through such distributions. We also have noobligation to take any other action to permit the distribution of ADSs,ordinary shares, rights or anything else to holders of ADSs. This means thatyou may not receive any distributions we make on our ordinary shares or anyvalue for them if it is illegal or impractical to make them available to you.These restrictions may have a material adverse effect on the value of yourADSs.

 

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

 

Your ADSsrepresented by the ADRs are transferable on the books of the depositary. However,the depositary may close its transfer books at any time or from time to timewhen it 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 persuasiveauthority, but are not binding on a court in the Cayman Islands. The rights ofour shareholders and the fiduciary responsibilities of our directors underCayman Islands law are not as clearly established as they would be understatutes or judicial precedent in some jurisdictions in the United States. Inparticular, the Cayman Islands has a less developed body of securities laws ascompared to the United States, and some U.S. states, such as Delaware, havemore fully developed and judicially interpreted bodies of corporate law. Inaddition, Cayman Islands companies may not have standing to initiate a shareholderderivative action in a federal court of the United States.

 

The Cayman Islandscourts are also unlikely:

 

·                  torecognize or enforce against us judgments of courts of the United States basedon the civil liability provisions of U.S. securities laws; and

 

·                  toimpose liabilities against us, in original actions brought in the CaymanIslands, based on certain civil liability provisions of U.S. securitieslaws that are penal in nature.

 

There is nostatutory recognition in the Cayman Islands of judgments obtained in the UnitedStates, 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.

 

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As a result of allof the above, 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.

 

**Item 4.  Information on theCompany**

 

A.           History and Development of the Company

 

We were incorporatedas an 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 acquisitions in 2005 (online tutoring, private primaryand secondary schools and curriculum services) and 2006 (vocationalpost-secondary education programs).

 

On December 14,2007, we and certain selling shareholders of our company completed an initialpublic offering 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 executive offices are located at 4th Floor-A, GeHua Building, No. 1QinglongHutong, 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 Walkers SPV Limited, Walker House, 87 MaryStreet, George Town, Grand Cayman KY1-9002, Cayman Islands.

 

Investor inquiries should be directed to us at theaddress and telephone number of our principal executive offices set forthabove. Our website is *www.chinaedu.net*.The information contained on our website and our other websites is not a partof this annual report. Our agent for service of process in the United States isCT Corporation System located at 111 Eighth Avenue, 13/F, New York, New York10011.

 

For a description of our principal capitalexpenditures, see “Item 5. Operating and Financial Review and Prospects—B.Liquidity and Capital Resources—Capital Expenditures.”

 

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B.             Business Overview

 

We are a leadingeducational service provider in China. Our primary business is to providecomprehensive services to the online degree programs of leading Chineseuniversities. Our services for online degree programs include academic programdevelopment, technology services, enrollment marketing, student supportservices and finance operations. We also operate private primary and secondaryschools, market and support international post-secondary and English languagecurriculum programs to established learning institutions, and offer onlineinteractive tutoring services to primary and secondary school students. Webelieve we are the largest service provider to online degree programs in Chinain terms of the number of higher education institutions that we serve and thenumber of student enrollments that we support. In 2007, the largest onlinedegree program that we service, Renmin University of China, was named thelargest online degree program in China in terms of student enrollment numbersby Xuexigang.com and Chinaonlineedu.com, two online education and distancelearning websites. In addition, in 2006, we were ranked among the top teneducation brands in China by an independent survey conducted by Sina.com (aleading Chinese Internet portal) and 40 other media organizations, or theSina.com Survey, based on online voting and evaluations by industry experts andmedia professionals. This survey also ranked the online degree programs ofthree of our university partners among the top ten online degree programs inChina, based on online voting and evaluations by industry experts and mediaprofessionals.

 

We currently havestrategic relationships with 12 universities, 10 of which are under long-term,exclusive****contracts that vary fromeight to 50 years in length. Nine of these universities currently operateonline degree programs and the three additional universities are awaitingregulatory approval to start their programs. As of December 31, 2007,approximately 192,000 students were registered in the online degree programsthat we service through these relationships. These online degree programs aremarketed under the brand names of leading Chinese universities, which allows usto benefit from the significant brand equity that these higher educationinstitutions 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, 2007, wewere providing services to online degree programs that in aggregate hadapproximately 192,000 registered students and we were serving approximately44,000****students in our other businesses. Ournet revenue increased from RMB100.9 million in 2004 to RMB126.4 million in2005, RMB213.5 million in 2006 and RMB265.0 million ($36.3 million) in 2007,representing a compound annual growth rate, or CAGR, of 38%. Our income fromoperations declined from RMB 22.3million in 2004 to RMB11.2 million in 2005,but increased to RMB57.2 million in 2006. Our income from operations decreased by 29.6% from RMB57.2 million inthe year ended December 31, 2006 to RMB40.3 million ($5.5 million) for theyear ended December 31, 2007. Our net income attributable to ordinaryshareholders improved from a net loss of RMB4.0 million in 2004 and a net lossof RMB2.9 million in 2005 to a net income of RMB25.5 million in 2006 and a netincome of RMB2.5 million ($0.3 million) in 2007. Our net income attributable toordinary shareholders declined from RMB25.5 million for the year ended December 31,2006 to a net income of RMB2.5 million ($0.3 million) for the year ended December 31,2007. This decline wasprimarily due to a goodwill impairment loss of RMB16.2****millionfor the year ended December 31, 2007, and a higher income tax provisionbooked for the year ended December 31, 2007 as compared with the year ended December 31, 2006, as a result of uncertainties regarding the future status of ourChinese subsidiaries and Chinese affiliated entities under the new tax law,which became effective on January 1, 2008. See “Item 5. Operating and Financial Review and Prospects—A. OperatingResults—Taxation” in this annualreport. Net revenue from our online degree programs contributed 100%, 78.0%,73.5% and 76.3% of our net revenue for the years ended December 31, 2004,2005, 2006 and 2007, respectively.

 

**Our Strengths**

 

We believe that the we possess the followingcompetitive strengths:

 

·                  ***Market leadership and proven trackrecord.***    Weare one of the market leaders in the education services market due to our earlymover advantage, proven track record and delivery of innovative services thatare in high 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.

 

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·                  ***Substantial knowledge of ourcustomers and the Chinese education market.***    Through oureight-year operating history, early efforts to develop an online technologyplatform and comprehensive service offering for Chinese universities, we haveacquired substantial knowledge of the education market and the needs of itsconsumers. As we have expanded our service offerings, we have been able to takeadvantage of our market knowledge to address additional areas in which we believewe can leverage our experience, processes and technology to meet the needs ofthe market. As a result, we have expanded our business to include thedistribution and support of international curriculum, private primary andsecondary schools and an online tutoring platform.

 

·                  ***Provider of premier services foronline degree programs.***    Webelieve our superior 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 770 courses for our universitypartners based on their different requirements. Many of these courses can beused as a basis to develop similar courses when we add new universitycustomers, thus enabling us to benefit from economies of scale. We use thisservice model with our reliable technology platforms, comprehensive library ofcourseware and operational and marketing expertise to help universities achievetheir academic and financial goals.

 

·                  ***Experienced management team withproven track record.***    Wehave an experienced management team with an average of over 10 years ofexperience in either the education services industry or the online servicesindustry. We have recruited strong leaders with proven skills to serve in keypositions within our management team, and our team includes members withsubstantial experience in education, technology, marketing and finance.

 

**Our Strategy**

 

Our strategy consists of the following key elements:

 

·                  ***Expand the penetration of our onlinedegree program services.***    Weplan to take advantage of our established leadership position and track recordto expand the penetration of our services to online degree programs byincreasing the number of universities that use our online degree programservices 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.

 

·                  ***Establish a network of learningcenters for online degree programs.***    To strengthen our ability to assist ourcustomers’ online degree programs in recruiting students and improving studentservice quality, we are building a network of learning centers, initially inkey cities, and, if regulatory approval is obtained, across China. In February 2007,we received a provisional approval from the MOE to operate learning centers inChina for a trial period of up to 18 months. According to *Distance Education in China*, a magazineunder the administration of the MOE, in May 2007, we were one of onlythree entities that have been given this approval by the MOE to operatelearning centers in multiple provinces in China. Under our provisionalapproval, during the trial period, we can operate 10 learning centers in fourprovinces, Beijing, Shanghai, Jiangsu and Zhejiang, which learning centers wereopened in 2007.****We believe that the opening ofthese learning centers will allow us to significantly enhance our brand recognition,increase access to potential students for online degree programs and enhanceprofitability. We also plan to establish strategic relationships withuniversities that currently are not our online degree program customers, toprovide learning center services to their online degree programs.

 

·                  ***Continue to strengthen our brandname and our reputation*****.**    Wewill focus on continuing to build our brand name and our reputation among ourexisting customers, as well as among other Chinese and foreign educationinstitutions. We believe that building our brand and reputation will allow usto attract new schools and students to our current business lines. We are alsoincreasing awareness of our online tutoring program and learning centers byincreasing advertising to continue to build brand recognition. We are takingpart in a wide range of activities to promote our brand and reputation, such asparticipating in conferences, sponsoring industry events and publishingarticles in education trade journals.

 

·                  ***Develop new products and services tofurther enhance the learning experience of existing students and attract newstudents.***    Weplan to increase our research and development efforts to develop new productsand services 

 

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withrespect to our online tutoring and online degree programs to introduce morerobust online learning programs, to enhance the students’ learning experienceand to improve their sense of community. We further plan to enhance our onlinetutoring program by recruiting additional high quality teachers, expanding thetype of programs offered and incorporating more interactive technology toincrease student retention and student usage rates for our programs. Inaddition, we plan to develop new products for children from pre-school age tograde 3 and their parents.

 

·                  ***Pursue strategic acquisitions.***    During the past twoyears, we have made strategic acquisitions to broaden our service offerings andto expand into additional segments of the Chinese educational market. Weplan to continue to consider and seek acquisition opportunities that arecomplementary to our existing lines of business or that can further expand theservices that we can provide to our customers.

 

**Our Business**

 

We are a leading educational service provider inChina. Our primary business is to provide comprehensive services to the onlinedegree programs of leading Chinese universities. We also operate primary andsecondary schools, market international post-secondary and English languagecurriculum programs to established learning institutions, and offer onlineinteractive tutoring services to primary and secondary school students.

 

***Online Degree Programs***

 

Our primary business is to assist universities inChina to establish, operate and expand their online degree programs. Wecurrently provide services to nine****universities(with three additional universities awaiting regulatory approval) for theironline degree programs, more than any other provider of comprehensive servicesin China. These online degree programs had approximately 192,000 registeredstudents as of December 31, 2007.****The onlinedegree programs we currently service offer associate and bachelor degreeprograms in a wide range of subjects, including, but not limited to,accounting, marketing, finance, business administration, internationalbusiness, law, civil engineering, education, computer science, literature,project management, marketing and administrative management. These onlinedegree programs are aimed primarily at working adults who have sufficienteconomic means to support their studies and value the flexibility of aself-paced online educational process. Based on a survey that we conductedamong students registered in these online degree programs in 2005,approximately 72% of registered students are between the ages of 21 to 30, andapproximately 16% are between the ages of 31 to 35. For the years ended December 31,2005, 2006 and 2007, we generated 78.0%, 73.5% and 76.3%, respectively, of ournet revenue from online degree programs.

 

Online degree programs in China must be approved bythe MOE. At present, 67 universities in China have received approvals from theMOE to operate online degree programs, as well as the China Central Radio andTV University, which functions primarily as a distance learning facility. TheChina Central Radio and TV University delivers its courses to studentsprimarily over satellite and television and we believe it currently does notcompete with the other 67 universities in the online degree program market. Asof December 31, 2007, most of these 67 universities had registeredstudents in their online degree programs and we currently provide services tonine out of 67****universities (with threeadditional universities that are awaiting regulatory approval to start theirprograms). Students registered in online degree programs can pursue eitherassociate degrees or bachelors degrees at the university level. They mustgenerally prepay tuition for a minimum number of credits upon admission andsubsequent enrollment, which can be applied to credits sought after theirinitial semester. The total number of credits required to graduate from anonline degree program offered by these universities generally ranges from 80credits for associate degrees to 160 credits for bachelor degrees. The tuitionper credit ranges from approximately RMB65 to RMB180. The tuition charged tostudents is subject to the review and approval of the pricing administrationauthority and the filing with the relevant education authority.

 

Learning centers assist the universities with anumber of vital functions for their online degree programs, includingmarketing, enrollment administration, student services and tuition collection.The learning centers also provide academic review sessions and technicalsupport for students. The physical presence of learning centers iscomplementary to online distance learning, since it facilitates face-to-facetutorial sessions, student consultations, and course material distribution. Thelearning centers also ensure the integrity of examinations, as entrance examsand final exams are conducted on site at the learning centers, allowing testingto occur under controlled environments. Learning centers are generally operatedby third parties that have entered into agreements with universities. Manylearning centers are owned by polytechnic, or vocational, schools, allowingthese institutions to leverage their infrastructures to serve the highereducation market. In February 2007, we received a provisional approvalfrom the MOE to operate 10 learning centers in selected cities and provinces inChina for a trial period of up to 18 months. According to *Distance Education in China*, a magazineunder the administration of the MOE, in May 2007, we were one of onlythree entities that have been given this approval by the MOE to operatelearning centers in multiple provinces in China. In August 2007, we openedone learning center in Beijing and 

 

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entered into agreements withthree universities to provide recruiting services for their online degreeprograms for the 2007-2008 academic year. We opened theother nine learning centers during the first quarter of 2008.

 

*OurServices*

 

Through collaborative alliances and otherrevenue-sharing arrangements, we offer a comprehensive service platform to ouruniversity customers, including academic program development, technologyservices, enrollment marketing, student support services and financeoperations. We also provide the initial capital resources needed to establishtheir online degree programs. We believe we are the only service provider inChina that offers a comprehensive set of services to online universities thatsupports virtually all aspects of a student’s progression through an onlinedegree program. Through these services, we enable our customers to quicklyestablish an online degree program with a high level of student service qualityand significantly expand or improve existing initiatives with minimal initialinvestment. Our strategic relationships with universities are based upon longterm contracts that vary in length from eight to 50 years.

 

*Academic Program Development.*   Academic programdevelopment entails the design and development of instructional materials,multimedia learning materials and quality assurance processes. The overalldevelopment time for a single course can range from as little as three weeks toas long as four months, depending on the subject matter and complexity of thecourse materials. We have developed over 770 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.*   Our technology consists ofa series of systems and tools, including our Learning Management System, orLMS, which enables the online degree programs to manage the entire student lifecycle from application to graduation by providing system support to the student’slearning process and the university staff’s daily management process. Webelieve that our LMS is among the most advanced offerings in the market. Thissystem manages courseware, including multimedia lectures, assignments andquizzes, and provides management information tools supporting the courseofferings. We also provide certain customers 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.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.

 

*Enrollment Marketing.*   Our support foruniversities’ student recruitment efforts includes the development andimplementation of on-line and off-line marketing strategies and promotionalevents, as well as the creation of collateral material to support thoseefforts. We further assist universities in identifying, retaining and supervisinglearning centers, including training learning center staff on executing ourmarketing programs. We constantly revise our marketing programs to maximizedemand for our university partners’ programs. Our marketing programs emphasizethe unique characteristics of each of our university partners’ offerings.

 

*Student Support Services.*   We employ significantresources in developing student support services for our university partners’programs to assist students in completing their course work and improvingretention. Support services that we provide to students include online andoffline tutorial resources, academic review sessions, student consultations andmock examinations. We also maintain a dedicated staff of student servicecounselors whom students may call upon to address any questions they may haveregarding the student support services.

 

Until late 2004, we marketed and sold ourproprietary courseware and technology solutions to universities and othereducation companies. However, to take advantage of the synergies created by thegrowing number of universities utilizing our services and technologies, in2005, we decided to focus on building a comprehensive service model with theseuniversities, and have significantly reduced, and in the future will continueto limit, the provision of one-time courseware and technology sales.

 

*Structureand Revenue Model*

 

Our relationships with our university partners arestructured either as collaborative alliances or as long-term contractualservice arrangements. Each of our university customers pays our collaborativealliances or, in the case of service contracts, us a share of the tuitioncollected by the universities, after deducting certain expenses, includinglearning center fees.

 

*Collaborative Alliances.*    Our relationshipswith seven of our university partners (including the two still seekingregulatory approval for their online degree programs) are structured ascollaborative alliances. In our collaborative alliance 

 

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structures, we establish acollaborative alliance with the university (or a commercial subsidiary of theuniversity), which in turn provides services and support to the university’sonline degree program. The collaborative alliances with our university partnershave terms ranging from eight to 50 years and are exclusive in nature. We havethe majority interest in each of these collaborative alliances. We aregenerally responsible for contributing the initial capital required for theestablishment and startup of the collaborative alliances, which hashistorically ranged from approximately RMB5.0 million to approximatelyRMB20.0 million. Our university partner pays to the collaborative alliance aservice fee equal to a portion of its tuition revenue from its online degreeprogram, after deducting certain operating expenses, administrative fees paidto the university, fees paid to learning centers for services such as studentrecruitment and tuition collection and, in some cases, licensing or technicalconsulting fees paid to us.

 

*Long-Term Contractual ServiceAgreements.*    Wealso have entered into long-term contractual service arrangements with four ofour university partners, two of which are exclusive arrangements. Pursuant tothese agreements 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.

 

*UniversityCustomers*

 

The number of registered students in the onlinedegree programs we service has grown rapidly, from approximately 30,000registered students at 2002 calendar year-end, when enrollment commenced at ourfirst university customer’s online degree program, to approximately 192,000 registeredstudents at December 31, 2007 at our nine existing university customers asof December 31, 2007. We have entered into exclusive 20-year joint venturearrangements with three additional university partners (Central Universityof Finance and Economics, or CUFE, in December 2006, Shanghai Universityof Finance and Economics, or SUFE, in November 2007, and Beijing ForestryUniversity, or BFU, in March 2008), but these online degree programs arenot yet operational, and thus we are not currently providing online educationservices to these universities.  In 2004, 2005, 2006 and 2007, 87.7%, 71.4%, 67.3% and 68.2%, 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 21.1%, 17.3% and 14.0%, respectively, ofour net revenue in 2007.

 

The following map shows our existing universitycustomers:

 

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*Sales andMarketing Strategy*

 

The two key elements of our sales and marketingstrategy are increasing the number of university online degree programsutilizing our services and helping our current customers recruit and retainmore online degree students. We employ a business development team to establishnew relationships with universities, both those with existing online programsand others that are interested in developing new programs. We are indiscussions with additional universities regarding their online programs**.** Historically, we have been able togenerate revenue from a new university partner or customer within nine to 17months from the time we initiated formal discussions with the universityregarding its program. Typically we have required six to 12 months to developand consummate a contractual relationship with a new university and anotherthree to five months to implement our service offerings and commence enrollmentin the online degree program.

 

The university’s and our relationship with thelearning centers is essential to the sales and marketing of online degreeprograms to new students. The learning centers assist the online programs witha number of vital functions, including recruitment, marketing and logistic servicesfor such programs. To provide a nationwide physical presence and to strengthenour sales network, we have assisted our university partners in developingrelationships with approximately 340 learning centers, which cover most majorcities in China. We provide student support training to many learning centersand assist learning centers in advertising to solicit students. Therelationships between the learning center operator and the university aretypically governed by non-exclusive compensation arrangements that are subjectto annual re-negotiation. The majority of the learning centers are owned andoperated by independent third parties.

 

To further expand our access to potential studentsand enhance the sales and marketing of online degree programs, we aredeveloping our own network of learning centers. In February 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 other provincial education authorities, weopened the other nine learning centers.****After the trial period, the MOE will decidewhether to issue us a permanent approval to operate learning centers on anationwide basis in China based on the performance and operation of ourlearning centers during the trial period.

 

We also plan to establish strategic relationshipswith universities that are currently not our online degree program customers toprovide learning center services to their online degree programs, and work toexpand the network of learning centers serving our existing universitypartners.

 

*Competition*

 

There are two main components of competition withinthe online degree program market: competition among service providers toattract and retain additional university partners; and competition among onlinedegree programs seeking to enroll students. We currently serve nine out of the67 universities that have been approved to offer online degree programs inChina and we have contracted with three additional universities that areawaiting regulatory approval to start their programs. There are 58 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 the online degree programs weservice depends on these programs’ total tuition cash receipts. The onlinedegree programs that we service must compete with other online programs, aswell as with other education and training programs that are seeking to enrollstudents. Recruitment of students for online degree programs relies heavily onlearning centers, most of which are owned and operated by third parties.Although we have assisted our university customers in developing relationshipswith approximately 340 learning centers, these learning centers can be subjectto varying degrees of customer loyalty due to the strong competitive positionthey occupy. In addition, many learning centers assist with recruitment onbehalf of other online degree programs, and, as a result, the online degreeprograms that we support face considerable competition for recruiting at thelearning centers.

 

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***International Curriculum Programs***

 

We distribute and support English language programsto secondary schools and international polytechnic programs to vocationalschools in China. We provide all aspects of delivery and support for theseprograms, including program development and implementation, English teacherrecruitment and administration, and other ancillary services. We generaterevenue based on the enrollment fees students pay to the participating schoolswith whom we have entered into revenue sharing arrangements, based either on afixed fee per student or a percentage of the enrollment fee per student. Forthe 2006-2007 academic year, approximately 4,700 students were enrolled in theinternational curriculum programs. In 2005, 2006 and 2007, we generated 3.8%,13.3% and 11.9%, respectively, of our net revenue from international curriculumservices.

 

Although there are many Chinese universities andcolleges that have established relationships with foreign “sister” schools, weare not aware of any other company in China that has a dedicated business linefocused on distributing and supporting curriculum from established foreigneducational institutions. We therefore believe that we are uniquely positionedto be a leader in this new market. We do compete more generally in the marketfor K-12 students seeking to learn English with other providers of Englishlanguage training programs. These providers include other private schooloperators that are offering English language programs, sister school programs,after school programs, distance learning programs and self-study materials.

 

We intend to expand the number of schools offeringthe BCIT and FEC programs by actively marketing the programs to polytechniccolleges and secondary schools in China. The market for English languageinstruction services is highly competitive in China, yet extremely fragmentedand localized. We intend to concentrate on adding new schools in the coastaland relatively more affluent regions of China, which include approximately 150cities. In addition to adding new Chinese polytechnic colleges offering theBCIT program, we plan to increase the number of majors and subjects covered bythe international post-secondary education program in order to attractadditional students. We also plan to explore strategic relationshipopportunities with other polytechnic colleges in Canada, the United Kingdom andAustralia. In the near term, however, our plans to add new polytechnic collegesto our BCIT program and explore strategic relationship with other polytechniccolleges, have been postponed due to the general suspension of the approval fornew Chinese-foreign cooperative polytechnic education programs by the MOE untilat least the end of 2008. See “—Regulation—Regulations on Operating PrivateSchools.”

 

*The FEC Program.*    We acquired ourinterest in, and began providing services with respect to, English languageprograms in September 2005. At that time, we acquired the right to serve asthe exclusive service provider to all of Western Institute of Technology atTaranki’s English language programs, known as FEC, within China until September 2020.Western Institute of Technology at Taranki, or WITT, is a government-ownedpost-secondary education institution based in New Zealand that offers Englishlanguage programs for overseas students. The FEC program provides secondaryschools in China with high-quality English language instruction programs usingnative English speakers for their students. Students at schools thatparticipate in the FEC program must choose to be enrolled in the FEC programwhen applying for admission to the school. The FEC program’s English curriculumtypically consists of five hours of class time each week. Currently, approximately70 native English-speaking teachers are deployed to work in the 18 schoolsoffering the FEC program. Most of these English teachers were recruited fromNew Zealand, Australia, Canada and the United Kingdom.

 

We believe that the FEC program has been and willcontinue to be well-received by parents and students due to the high quality ofthe English language instruction. We also believe that there is a vast marketof students throughout China whose needs for high quality English languageinstruction, such as the FEC program, are not currently being met by theChinese public schools. We intend to target schools in the markets where theChinese public schools do not meet the public need for English languageinstruction. In addition, a core element of our marketing strategy ishighlighting the program’s role in enabling students to differentiatethemselves for college entrance examinations and to better compete in acompetitive education system and job market.

 

*The BCIT Program*.    We entered into an exclusiveservice provider relationship with the British Columbia Institute ofTechnology, or BCIT, a leading polytechnic institute in Canada, in February 2006.In this program, 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 polytechnic colleges until 2020. At present, we provideservices to the BCIT programs of six polytechnic colleges approved by BCIT tooffer these programs. The BCIT international post-secondary education 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 

 

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and related course materialsare in Chinese, but instruction and course materials for more advanced coursesare transitioned to English.

 

We believe that the BCIT program is highlyattractive to students as it offers them the opportunity to pursue a foreigndegree and provides them with practical, job-oriented vocational training inEnglish, which enables the students to improve their language skills in theirrespective professional areas. For participating Chinese polytechnic colleges,the BCIT program enables them to distinguish themselves from their peers byoffering an international dual degree program with a world-class polytechniccurriculum and overseas-trained faculty. Such differentiation also enablesthese colleges to collect higher tuition fees from the students enrolling inthe program.

 

***Private Primary and SecondarySchools***

 

The market for private primary and secondary schoolsin China is growing rapidly. We believe that private primary and secondaryschools will play an increasingly important role in providing quality educationin China, particularly to the children of the emerging middle class. Parents inChina, as in the rest of the world, are continuously searching for the besteducational solutions for their children. By acquiring or partnering withleading established institutions, we believe the private primary and secondaryschool business represents a compelling business opportunity for us. Accordingto the World Bank Study, between 2002 and 2005, China accounted forapproximately 70% of global primary and secondary enrollment growth. As aresult of this market opportunity, we acquired three private schools in 2005.We believe this market opportunity is attractive, complements our existingsources of revenue and also provides us with opportunities to realize synergieswith our other K-12 business lines, specifically our 101 Online School and ourFEC program. English language training is a core element of our curriculum ateach of our schools and is a central to our strategy of establishing schools withelite reputations. 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 2005, 2006 and 2007, wegenerated 6.8%, 5.1% and 5.0%, respectively, of our net revenue from this lineof business.

 

*AnqingForeign Language School*

 

Through our Chinese affiliated entity, HongchengEducation, we currently operate the Anqing Foreign Language School, or theAnqing School, a private primary school, grades 7 to 9, which has beenoperational since 2004. The Anqing School is regarded as one of the leadingschools in the market that it serves. We are currently constructing a newcampus for the school and expect to begin recruitment for the new campus in thethird quarter of this year. During the 2006-2007 academic year, the AnqingSchool had an enrollment of approximately 1,400 students. In 2007, the AnqingSchool had the highest exam scores in Anqing for students enrolled in grades 7and 9. The school is also well regarded for its English language program andforeign English language teachers. The Anqing School was established in 2004and has seen its enrollment grow rapidly from 184 students in its first fullyear of operations.

 

*JingzhouSchool (Southern Campus)*

 

Through our Chinese affiliated entity, HongchengEducation, we are constructing a new private secondary school for students ingrades 9-12 in Jingzhou, Hubei province. The school will be established as apartnership with Jingzhou High School whereby we will own 54.4% of the newschool, our partner Jingzhou High School will own 25% and one minorityshareholder will own the remaining 20.6%. Under the cooperation agreementbetween Hongcheng Education and Jingzhou High School, we will undertakeconstruction of the new campus and Jingzhou High School will contribute itsbrand as well as management and teaching resources to the school. The school isexpected to be come operational in 2009****and will havecapacity to serve approximately 6,000 students. However, we cannot assure you that the school will become operational atthat time, or at all.

 

*PingdingshanBilingual School*

 

In 2005, we acquired all of the rights and interestsin the Pingdingshan Bilingual School. The Pingdingshan Bilingual School is aprivate primary school, grades 1-9, in Pingdingshan, Henan province. ThePingdingshan Bilingual School is regarded as one of the leading schools in itsmarket. During the 2006-2007 academic year, the Pingdingshan Bilingual Schoolhad an enrollment of approximately 1,250 students.

 

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***Online Tutoring and Test PreparationPrograms***

 

We provide online tutoring and test preparationservices to primary and secondary school students in China through a separatelybranded program known as the “101 Distance Learning Center” or the “101 OnlineSchool,” which we acquired 80% of in January 2005 and the remaining 20%equity interest in May 2008. The 101 Online School was originally foundedin 1996, and over the past decade has developed a strong reputation as avaluable learning tool with students and teachers alike. In 2006, the 101Online School was ranked by Sina.com as one of the 10 best online educationinstitutions in China based on Internet voting and the evaluations by industryexperts and media professionals. The 101 Online School also received the BestCurriculum Design Award in Remote Elementary and Secondary Education fromBeijing News in its 2005 education market survey. In the 2006-2007 academicyear, the 101 Online School served more than 35,000 revenue students. In 2005,2006 and 2007, we generated 11.4%, 8.1% and****6.8%,respectively, of our net revenue from the 101 Online School throughsubscription fees paid by students for the online tutoring service.

 

Using our proprietary e-learning platform, the 101Online School provides interactive tutoring services to primary and secondaryschool students in virtually all academic subjects offered to these students inChina. Our online tutoring and test preparation services also assist secondaryschool students in preparing for key examinations administered in China,including the national college entrance examination. All of the tutoring andtest preparation materials used by our 101 Online School are developed byqualified teachers and subject to review by our quality control staff. Byproviding tutoring and test preparation services online, the 101 Online Schoolmakes the tutoring and test preparation process more convenient and accessiblefor students, especially those with limited access to traditional tutoring ortest preparation services. In addition, we continue to innovate new services toattract and retain students for our 101 Online School. Recently, we introduceda new service, “Homework Help,” to assist students online on their homeworkassignments. We also plan to develop new products for children from pre-schoolage to grade 3 and their parents. The website address for our 101 Online Schoolis *www.chinaedu.com*.

 

We currently market our 101 Online School throughexclusive regional third-party distributors and our own sales centers in Beijing,Tianjin and other cities and provinces in China. More than 200 distributorslocated in major cities in China purchase bulk subscriptions to our 101 OnlineSchool and resell these subscriptions to students. Bulk subscription sales todistributors accounted for 48.0% and 62.3% of our 101 Online School revenue in2006 and 2007, respectively.

 

In addition, we have entered into an arrangementwith Lenovo Group Limited, a personal computer manufacturer in China, todistribute our online tutoring services in various lines of Lenovo personalcomputers.

 

**Seasonality**

 

We have experienced,and expect 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 students whoare enrolled in, or served by, our businesses. We expect quarterly fluctuationsin our revenue and results of operations to continue. As our revenue grows,these seasonal fluctuations may become more pronounced.

 

**Regulation**

 

The Chinese government regulates the educationservices industry and the provision of Internet content. This sectionsummarizes the principal Chinese regulations relating to our businesses.

 

We operate our business in China under a legalframework that consists of the State Council, which is the highest executiveauthority of the Chinese central government, and several ministries andagencies under its authority, including the Ministry of Education, or MOE, theState Administration of Foreign Exchange, or SAFE, the General Administrationof Press and Publication, or GAPP, the Ministry of Information Industry, orMII, the State Administration for Industry and Commerce, or SAIC, the Ministryof Civil Affairs, or MCA, and their respective authorized local counterparts.

 

***Regulations on Online Education***

 

Pursuant to the *AdministrativeRegulations on Educational Websites and Online and Distance Education Schools*,issued by the MOE in 2000, educational websites and online education schoolsmay provide educational services in relation to higher education, elementaryeducation, pre-school education, teacher education, occupational education,adult education, other education and public educational information services. “Educationalwebsites” refers to organizations providing education or education-relatedinformation services to website visitors by means of a database or online 

 

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education platform connectedvia the Internet or an educational television station. “Online educationschools” refers to education websites that issue educational certificates inconnection with their providing academic education services or trainingservices.

 

On June 29, 2004, the State Council issued the *Decision on Setting Down Administrative Licenses forthe Administrative Examination and Approval Items Really Necessary to beRetained*, which provides that an administrative license is requiredfor “online education schools” that provide degree education to students, butnot for “educational websites” that do not provide degree education tostudents.

 

The MOE issued *CertainOpinions on the Pilot Program of Supporting Certain Higher EducationInstitutions to Establish Online Education Colleges to Develop ModernLong-Distance Education* in 2000 and *CertainOpinions regarding the Enhancement of the Administration of Higher EducationInstitution Online Education Colleges and the Improvement of Education Quality*in2002 to regulate online higher education. And, on February 27, 2004, theMOE issued a *Circular on the Student Enrollmentof Online Degree Education by the Pilot Universities which are Permitted toOperate Online Degree Education*, or the 2004 circular, to regulatethe recruitment of online degree students. The 2004 circular prohibitsuniversities from recruiting existing full-time students and instructs schoolsoffering online degrees to recruit only working adults for their programs. The2004 circular also required universities to tighten their admission criteriafor their online programs and to improve the quality of their recruitingmaterials. As of December 31, 2007, 67 universities and colleges had beenapproved by the MOE to operate online education programs as part of the MOEpilot program. Nine of the 12 universities to which we currently provide, orhave entered into agreements to provide, online degree program services areincluded within the pilot program. Central University of Finance and Economics,one of the universities that we serve, is not in the pilot program and iscurrently in the process of applying for the MOE approval to offer onlinedegrees.

 

To regulate the learning centers that provideservices to online degree programs, the MOE issued the *Principles on the Establishment and Administration ofModern Distance Education Off-campus Learning Center (Pilot)*, in January 2002,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 and the educational institutionwith which it is associated must jointly apply to the education authorities forapproval before the learning center can provide services to any onlineeducation program. Additional approvals are required for a learning center ifit intends to provide support services to additional educational institutions.The education authorities have the authority to supervise, inspect and evaluatethe learning centers from time to time. A learning center’s approvals may bewithdrawn by the education authorities if during a periodic inspection theydetermine that the learning center is unqualified to continue operations.

 

On February 9, 2007, we received a provisionalapproval from the MOE to operate 10 learning centers in four provinces,Beijing, Shanghai, Jiangsu and Zhejiang, for a trial period of up to 18-months.Upon the receipt of the related approval from the educational authorities ofthese four provinces, we plan to establish and operate learning centers inthose provinces. In August 2007, we received the related provincial-levelapproval from the Beijing education authorities to operate learning centers inBeijing and opened one learning center in Beijing. In addition, during thefirst quarter of 2008, after receiving the related provincial-level approvalfrom the other provincial education authorities, we opened the other ninelearning centers.****After the trial period, the MOEwill decide whether to issue us a final approval to operate learning centers ona nationwide basis in China based on the performance and operation of ourlearning centers during the trial period.

 

***Regulations on Operating Private Schools***

 

The principal regulations governing privateeducation in China consist of the *EducationLaw of China*, *The Law forPromoting Private Education (2003),* *The Implementation Rules for the Law for Promoting PrivateEducation (2004)* and the *Regulationson Chinese-Foreign Cooperation in Operating Schools*. Theseregulations are summarized below.

 

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*EducationLaw of China*

 

The *Education Lawof China*, or the*Education Law*,was enacted on March 18, 1995. The*Education Law* sets forth provisions relating to the fundamentaleducation systems of China, including a system of pre-school education, primaryeducation, secondary education and higher education, a system of nine-yearcompulsory education and a system of education certificates. The *Education Law* requires the government toformulate plans for the development of education and the 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, privateschools may be operated for “reasonable returns,” as described in more detailbelow.

 

*The Lawfor Promoting Private Education (2003) and The Implementation Rules forthe Law for Promoting Private Education (2004)*

 

The*Law forPromoting Private Education (2003)* became effective on September 1,2003, and its implementing regulations, *TheImplementation Rules for the Law for Promoting Private Education (2004)*, becameeffective on April 1, 2004. Under these regulations, “private schools” aredefined as schools established by individuals or private social organizationsusing private funds. Private schools providing degree education, pre-schooleducation, education for self-study aid and other academic education aresubject to approval by the education authorities, while private schools engagingin occupational qualification training and occupational skill training aresubject to approvals from the authorities in charge of labor and socialwelfare. An approved private school will be granted an operating permit, and itmust be registered with the MCA or its local counterpart as a privately runnon-enterprise legal person. Two of our private primary and secondary schools,the Anqing School and the Pingdingshan School, have obtained operating permitsand have been registered with the relevant local office of the MCA. We willapply for the permit for operating a private school for the Jingzhou School(Southern Campus) when we complete construction of the new southern campus,which is expected to be completed in 2009.

 

The operation of private schools is highlyregulated. For example, the types and amounts of fees charged by privateschools offering certifications must be approved by the relevant governmentalauthority and be publicly disclosed, and the types and amounts of fees chargedby private schools that do not offer certifications need only be filed with therelevant governmental authority and be publicly disclosed. Our Anqing Schooland Pingdingshan School currently offer certifications to students, and weexpect our Jingzhou School (Southern Campus) to do so once it beginsoperations.

 

Private education is treated as a public welfareundertaking under the regulations. Nonetheless, investors in a private schoolmay elect to require “reasonable returns” from the schools. Under theregulations, an election to establish a private school as one requiringreasonable returns must be made in the articles of association of the school.For schools that have made this election, the amount of reasonable return thatcan be distributed to investors each year is determined based on a percentageof the school’s “operating surplus,” which is equal to the school’s annual netincome less the aggregate amount of donations received, government subsidies,if any, the amount required to be reserved for the school’s development fundand other expenses as required by the regulations. This percentage isdetermined by the school’s board of directors, taking into consideration thefollowing factors: (i) the school’s tuition and other fees, (ii) theratio of the school’s expenses used for educational activities and improvingthe 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.****After thecompletion 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 fiscal year, private schools arerequired to allocate a certain amount to their development fund for theconstruction and maintenance of the school and the procurement and upgrade ofeducational equipment. For private schools that require reasonable returns,this amount must be no less than 25% of the annual net income or the annualincrease in the net assets of the school, while for other private schools, thisamount must be no less than 25% of the annual increase in the net assets of theschool, if any. Private schools that have not elected to require reasonablereturns are entitled to the same preferential tax treatment as public schools.The regulations require that preferential tax treatment policies applicable toprivate schools requiring reasonable returns to be formulated by the financeauthority, taxation authority and other authorities under the State Council,but to date no such regulations have been promulgated by the relevantauthorities.

 

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***Regulations on Chinese-Foreign Cooperation inOperating Schools***

 

Chinese-foreign cooperation in the operation ofschools and training programs is governed by the *Regulations on Operating Chinese-Foreign Schools*, issued bythe State Council in 2003 in accordance with the *Education Law*, the *OccupationalEducation Law* and the *Law forPromoting Private Education*.

 

The *Regulationson Operating Chinese-foreign Schools*and its implementing regulations,the *Implementing Rules for theRegulations on Operating Chinese-foreign Schools*, or the *Implementing Rules*, which were issued bythe MOE in 2004, encourage substantive cooperation between overseas educationalorganizations, which are required to have relevant qualifications andexperience in providing high-quality education, and Chinese educationalorganizations to jointly operate various types of schools in China.

 

Permits for Chinese-foreign cooperation in operatingschools must be obtained from the relevant education authorities or theauthorities that regulate labor and social welfare in China. Since all of ourprivate primary and secondary schools are operated by our Chinese affiliatedentities and not by us, we believe, based on the advice of our Chinese counsel,Jun He Law Offices, that we are not required to apply for these permits.

 

Additionally, the *Regulationson Operating Chinese-Foreign Schools*and its *Implementing Rules *require that theforeign party to Chinese-foreign cooperative educational institutions orprograms be a “foreign educational institution,” and under those regulations, afor-profit company, such as us, cannot qualify as a foreign educationalinstitution. As a result, we cannot directly operate the FEC or BCIT program,and instead we are a service provider to these programs.

 

In August 2004, the MOE promulgated the *Announcement Regarding Re-Approval of Chinese-foreignCooperative Educational Institutions and Programs*, which requiresChinese-foreign cooperative educational institutions and programs that wereestablished before July 1, 2004 (the effective date for the *Implementing Rules*) to obtain re-approvalfrom the MOE. At that time, 19 of our 21 contracted schools with FEC programswere subject to re-approval. So far, seven of our contracted schools haveobtained re-approval from the MOE and the other 12 have submitted theirapplications for re-approval.****If theseschools cannot obtain the MOE’s re-approval, they may have to terminate theirFEC programs.

 

In April 2007, the MOE issued the *Circular on Further Regulating Chinese-foreignCooperative Education Programs*. The circular directs the localeducation 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 would be able to contract new schools in 2009 or at any time afterthat.

 

***Regulations on Internet Information Services***

 

Following the State Council’s issuance of the *Telecom Regulations and the Internet InformationServices Administrative Measures*, or the *Internet Information Measures*, on September 25, 2000,the MII and other regulatory authorities have issued a number ofInternet-related regulations, including the *InternetElectronic Bulletin Board Service Administrative Measures*, or the *BBS Measures*.

 

The *InternetInformation Measures* require that commercial Internet contentproviders, or ICPs, must either obtain a license for Internet informationservices, or an ICP license, from, or make an ICP filing with, the appropriatetelecommunications authorities to carry on any commercial Internet informationservices in China. Generally, an ICP license is required to provide Internetinformation services for profit-making purposes, whereas only an ICP filing isrequired to provide Internet information services on a non-profit basis. Thetelecommunications authorities generally consider that the online degreeprograms established by universities are not for profit-making purposes, andthe universities are only required to make an ICP filing, rather than obtain anICP license, for their online degree programs. The telecommunicationsauthorities could, however, require the universities to obtain ICP licenses inthe future. In addition, some of our university partners for online degreeprograms have not made the required filing with the telecommunicationsauthorities. If our university partners fail to make an ICP filing, or obtainan ICP license (if required), these online degree programs may be sanctioned orsuspended.

 

The 101 Online School, a profit-making business, isrequired to obtain an ICP license. Gotop Electronic, a subsidiary of one of ourChinese affiliated entities, holds the ICP license for our 101 Online School.Before we acquired Gotop 

 

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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.****Although approvals of the MII,the MOE and the MOC were required for this transaction, we did not apply for orobtain these approvals. Subsequent to the acquisition, we have transferred ourequity interests in Gotop Electronic to one of our Chinese affiliated entities.In addition, at the time when Gotop Electronic was approved by relevant Chineseauthorities to engage in the ICP business, its registered capital did not meetthe minimum requirement specified under Chinese law for ICP license holders. Wehave subsequently increased the registered capital of Gotop Electronic tosatisfy this requirement. As a result, we believe that any regulatory issuesrelating to our interest in Gotop Electronic have been resolved.

 

Under the *InternetInformation**Measures*,Internet information service providers are prohibited from producing, copying,publishing or distributing information that insults or slanders a third partyor that infringes the lawful rights and interests of others. Depending on thenature of a violation, ICPs that violate this provision may face criminalcharges or be sanctioned by security authorities. In addition, they may beordered to temporarily suspend their service, or their licenses may be revoked.

 

The *BBS Measures*provide that ICPs engaged in providing online bulletin board services, or BBS,must comply with a special approval process and make a specific filing with therelevant telecommunications industry authorities. ICPs that provide electronicmessaging services must not disclose user personal information to any thirdparty without the consent of the user, unless the law otherwise requires that thedata be disclosed. 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 provides BBS orsimilar services. Gotop Electronic, the ICP license holder and website operatorof our 101 Online School, has obtained the BBS license, which is valid until September 24,2011 and is subject to annual inspection.

 

In July 2006, the MII issued the *Notice on Strengthening Management of Foreign Investmentin Operating Value-Added Telecom Services*. The notice prohibitsChinese ICPs engaged in providing value-added telecom services from leasing,transferring or selling their ICP licenses or providing facilities or otherresources to illegal foreign investors. The notice requires Chinese ICPs todirectly own the trademarks and domain names for the websites they operate, aswell as servers and other infrastructure used to support these websites. Thenotice also requires Chinese ICPs to evaluate their compliance with the noticeby November 1, 2006 and correct any non-compliance. A Chinese ICP’sfailure 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 for our 101 Online School, through Gotop Electronic, asubsidiary of Xiandai Technology, our Chinese affiliated entity. GotopElectronic holds the ICP license for this website. The ICP license is validuntil 2011 and is subject to annual inspection. Gotop Electronic passed theannual inspection in 2007. We operate our corporate websites, *www.chinaedu.net and www.prcedu.com,*through our Chinese affiliated entity, Xiandai Technology, which holds the ICPlicense for the website. The ICP license is valid for five years beginning in November 2004and is subject to annual inspection. Xiandai Technology passed the annualinspection in 2006 and 2007.  We have nottransferred the domain name and trademark for any of our websites to GotopElectronic or Xiandai Technology. We may be required to make these transfers inthe future and, if we are unable to do so, the ICP licenses held by GotopElectronic or Xiandai Technology may be suspended or revoked by MII.

 

***Regulations on Online Publications***

 

The GAPP and the MII jointly promulgated the *Tentative Internet Publishing AdministrativeMeasures,*or the*InternetPublishing Measures*, which took effect on August 1, 2002. The *Internet Publishing Measures* requireInternet publishers to obtain approval from the GAPP. The term “Internet publishing”is defined in these regulations as online dissemination through which Internetinformation service providers select, edit and process works created bythemselves or others (including content from books, newspapers, periodicals,audio and video products, electronic publications, and other sources that havealready been formally published or works that have been made public in othermedia) and subsequently post this content on the Internet or transmit it tousers over the Internet for browsing, use or downloading by the public.

 

Gotop Electronic, our Chinese affiliated entity thatoperates our 101 Online School, received verbal confirmation from the GAPP thatthe online content services that it provides do not fall within the scope of “Internetpublishing” that would require approval or a license from GAPP. Obtaining anonline publication license requires compliance with certain conditions,including having five or more qualified editors, which Gotop Electronic cannotsatisfy. However, because there 

 

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is no further official orpublicly-available interpretation of “Internet publishing,” we cannot assureyou that Gotop Electronic will not require an online publication license in thefuture.

 

***Regulations on Internet Culture Activities***

 

The Ministry of Culture of China promulgated the *Internet Culture Administration Tentative Measures,*orthe*Internet Culture Measures*, onMay 10, 2003. These measures became effective on July 1, 2003 andwere amended on July 1, 2004. The *InternetCulture Measures* require ICPs engaging in Internet cultureactivities to obtain an Internet culture business operations license from theMinistry of Culture in accordance with the *InternetCulture Measures*. As defined under the *Internet Culture Measures*, the term “Internet cultureactivities” includes, among other things, acts of online dissemination ofInternet cultural products, such as audio-visual products, games, performancesof plays or programs, works of art and cartoons, and the production,reproduction, importation, sale (wholesale or retail), leasing and broadcastingof Internet cultural products.

 

Gotop Electronic, our Chinese affiliated entity thatoperates our 101 Online School, is engaged in the distribution of certainaudio-visual products through the Internet. Gotop Electronic received verbalconfirmation from the Ministry of Culture that its products do not fall withinthe definition of “Internet culture products” and its operations do not fallwithin the definition of “Internet culture activities” as defined under the *Internet Culture Measures*. Accordingly,Gotop Electronic is not required to obtain an Internet culture businessoperations license. However, because there is no further official orpublicly-available interpretation of these definitions, we cannot assure youthat Gotop Electronic will not need an Internet culture business operationslicense in the future.

 

***Regulations relating to Information Security***

 

On December 28, 2000, the National People’sCongress enacted the *Decisions RegardingMaintaining Internet Security*, which prohibits any use of theInternet that results in a breach of public security, dissemination of sociallydestabilizing content or divulgence of state secrets. The conduct prohibited isbroadly defined under the decisions.

 

According to other relevant regulations, ICPs mustcomplete mandatory security filing procedures with local public securityauthorities and must also report any public dissemination of prohibitedcontent. According to the *Interim Measuresfor the Administration of Filings for Commercial Web Sites*promulgated by the Beijing Administration of Industry and Commerce, or theBeijing AIC, and other related regulations, we must file and register ourwebsites with Beijing AIC and obtain electronic registration marks. We havefiled and registered our websites, *www.chinaedu.com*,*www.chinaedu.net* and *www.prcedu.com* with Beijing AIC andobtained electronic registration marks.

 

***Regulations on Broadcasting Audio-VideoPrograms through the Internet or Other Information Network***

 

The State Administration of Radio, Film andTelevision, or SARFT, promulgated the Rules for Administration of*Broadcasting of Audio-Video Programs through theInternet and Other Information Networks*, or the *Broadcasting Rules*, which became effectiveon October 11, 2004. The *Broadcasting Rules *applyto the activities of broadcasting, integration, transmission, downloading ofaudio-video programs with computers, televisions or mobile phones as the mainterminals and through various types of information networks. Pursuant to the *Broadcasting Rules*, a permit forbroadcasting audio-video programs through an information network is required toengage in these Internet broadcasting activities. On April 13, 2005, theState Council announced a policy on private investments in businesses in Chinathat relate to cultural matters, which prohibits private investments inbusinesses 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,including the definition of “audio-video programs” as specified in theseregulations. Gotop Electronic, our Chinese affiliated entity engaging in onlinetutoring services, does not now possess a permit for broadcasting audio-videoprograms, and we cannot assure you that it will not be required to obtain onein the future.

 

***Regulations on Protection of the Right ofDissemination through Information Networks***

 

On May 18, 2006, the State Council issued the *Regulations on Protection of the Right ofDissemination through Information Networks*, and they becameeffective 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 also 

 

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provide that permission fromand compensation for the copyright owner are not required in the event oflimited dissemination to teaching or research staff for the purpose of schoolteaching or scientific research.

 

We own the copyrights to all of the educationalmaterials of our 101 Online School, and the copyrights to all of the onlinecourses for our university partners’ online degree programs are either owned byus or by collaborative alliances with the university partners. However, usersof our BBS for our 101 Online School may post copyrighted materials from timeto time, without our prior knowledge. We actively monitor the contents postedon our BBS and will remove any materials that we believe may infringe thecopyrights of third parties.

 

***Regulations on Copyright and TrademarkProtection***

 

China has adopted legislation governing intellectualproperty rights, including copyrights and trademarks. China is a signatory tothe main international conventions on intellectual property rights and became amember of the *Agreement on Trade RelatedAspects of Intellectual Property Rights*, or *TRIPS*, upon its accession to the World TradeOrganization in December 2001.

 

*Copyright*.    The National People’sCongress amended its *Copyright Law*in 2001 to widen the scope of works and rights that are eligible for copyrightprotection. The amended *Copyright Law*extends copyright protection to Internet activities, products disseminated overthe Internet and software products. In addition, there is a voluntaryregistration system administered by the China Copyright Protection Center.

 

To address the problem of copyright infringementrelated to content posted or transmitted over the Internet, the NationalCopyright Administration and the MII jointly issued the *Administrative Measures for Copyright ProtectionRelated to the Internet* on April 30, 2005. These measuresbecame effective on May 30, 2005.

 

We own the copyrights to all of the educationalmaterials of our 101 Online School, and the copyrights to all of the onlinecourses for our university partners’ programs are either owned by us or by ouruniversity collaborative alliances.

 

*Trademark.*    The *Chinese Trademark Law*, adopted in 1982 andrevised in 2001, protects the proprietary rights to registered trademarks. TheTrademark Office, which is under the SAIC, handles trademark registrations andgrants a ten-year term to registered trademarks, subject to renewal for anotherten years. Trademark license agreements must be filed with the Trademark Officefor record. We have registered nine trademarks with the Trademark Office andare in the process of registering additional marks. In addition, if a registeredtrademark is recognized as a well-known trademark, the proprietary right of thetrademark holder may be extended beyond the registered sphere of products andservices of the trademark.

 

On November 5, 2004, the MII amended the *Measures for Administration of Domain Names for theChinese Internet*, or the *DomainName Measures*. The *Domain NameMeasures* regulate the registration of domain names, such as thefirst tier domain name “.cn.” In February 2006, China Internet NetworkInformation Center, or CINIC, issued the*Implementing Rules for Domain Name Registration and the Measures on DomainName Disputes Resolution*, pursuant to which CINIC can authorize adomain name dispute resolution institution to decide disputes. We haveregistered the domain names for our main websites,*www.chinaedu.net*, *www.chinaedu.com*and *www.prcedu.com,* with CINIC.We are also the 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 our domain names tosome of our university partners for them to operate their online degreeprograms, and some of our university partners are the registered owners of thedomain names under which their programs operate.

 

***Limitations on Foreign Ownership of OurBusinesses***

 

The Foreign Investment Industry Guidance Catalogue(amended in 2004), the Regulations on Chinese-Foreign Cooperation in OperatingSchool, the Implementation Measures for the Regulations on Sino-ForeignCooperation in Operating Schools and other applicable laws and regulationslimit foreign ownership in entities, or foreign participation in entities,engaging in specified education activities by:

 

·                  requiringthat the foreign party in any Chinese-foreign cooperation in operating schoolsbe a qualified foreign educational institution;

 

·                  requiringregulatory approval for any Chinese-foreign cooperation in operating schools;

 

·                  prohibitingforeign investment in schools providing compulsory education (that is, thefirst grade through the ninth grade, or primary school and junior high schooleducation); and

 

·                  restrictingforeign investment in educational websites.

 

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Moreover, from a practical perspective, the MOE willnot approve any foreign investment or participation in online degree education.

 

Our corporate structure is designed to comply withcurrent regulatory limitations on foreign ownership and participation whileengaging in our core business activities. For details, see “—C. Organizational Structure.”

 

***Compliance with Chinese Regulations on theEducation Services Industry, Publishing, Internet Activities and Copyrights andTrademarks***

 

In the opinion of our Chinese counsel, Jun He LawOffices, except for the online publication license, the Internet culturebusiness operations license and the license for broadcasting audio-videoprograms through the Internet discussed above, no consent, approval or licenseother than those already obtained by our Chinese subsidiaries and affiliates isrequired under any of the existing laws and regulations of China for our mainbusiness and operations as disclosed in this annual report.

 

***Regulation of Foreign Currency Exchange andDividend Distribution***

 

*Foreigncurrency exchange*

 

The principal regulations governing foreign currencyexchange in China are the *Foreign CurrencyAdministration Regulations* (1996), as amended. Under theseregulations, the Renminbi is convertible for current account items, includingthe distribution of dividends, interest payments, trade and service-relatedforeign exchange transactions. Conversion of the Renminbi for capital accountitems, such as direct investment, loans, repatriation of investment andinvestment in securities outside China, however, is still subject to SAFEapproval.

 

Dividends paid by a subsidiary to its shareholderare deemed income of the shareholder and are taxable in China. Pursuant to the *Administration Rules of the Settlement, Sale andPayment of Foreign Exchange* (1996), foreign-invested enterprises inChina may purchase or remit foreign exchange, subject to a cap approved by theSAFE, for settlement of current account transactions without the approval ofthe SAFE. Foreign exchange transactions under the capital account are stillsubject to limitations and require approvals from, or registration with, theSAFE and other relevant Chinese governmental authorities.

 

*Dividenddistribution*

 

The principal regulations governing distribution ofdividends of foreign holding companies include the *Foreign Investment Enterprise Law*(1986), as amended, andthe *Administrative Rules under theForeign Investment Enterprise Law* (2001). Under these regulations,foreign investment enterprises in China may pay dividends only out of theiraccumulated profits, if any, determined in accordance with Chinese accountingstandards and regulations. In addition, foreign investment enterprises in Chinaare required to allocate at least 10% of their accumulated profits each year,if any, to fund certain reserve funds unless these reserves have reached 50% ofthe registered capital of the enterprises. These reserves are not distributableas cash dividends. Our Chinese subsidiaries, which are all foreign investmententerprises, are restricted from distributing any dividends to us until theyhave met the requirements set out in these regulations.

 

Under the current Chinese tax law, dividend paymentsto foreign investors made by FIEs are exempt from Chinese withholding tax.However, pursuant to the new Chinese enterprise income tax law, which becameeffective on January 1, 2008, and subsequently issued implementation rules anda related circular, dividendspayable by an FIE to its foreign investors are subject to a 10% withholdingtax, unless the 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. Although the new tax law contemplates the possibility of exemptions fromwithholding taxes for China-sourced income of FIEs, the Chinese tax authoritieshave not promulgated any related implementation rules and it remainsunclear whether we would be able to obtain exemptions from Chinese withholdingtaxes for dividends distributed to us by our Chinese subsidiaries.

 

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

 

The SAFE issued *theNotice on Issues Relating to the Administration of Foreign Exchange inFund-Raising and Reverse Investment Activities of Domestic Residents Conductedvia Offshore Special Purpose Companies*in October 2005, whichbecame 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 and 

 

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foreign citizens who residein China, are required to register with the SAFE or its local branch beforeestablishing or controlling any company outside China, referred to in the SAFE rules asan “offshore special purpose company,” for the purpose of financing thatoffshore company with their ownership interests in the assets of or theirinterests in any Chinese enterprise. In addition, a Chinese resident that is ashareholder of an offshore special purpose company is required to amend itsSAFE registration with the local SAFE branch with respect to that offshorespecial purpose company in connection with the injection of equity interests orassets of a Chinese enterprise in the offshore company or overseas fund raisingby the offshore company, or any other material change in the capital of theoffshore company, including any increase or decrease of capital, transfer orswap of share, merger, division, long-term equity or debt investment orcreation of any security interest. The SAFE Rules apply retroactively. Asa result, Chinese residents who have established or acquired control ofoffshore companies that have made onshore investments in China in the past wererequired to complete the relevant registration procedures with the competentlocal SAFE branch. If any resident of China failed to file its SAFE registrationfor an existing offshore entity, any dividends remitted by the onshore entityto its overseas parent since April 21, 2005 will be considered to be anevasion of foreign exchange purchase rules, and the payment of the dividendwill be illegal. As a result of any illegal action of this type, both theonshore entity and its actual controlling person(s) can be fined. Inaddition, failure to comply with the registration procedures may result inrestrictions on the relevant onshore entity, including prohibitions on thepayment 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 our shareholders and beneficial ownerswho are Chinese residents to make the necessary applications and filings asrequired under Notice 75 and other related rules. However, due to uncertaintyconcerning the reconciliation of Notice 75 with other approval or registrationrequirements, it remains unclear how Notice 75, and any future legislationconcerning offshore or cross-border transactions, will be interpreted, amendedand implemented by the relevant government authorities. We will attempt tocomply, and attempt to ensure that our shareholders and beneficial owners whoare subject to these rules comply, with the relevant requirements.However, we cannot provide any assurances that all of our shareholders andbeneficial owners who are Chinese residents will comply with our request tomake or obtain any applicable registrations or comply with other requirementsrequired by Notice 75 or other related rules. In addition, certain of theholders of options to purchase our ordinary shares are Chinese residents. OurChinese counsel, Jun He Law Offices, has advised us that it is unclear underthe SAFE Rules whether these option holders would be deemed to bebeneficial owners of our company for the purposes of these rules as aresult of holding these options. We are currently in the process of confirmingthe beneficial ownership status of these option holders with the SAFE. Thefailure or inability of our Chinese resident shareholders or beneficial ownersto register with the SAFE in a timely manner pursuant to the SAFE Rules, or thefailure or inability of any future Chinese resident shareholders or beneficialowners to make any required SAFE registration or comply with other requirementsunder the SAFE Rules may subject these shareholders or beneficial ownersto fines or other sanctions and may also limit our ability to contributeadditional capital into or provide loans to our Chinese subsidiaries, limit ourChinese subsidiaries’ ability to pay dividends to us, repay shareholder loansor otherwise distribute profits or proceeds from any reduction in capital,share transfer or liquidation to us, or otherwise adversely affect us.

 

On March 28, 2007, SAFE promulgated the *Application Procedure of Foreign ExchangeAdministration for Domestic Individuals Participating in Employee Stock OptionHolding Plan or Stock Option Plan of Overseas Listed Company*, or the*Stock Option Rule*. The purpose ofthe *Stock Option Rule *is toregulate foreign exchange administration of Chinese citizens who participate inemployee 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 holdoffshore funds used in connection with any employee stock holding plans.

 

All proceeds obtained by a Chinese citizen fromdividends acquired from the offshore listed company through employee stockholding plans or stock option plans, or sales of the offshore listed company’sstock acquired through other methods, must be remitted back to China afterrelevant offshore expenses are deducted. The foreign exchange proceeds fromthese sales can be converted into Renminbi or transferred to the individuals’foreign exchange savings account after the proceeds have been remitted back tothe special foreign exchange account opened at a Chinese bank. If stock options

 

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are exercised in a cashlessexercise, the Chinese individuals exercising them are required to remit theproceeds to the special foreign exchange account. Although the *Stock Option Rule *has beenpromulgated recently and many issues require further interpretation, we and ourChinese employees who have been granted stock options will be subject to the *Stock Option Rule *when our companybecomes an offshore listed company. If we or our Chinese employees fail tocomply with the *Stock Option Rule*,we and/or our Chinese employees may face sanctions imposed by foreign exchangeauthority or any other Chinese government authorities.

 

***Regulation of Merger and Acquisitions ofDomestic Enterprises by Foreign Investors***

 

On August 8, 2006, six Chinese regulatoryagencies, including the Ministry of Commerce, the State Assets Supervision andAdministration Commission, the State Administration for Taxation, the StateAdministration for Industry and Commerce, the CSRC, and the SAFE, jointlyissued the *Regulations on Mergers andAcquisitions of Domestic Enterprises by Foreign Investors*, or the *New M&A Rule*, which became effectiveon September 8, 2006. Under the *NewM&A Rule*, equity or asset purchases from, and mergers andacquisitions of, Chinese enterprises by foreign investors will be subject tothe approval from the Ministry of Commerce. This regulation also includesprovisions that require special purpose companies formed for purposes ofoffshore listing of equity interests in Chinese companies to obtain the approvalof the CSRC prior to the listing and trading of their securities on anyoffshore 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 onits website procedures regarding its approval of offshore listings by specialpurpose vehicles. These procedures require the filing of a number of documentswith the CSRC and it would take several months to complete the approvalprocess. The application of the *New M&A Rule *withrespect to offshore listings of special purpose companies remains unclear withno consensus currently existing among leading Chinese law firms regarding thescope of the applicability of the CSRC approval requirement.

 

In connection with our initial public offering, ourChinese counsel, Jun He Law Offices advised us that, based on the theirunderstanding of Chinese laws, regulations and rules, including the *New M&A Rule *and the CSRCprocedures 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 trading ofour ADSs in connection with our initial public offering did not conflict withor violate this new regulation.

 

C.  Organizational Structure

 

**Overview**

 

We were incorporated as an exempted company in theCayman Islands with limited liability in 1999. We are a holding company, and we conduct our business primarily throughour subsidiaries and Chinese affiliated entities incorporated in China. Chinese laws and regulations limit theability of foreign-owned entities to participate in the education andtelecommunication sectors in China. Our corporate structure is designed tocomply with current Chinese limitations on foreign ownership of, andparticipation in, companies operating in the education and telecommunicationsectors in China. For a discussion of these restrictions see “—B. Business Overview—Regulation—Limitationson Foreign Ownership of Our Businesses” and “Item 3. Key Information—D. Risk Factors—Risks Related to China’s Regulation of the Education andTelecommunication Sectors and Our Corporate Structure.”

 

**Our Corporate Structure and Contractual Arrangements**

 

Our primary business is to provide comprehensiveservices to the online degree programs of leading Chinese universities. Weconduct this business and our international curriculum program business throughour three Chinese subsidiaries, except for two online degree programs that areserviced through one of our Chinese affiliated entities. Due to restrictions onthe foreign ownership and operation of our online tutoring business and ourprivate primary and secondary school business, we conduct these businessesthrough arrangements with our Chinese affiliated entities. We do not have adirect ownership interest in, and are not obligated to absorb the losses of,our Chinese affiliated entities, but we direct these companies’ businessaffairs and receive substantially all of the economic benefits of theirbusinesses through our contractual arrangements. In 2007, 89.0% of our netrevenue was derived from businesses conducted by our three principal Chinesesubsidiaries.

 

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Our principal subsidiaries in China are:

 

·                  Beijing Hongcheng Liye Technology Co., Ltd,or Hongcheng Liye, our wholly owned subsidiary, which has establishedcollaborative alliances with four 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 and Central University of Finance and Economics. Our service revenuefrom these four universities in aggregate accounted for 34.7% of our netrevenue in 2007. Hongcheng Liye also provides our learning-based products andservices, which include our English language training, online tutoring programsand post-secondary vocational educational programs;

 

·                  Hongcheng Technology Development Co., Ltd.,or Hongcheng Technology, our wholly owned subsidiary, which has established acollaborative alliance with Chongqing University to provide services to thatuniversity for the establishment, operation, and expansion of its online degreeprogram. Hongcheng Technology also provides services to two other universities,Jiangnan University and Nanjing University, for their online degree programs.Our service revenue from these three universities in aggregate accounted for14.1% of our net revenue in 2007. Hongcheng Technology also operates ourlearning center in Beijing, which was established in August 2007. Underthe provisional approval granted to Hongcheng Technology by the MOE to operatelearning centers, Hongcheng Technology may establish and operate nine otherlearning centers in Beijing, Shanghai, Jiangsu and Zhejiang for a trial periodof up to 18-months; and

 

·                  CMR Web Learning Co., Ltd., or CMR Web, our70 percent-owned subsidiary, which has established a collaborative alliancewith Renmin University of China to provide services to Renmin University ofChina for the establishment, operation, and expansion of its online degreeprogram. The remaining 30% of CMR Web is owned by Rendashiji TechnologyDevelopment Co., Ltd., a wholly owned subsidiary of Renmin University of China.Our service revenue from Renmin University of China accounted for 21.1% of ournet revenue in 2007.

 

Our Chinese affiliated entities are:

 

·                  Beijing Hongcheng Education Technology Co.,Ltd., or Hongcheng Education, through which we own and operate three privateprimary and secondary schools and provide services to Lanzhou University andEast China University of Science and Technology for their online degreeprograms. Our service revenue from these online degree programs in aggregateaccounted for 11.8% of our net revenue in 2007; and

 

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

 

The following diagram illustrates our corporatestructure as of December 31, 2007.

 

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(1) RendashijiTechnology Development Co., Ltd., a wholly-owned subsidary of RenminUniversity, owns the remaining 30% of CMR Web.

 

We have been, and expect tocontinue 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:

 

•                  weeffectively control our Chinese affiliated entities and their respectivesubsidiaries;

 

•                  substantiallyall of the economic benefits of our Chinese affiliated entities are transferredto us; and

 

•                  ourChinese subsidiaries or their respective designees have an exclusive option topurchase all or substantially all of the equity interests in our Chineseaffiliated entities, to the extent permitted by Chinese law.

 

*Technical Consulting and Services Agreements.*    Through our wholly-owned subsidiary HongchengTechnology, we have entered into exclusive technical consulting and serviceagreements with each of Hongcheng Education and Xiandai Technology. Each ofthese consulting and service agreements has an initial term of ten years andwill be automatically renewed for successive periods of ten years thereafter,unless Hongcheng Technology provides written notice to the other party prior tothe expiration of the then current term of its election not to renew theagreement. Under the agreement with Hongcheng Education, 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. Under the agreement withXiandai Technology, Hongcheng Technology provides network technologydevelopment services, website design services, maintenance and securityservices and employee training services, as well as any other services that maybe agreed upon by the parties. Under each of these agreements the fees payableto Hongcheng Technology are based on the gross revenue of the service recipientand are paid once annually within 30 days of the year-end.

 

We operate three private primary and secondary schools through HongchengEducation, and have entered into a series of agreements with the shareholdersof Hongcheng Education, Mr. Changqing Xie, one of our officers, and Mr. XueshanYang, one of our former directors, to maintain effective control over HongchengEducation. Currently, Mr. Xie and Mr. Yang hold 72% and 28%,respectively, of the equity interest in Hongcheng Education.

 

We have also entered into a series of agreements with the shareholdersof Xiandai Technology, our former directors Mr. Gongquan Wang and Mr. XueshanYang, to maintain effective control over Xiandai Technology. Currently, Mr. Wangand Mr. Yang each hold 50% of the equity interest of Xiandai Technology.

 

*Loan Agreements*.    In 2005, we loaned approximately $4.8 millionto 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

 

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may be extended withthe consent of the parties. To the extent permitted by Chinese law, each loanmay be repaid only by the transfer by Mr. Xie or Mr. Yang of hisequity interests in Hongcheng Education to us or our designee. Mr. Xie andMr. Yang each have granted us the right to appoint all directors to theboard of Hongcheng Education, a right that they otherwise would be entitled toas shareholders.

 

Similarly, Hongcheng Technology entered into loan agreements withMr. Wang and Mr. Yang under which Hongcheng Technology loaned themeach RMB0.3 million to fund the registered capital requirements of XiandaiTechnology. The terms of the loans are 20 years and may be extended with theconsent of the parties. To the extent permitted by Chinese law, each loan maybe repaid only by the transfer by Mr. Wang or Mr. Yang of his equityinterests in Xiandai Technology to Hongcheng Technology or its designee. Mr. Wangand Mr. Yang each have granted Hongcheng Technology the right to appointall directors to the board of Xiandai Technology, a right that they otherwisewould be entitled to as shareholders.

 

*Shareholder Voting Rights Entrustment Agreements*.    In connection with the Hongcheng Education loanagreements described above, in 2005, Mr. Xie and Mr. Yang enteredinto shareholder voting rights entrustment agreements with HongchengTechnology. Pursuant to these agreements, Mr. Xie and Mr. Yang eachirrevocably entrusted Hongcheng Technology with the right to act as their proxyand vote all of their shares in Hongcheng Education. Each of these agreementswill remain effective as long as Mr. Xie or Mr. Yang remains ashareholder in Hongcheng Education.

 

Similarly, in connection with the Xiandai Technology loans describedabove, in 2005, Mr. Wang and Mr. Yang entered into shareholder votingrights entrustment agreements with Hongcheng Technology. Pursuant to theseagreements, Mr. Wang and Mr. Yang irrevocably entrusted HongchengTechnology with the right to act as their proxy and vote all of their shares inXiandai Technology. Each of these agreements will remain effective as long as Mr. Wangor Mr. Yang remains a shareholder in Xiandai Technology.

 

*Call Option Agreements*.    Mr. Xie and Mr. Yang each enteredinto call option agreements with Hongcheng Technology in 2005. Pursuant tothese agreements, Mr. Xie and Mr. Yang each granted irrevocableoptions to purchase all of their respective equity interests in HongchengEducation to Hongcheng Technology at the lowest price permitted underapplicable Chinese laws.

 

Similarly, Mr. Wang and Mr. Yang each entered into call optionagreements with Hongcheng Technology under which Mr. Wang and Mr. Yangeach granted to Hongcheng Technology or its designee irrevocable options topurchase all of their respective equity interests in Xiandai Technology at thelowest price permitted under applicable Chinese laws.

 

*Equity Pledge Agreements and Powers of Attorney*.    As security for their obligations under theircall option agreements and shareholder voting rights entrustment agreementswith Hongcheng Technology and Hongcheng Education’s obligations under thetechnical consulting and services agreement with Hongcheng Technology, in 2005,Mr. Xie and Mr. Yang entered into equity pledge agreements withHongcheng Education to pledge all of their equity interests in HongchengEducation and all distributions arising from those interests to HongchengTechnology.

 

Similarly, in 2005, Mr. Wang and Mr. Yang entered into equitypledge agreements with Xiandai Technology to pledge all of their equityinterests in Xiandai Technology and all distributions arising from thoseinterests to Hongcheng Technology, as security for their obligations undertheir call option agreements and shareholder voting rights entrustmentagreements with Hongcheng Technology and Xiandai Technology’s obligations underthe technical consulting and services agreement with Hongcheng Technology.

 

**Our Significant Subsidiaries**

 

A summary of oursubsidiaries and variable interest entities as of December 31, 2007 is asfollows:

 
| **Name of subsidiaries:**                                             | ** ** | **Date of********incorporation********or establishment** | ** ** | **Percentage of  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           |

 

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| **Name of subsidiaries:**                                                                | ** ** | **Date of********incorporation********or establishment** | ** ** | **Percentage of  ownership** | ** ** | **Principal********activities**                       |
|----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------------------|------------|-------------------------------------------------------|
| 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                                              |       | 80                                | %*         | Online tutoring                                       |
| Beijing Gotop Education  Co., Ltd. (“Gotop Hongcheng”)                                   |       | December 26, 2005                                        |       | 80                                | %*         | 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                                             |       | 80                                | %*         | Provision of internet  content                        |
| Tianjin Gotop Electric  Science Co., Ltd. (“Tianjin 101”)                                |       | January 27, 2001                                              |       | 80                                | %*         | Online tutoring                                       |
| 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 |
| Beijing  Mingdaoyuan Technology Co., Ltd (“Zhongcai”)                                    |       | March 27,  2007                                               |       | 51                                | %          | Online  degree program                                |

 

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* In March 2008,we entered into a definitive agreement to acquire the remaining 20% equityinterest in Gotop Electronic, our Chinese affiliated entity that operates our101 Online School, which acquisition was completed in May 2008.

 

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(1) PRC regulations currently limit foreignownership of entities that provide Internet content and engage in primary andjunior high school education. To comply with PRC laws and regulations, theCompany provides such services in China through its variable interest entities,Xiandai Technology, Hongcheng Education and their subsidiaries.

 

D. Property,Plants and Equipment

 

Our principal executiveoffice is located at 4th Floor-A, GeHua Building, No. 1 QinglongHutong,Dongcheng District, Beijing, 100007, People’s Republic of China, where we own approximately 3,450square meters. We also lease or own other operating space in Beijing, Shanghai,Wuxi, Chongqing and Dalian. Each of our three schools, Pingdingshan School,Anqing School and Jingzhou School (Southern Campus), have associated propertiesthat we own or lease. The Anqing School plans to build additional space when itreceives regulatory approval. Other than Anqing School, we believe that ourexisting facilities, together with the facilities under construction, areadequate for our current and foreseeable future operations.

 

We recently undertook acapital improvements program involving the Anqing School. The renovations andimprovements include, or will include, a new campus to accommodate largerstudent populations and general facility upgrades. We are also in the processof building a new campus for the Jingzhou School (Southern Campus), which willbe owned and operated by us. We spent a total of RMB9.3 million in 2005,RMB21.0 million in 2006 and RMB27.4 million ($3.8 million) in 2007 on these schools. As of December 31,2007, we had capital commitments totaling RMB141.4 million ($19.4 million) forthe expansion of the Anqing School and the Jingzhou School (Southern Campus),and our capital commitment for the ongoing construction in progress was RMB19.8 million ($2.7 million) at December 31, 2007.

 

The following table liststhe properties that we owned or leased as of December 31, 2007:

 
| **Property Address**                                                               | ** ** | **Use of  Property** | ** ** | **Owned/Leased** | ** ** | **Approximate  Size (m****2****)** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------|------------|------------------|------------|-----------------------------------------|------------|
| Suite 501, Tower A, Jin Feng He  Office Building,                                  |       |                      |       |             |       |                                    |       |
| No. 8  Xinjiekouwai Dajie, Beijing                                                 |       | Office                    |       | Leased           |       | 56                                      |       |
| 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                                      |       |
| R1201-1210, F12, Capital  Time Square, Beijing                                          |       | Office                    |       | Leased           |       | 1,952                                   |       |
| R1202, F12, Capital Time  Square, Beijing                                               |       | Office                    |       | Subleased        |       |                                    |       |
| R1205, 1209, F12, Capital  Time Square, Beijing                                         |       | Office                    |       | Subleased        |       | 421                                     |       |
| 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                                      |       |
| Suite 2, 17 F, Renda Technology and Education                                      |       |                      |       |             |       |                                    |       |
| Centre, No. 59, Zhongguancun Dajie, Haidian                                        |       |                      |       |             |       |                                    |       |
| District, Beijing                                                                       |       | Office                    |       | Leased           |       | 177                                     |       |
| 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                                     |       |
| Suite 9, 16 F, Renda Technology and                                                |       |                      |       |             |       |                                    |       |
| Education Centre, No. 59, Zhongguancun Dajie,                                      |       |                      |       |             |       |                                    |       |
| Haidian District, Beijing                                                               |       | Office                    |       | Leased           |       | 100                                     |       |
| R 809, Tower C, No. 9, Shangdi Sanjie,                                             |       |                      |       |             |       |                                    |       |
| Haidian District, Beijing                                                               |       | Office                    |       | Leased           |       | 90                                      |       |
| RA-417, No. 10, Xinghuo Road, Science Town,                                        |       |                      |       |             |       |                                    |       |
| Fengtai District, Beijing                                                               |       | Office                    |       | Leased           |       | 11                                      |       |
| F1, F2, Jingzhou Procuratorate Rest House, Jingzhou, Hubei                              |       | Office                    |       | Leased           |       | 500                                     |       |
| 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                                   |       |

 

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| 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 |   |

 

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(1) Inaddition to the owned property, 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.

 

**Item 5.Operating and Financial Review and Prospects**

 

A.           Operating Results

 

*You should read the following discussion and analysisof our financial condition and results of operations in conjunction with ourconsolidated financial statements and related notes included elsewhere in thisannual report on Form 20-F. This discussion contains forward-lookingstatements that involve risks and uncertainties. Actual results could differmaterially from those projected in the forward-looking statements as a resultof various factors, including those set forth under “Item 3. Key Information—D.Risk Factors” and elsewhere in this annual report on Form 20-F.*

 

**Overview**

 

We are a leading educational service provider in China. Our primarybusiness is to provide comprehensive services to the online degree programs ofleading Chinese universities. Our services for online degree programs includeacademic program development, technology services, enrollment marketing,student support services and finance operations. We also operate privateprimary and secondary schools, market and support international post-secondaryand English language curriculum programs to established learning institutions,and offer online interactive tutoring services to primary and secondary schoolstudents. We believe we are the largest service provider to online degreeprograms in China in terms of the number of higher education institutions thatwe serve and the number of student enrollments that we support. In 2007, thelargest online degree program that we service, Renmin University of China, wasnamed the largest online degree program in China in terms of student enrollmentnumbers by Xuexigang.com and Chinaonlineedu.com, two online education anddistance learning websites. In addition, in 2006, we were ranked among the topten education brands in China by the Sina.com Survey, based on online votingand evaluations by industry experts and media professionals. This survey alsoranked the online degree programs of three of our university partners among thetop ten online degree programs in China, based on online voting and evaluationsby industry experts and media professionals.

 

We currently have strategic relationships with 12 universities, 10 ofwhich are under long-term, exclusive contracts that vary from eight to 50 yearsin length. Nine of these universities currently operate online degree programsand the three additionaluniversities are awaiting regulatory approval to starttheir programs. As of December 31, 2007, approximately 192,000 studentswere registered in the online degree programs that we service through theserelationships. These online degree programs are marketed under the brand namesof leading universities in China, which allows us to benefit from thesignificant brand equity that these higher education institutions haveestablished. Ten of our university partners have been included in the Chinesegovernment’s 211 Program, which is a program to promote and develop the leading100 Chinese universities into world-class institutions.

 

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, 2007, wewere providing services to online degree programs that in aggregate hadapproximately 192,000 registered students and we were servingapproximately 44,000 students in our other businesses. Our net revenueincreased from RMB100.9 million in 2004 to RMB126.4 million in 2005, RMB213.5million in 2006 and RMB265.0 million ($36.3 million) in 2007, representing acompound annual growth rate, or CAGR, of 38%. Our income from operationsdeclined from RMB 22.3million in 2004 to RMB11.2 million in 2005, but increasedto RMB57.2 million in 2006. Our income from operations decreased by 29.6% fromRMB57.2 million in the year ended December 31, 2006 to RMB40.3 million($5.5 million) for the year ended December 31, 2007. Our net incomeattributable to ordinary shareholders improved from a net loss of RMB4.0million in 2004 and a net loss of RMB2.9 million in 2005 to a net income ofRMB25.5 million in 2006 and a net income of RMB2.5 million ($0.3 million) in2007. Our net income attributable to ordinary shareholders declined fromRMB25.5 million for the year ended December 31, 2006 to a net income ofRMB2.5 million ($0.3 million) for the year

 

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ended December 31, 2007. This decline wasprimarily due to a goodwill impairment loss of RMB16.2****millionfor the year ended December 31, 2007, and a higher income tax provisionbooked for the year ended December 31, 2007 as compared with the year ended December 31, 2006, as a result of uncertainties regarding the future status of ourChinese subsidiaries and Chinese affiliated entities under the new tax law,which became effective on January 1, 2008. See “—Taxation” in this annualreport. Net revenue from our online degree programs contributed 100%, 78.0%,73.5% and 76.3% of our net revenue for the years ended December 31, 2004,2005, 2006 and 2007, respectively.

 

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

 

We have benefited greatly from the rapid growth of the Chinese educationmarket. This growth has been driven by several factors, including favorabledemographic trends, overall economic growth and the increase in per capitaincome, the imbalance between supply and demand for traditional post-secondaryeducation, the emphasis that Chinese culture places on higher education and thegrowing number of Internet users, especially those with broadband access. China’saccelerating integration into the global economy is providing increasing careeropportunities for those with post-secondary qualifications, particularly thosewith English proficiency. These factors have led to significant increases ineducation spending 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.

 

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

 

While the general factors affecting the Chinese education marketinfluence us, we believe that company specific and regulatory factors moredirectly affect our business. Company specific factors include the number ofonline degree programs we service, the number of registered students and thenumber of revenue students in the programs that we service, the amount oftuition fees these programs can charge, the amount of fees that we can derivefrom tuition fees collected by these programs, the amount of expenses paid byour university partners for their online degree programs, particularly fees theypay to learning centers, and our cost of revenue and operating expenses.Because the online degree programs that we service, which constitute ourlargest business segment, are operated by our university partners to whom weprovide services, the number of student enrollments, the number of revenuestudents and tuition fees, are largely driven by the demand for the courseofferings and recruitment efforts of our partners. We do, however, provide atechnology and service platform that helps drive enrollment through the qualityof the course offerings and we assist in enrollment marketing for theuniversity programs.

 

Regulatory factors include the number of additional universities thatmay be authorized by the MOE to offer online degree programs, the timing of anysuch approvals by the MOE, regulations related to student recruitingactivities, whether our establishment of particular learning centers, whichhave been approved by the MOE, may be delayed or restricted by localauthorities, and whether the MOE will approve and facilitate future cooperativearrangements between Chinese and foreign educational institutions. In addition,the tuition fees for all the programs we provide services to, as well as thetuition fees for our private schools, are subject to direct regulation by China’sprice control authorities. Furthermore, any increase in the tax ratesapplicable to, or the loss of preferential tax treatments enjoyed by, ourChinese subsidiaries and Chinese affiliated entities as a result of changes inChinese tax laws will adversely affect our results of operations. See “—Taxation.”

 

We expect to expand the penetration of our online degree programservices by increasing the number of universities that use our online degreeprogram services. We believe that our ability to attract additional partnerswill be driven principally by the continued strengthening of our brand name andreputation and our development of new services. We are actively targeting otheruniversities to become our partners for their online education programs. Thetargeted universities include both those already offering online degreeprograms and those planning to offer online degree programs.

 

We also plan to increase total student enrollment and revenue studentnumbers in the online degree programs we service by assisting our partners inrecruiting more students and expanding their course offerings.

 

A significant factor affecting the results of our online degree programsegment is the fees that our university partners are required to pay toindependent learning centers. The learning centers play an important role inthe recruitment of students and provide other student guidance and testingservices for online degree programs. The share of tuition revenue that wereceive, through the collaborative alliances with our university partners, isafter the payment of fees to learning center. As a result, an increase in theportion of tuition fees paid to the learning centers will result in a decreasein the portion of tuition fees that we receive as revenue. The portion oftuition fees payable to learning centers has been

 

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increasing. In 2007,our university partners paid fees to independent learning centers in amountsranging from 23% to 56% of the gross tuition revenues received by their onlinedegree programs. In 2004, 2005, 2006 and 2007, the portion of gross tuitionfees that our university partners in aggregate paid to independent learningcenters was approximately 30%, 39%, 39% and 40%, respectively. This increasewas attributable mainly to increases in demand by universities for servicesprovided by a limited number of learning centers. We believe, however, that thecompetitive pressure for universities to secure the services of learning centersmay be relieved somewhat by the recent approvals by the MOE to permit three newoperators, including us, to establish national networks of learning centers.There can be no assurance, however, that the amounts payable to independentlearning centers, as a portion of gross tuition fees, will not continue toincrease.

 

To strengthen our ability to assist our university partners to recruitstudents and improve student service quality, we are building a network oflearning centers, initially in key cities and, if regulatory approval isobtained, across China. We anticipate that if we are successful in building anational network of learning centers, we will be able to significantly enhanceour brand recognition and increase access to potential students for onlinedegree programs. In February 2007, we received provisional approval fromthe MOE to operate 10 learning centers in selected cities and provinces inChina for a trial period of up to 18-months. According to Distance Education inChina, a magazine under the administration of the MOE, in May 2007, wewere one of only three entities that have been given this approval by the MOEto operate learning centers in multiple provinces in China. In August 2007,we opened one learning center in Beijing and entered into agreements with threeuniversities to provide recruiting services for their online degree programsfor the 2007-2008 academic year. In addition, we opened our other nine learningcenters during the first quarter of 2008.

 

The results of operations of our international curriculum programs willdepend significantly on the number of schools and students enrolled in theseprograms and the amount per student that we receive. Due to recentdevelopments, we expect the future results for our international curriculumprograms to be adversely affected. Our net revenue from our FEC program hasbeen below our previous expectations as a result of lower student numbers andlower per student amounts payable to us under our contractual arrangements withparticipating schools. These developments are the result of increasedcompetition, increased bargaining power of the schools participating in theprogram and our expansion of the program into less affluent areas of China,where tuition fees tend to be lower. In addition to these developments, in April 2007,the MOE issued a circular directing provincial governments generally to suspendthe approval of any new Chinese-foreign cooperative polytechnic educationalprograms until the end of 2008. As a result, our BCIT program has not been ableto contract new schools for the program and we do not expect it to until atleast 2009. Because of these factors, we expect the future financial resultsfor our international curriculum programs to be adversely affected.

 

The results of operations of our private primaryand secondary schools will depend significantly upon our ability to timelycomplete the construction of our Anqing School and Jingzhou School (SouthernCampus). We plan to complete the construction of the new campus of AnqingSchool in 2008 and of Jingzhou School (Southern Campus) in 2009, with studentrecruitment commencing prior to completion of construction.****Wehave experienced delays in completing the Anqing School (which is expected tobe completed by the end of the third quarter of 2008), and the Jingzhou School(Southern Campus), which will adversely affect our results of operations in2008. In addition our results of operations in 2009 may be adversely affectedif we are delayed in completing construction of the Jingzhou School (SouthernCampus). To ensure long term success of our three private primary and secondaryschools, we must recruit and retain high quality teachers and school managementpersonnel, and we must be able to successfully recruit students who are able toafford the relatively higher tuition fees charged by our schools.

 

The future results of operations of our online tutoring services willdepend significantly upon our ability to increase awareness of our onlinetutoring program, to improve effectiveness and efficiency of our sales channeland to develop new products and services to further enhance the learningexperience of existing students and attract new students.

 

Our cost of revenue and operating costs principally consist of thesalaries, academic program development costs, rent, marketing expenses,administrative costs and, to a lesser extent, depreciation and amortizationcosts relating to our growing business. If we are successful in building anational network of learning centers, we expect that our salaries, rent,advertising and marketing costs will increase.

 

We have formed collaborative alliances with six of our university onlinedegree partners to establish long-term relationships with these universitiesand to create economic incentives for our university partners. Under thesearrangements, we receive a share of the tuition fees collected by our onlinedegree program partners in the form of service fees derived from servicingthese online degree programs. We believe that, in comparison with our partnerrelationships structured as contractual arrangements, our collaborativealliance structures can increase our profitability from these programs if theygrow and perform well, although they also can cause us to be less profitable ifthe operating results of these programs decline.

 

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**Revenue**

 

In the fiscal years ended December 31, 2004, 2005, 2006 and 2007,we generated net revenue of  RMB100.9million, RMB126.4 million, RMB213.5 million and RMB265.0 million($36.3 million), respectively, representing a CAGR of 38%. In the years ended December 31,2006 and 2007, we generated net revenue of RMB213.5****millionand RMB265.0 million ($36.3 million), respectively, representing an increase of24.1% over such period. Our revenue is net of Chinese business taxes andrelated surcharges. Our net revenue from servicing the online degree programsis net of certain expenses paid by our university partners relating to theironline degree programs, including fees they pay to learning centers, and anytuition refunds paid by our university partners to students. For the yearsended December 31, 2004, 2005, 2006 and 2007, the percentage of grosstuition fees paid by our university partners to learning centers was 30%, 39%,39% and 40%, respectively.

 

Until 2005, we derived all of our revenue from the provision of servicesto online degree programs of universities in China. In 2005, we added three newlines of business (online tutoring, private primary and secondary schools andour FEC program), and in 2006 we added our BCIT program. The revenue from theseprograms is driven by the number of participating universities or schools, thenumber of revenue students and the fees charged for each student.

 

A significant portion ofour revenue is derived from a small number of our customers. For the yearsended December 31, 2004, 2005, 2006, and 2007, 87.7%, 71.4%, 67.3% and 68.2%,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 17.8%, 18.6% and 15.2%, respectively, of our net revenue forthe year ended December 31, 2006 and 21.1%, 17.3% and 14.0%, respectively,of our net revenue for the year ended December 31, 2007.

 

***Segment Information***

 

We operate through four reporting segments that offer distincteducational services: online degree programs, international curriculumprograms, online tutoring and private primary and secondary schools. Theinternational curriculum program segment includes both English languageprograms and international polytechnic curriculum programs.

 

The following table sets forth the net revenue for each segment and as apercentage of net revenue for the periods indicated.

 
| ** **                             | ** ** | **Years ended December 31,**           | ** ** |
|----------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                             | ** ** | **2005**                                              | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                             | ** ** | **RMB**                                               | ** ** | **% of net  revenue** | ** ** | **RMB** | ** ** | **% of net  revenue** | ** ** | **RMB** | ** ** | **$** | ** ** | **% of net  revenue** | ** ** |
| ** **                             | ** ** | **(In thousands, except percentages)** | ** ** |
| Net revenue:                           |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Online degree programs                 |       | 98,527                                                |       | 78.0 | % | 156,845 |   | 73.5 | % | 202,185 |   | 27,718 |   | 76.3 | % |
| International curriculum  program      |       | 4,854                                                 |       | 3.8 | % | 28,428 |   | 13.3 | % | 31,434 |   | 4,309 |   | 11.9 | % |
| Online tutoring programs               |       | 14,390                                                |       | 11.4 | % | 17,384 |   | 8.1 | % | 18,013 |   | 2,469 |   | 6.8 | % |
| Private primary and secondary  schools |       | 8,591                                                 |       | 6.8 | % | 10,874 |   | 5.1 | % | 13,356 |   | 1,831 |   | 5.0 | % |
| Total                                  |       | 126,362                                               |       | 100.0 | % | 213,531 |   | 100.0 | % | 264,988 |   | 36,327 |   | 100.0 | % |

 

*Online degree program revenue.    *We generate our online degree program revenue through various collaborativealliances and contractual arrangements with universities in China. We expectthat we will continue to earn the substantial majority of our revenue andprofits from this segment. Through collaborative alliances and otherrevenue-sharing arrangements, we provide a comprehensive service platform toour university customers, including academic program development, technologyservices, enrollment marketing, student support services and financeoperations. We first launched our services to the Renmin University of Chinaonline degree program with 400 students registered in 1999. We currentlyprovide services to nine universities (with three additional universitiesawaiting regulatory approval), five of which are structured as collaborativealliances and four of which are structured as contractual service arrangements.Our collaborative alliances and service arrangements are based on long-termcontracts that vary from eight years to 50 years.

 

As of December 31, 2007, our university partners had, in the aggregate,approximately 192,000 revenue students. Our service fees are determined by theagreements we have with each university, as well as the terms of the agreementsthat each university negotiates annually with the learning centers that providecertain essential services to students for their online degree programs.University online degree programs generally require students to prepay tuitionfees for a set number of courses at the outset of their enrollment. The prepaidtuition fees may cover courses to be taken by the students beyond theparticular six-month semester in which the fees are paid and may cover coursesto be taken over a period of one year or longer. Under our service contractswith the universities, our service fees for each semester are calculated based

 

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upon on a share ofactual cash tuition received by the university for such semester, includingtuition pre-payments for courses to be taken in the future, after deductingcertain expenses of the university for such semester, which consist of servicefees paid to learning centers as well as any tuition refunds due to studentsand administrative expenses. We provide technology and support services to ouruniversity partners’ online degree programs rather than directly to students.We are not responsible for academic instructional support and its associatedcosts. As a result, we recognize these service fees as revenue over the courseof the relevant six-month academic semester for which we provide services toour university customers rather than over the period the universities provideservices and support to their students.

 

In addition to our exclusive service arrangements with theseuniversities, prior to 2005, we provided technical services to otheruniversities with respect to the design and installation of network platformsand courseware for their online degree programs.

 

*International curriculum programrevenue.    *We combineour English language, or FEC, and international polytechnic education, or BCIT,business lines into our international curriculum segment. We generate ourrevenue in this segment through contractual arrangements with Western Instituteof Technology at Taranki, New Zealand, or WITT, which provides the FEC programthat we offer to secondary schools in China, and with the British ColumbiaInstitute of Technology, or BCIT, which provides the post secondary educationprograms that we offer to polytechnic colleges in China. We acquired ourinterest in the FEC program in September 2005 and our interest in the BCITprogram in February 2006. We are the exclusive supplier to all of WITT’sFEC programs within China until September 2020 and the exclusive supplierto BCIT for the BCIT programs of selected polytechnic colleges in Chinaapproved by BCIT from time to time until January 2020. Our revenue in thissegment depends upon the number of schools participating in the programs, thefees charged for the programs and the number of students enrolled in theprograms. During the 2006-2007 academic year, approximately 4,700 students wereenrolled in the international curriculum programs.******Our service fees from the FEC and BCITprograms are received from schools in the fall of each year on the basis of thenumber of students enrolled in the program at each school for the upcomingacademic year and are recognized ratably over the twelve-month period as ourservices are delivered.

 

The results of operations of our international curriculum programs willdepend significantly on the number of schools and students enrolled in theseprograms and the amount per student that we receive. Due to recentdevelopments, we expect our future results for our international curriculumprograms to be adversely affected. Our net revenue from our FEC program hasbeen below our previous expectations, and our managementhas significantly adjusted downward our profitability forecast for this portionof our business, as a result of lower student numbers andlower per student amounts payable to us under our contractual arrangements withparticipating schools. These developments are the result of increasedcompetition, increased bargaining power of the schools participating in theprogram and our expansion of the program into less affluent areas of China,where tuition fees tend to be lower. As a result of these developments, we incurred a goodwill impairment charge of RMB16.2 million during the year ended December 31, 2007. We also expect that these developments will adversely affect thefuture financial results of our FEC program. In additionto these developments with respect to our FEC program, in April 2007, theMOE issued a circular directing provincial governments generally to suspend theapproval of any new Chinese-foreign cooperative polytechnic educational programsuntil the end of 2008. As a result, our BCIT program has not been able tocontract new schools for the program and we do not expect it to until at least2009. Because of these factors, we expect the future financial results for ourinternational curriculum programs to be adversely affected.

 

*Online tutoring revenue.    *We generate our online tutoring and test preparation services revenuefrom the sale to students and their parents, most of which are made throughdistributors, of a tutoring and test preparation program known as the 101Online School. After paying a subscription fee based on the desired use period,a student has direct access to online tutoring materials. Our service fees fromthis business line depend upon the number of students enrolled in the onlinetutoring and test preparation programs and the level of fees charged. Ourservice 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.

 

*Private primary and secondary schools revenue.*    In 2005, we acquired three private primary andsecondary schools in medium-sized cities in China: the Anqing Foreign LanguageSchool in Anqing, Anhui province, or Anqing School; the Jingzhou School(Southern Campus) in Jingzhou, Hubei province; and the Pingdingshan BilingualSchool in Pingdingshan, Henan province, or Pingdingshan School. Two of ourschools, Anqing School and Pingdingshan School, are operational. Our operationof the Jingzhou School (Southern Campus) will begin only after we complete thebuilding of a new Southern campus (we do not own or operate the Northerncampus), construction of which we expect to be completed in the Fall of 2009.Our revenue from these schools is based on the number of students enrolled andtuition fees charged. The Anqing School had approximately 1,400 studentsenrolled in the 2006-2007 academic year and the Pingdingshan School had anenrollment of approximately 1,250 students in the 2006-2007 academic year.****Jingzhou School (Southern Campus) will

 

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have capacity toserve approximately 6,000 students when it becomes operational, which isexpected to occur in the Fall of 2009. However, we cannot assure you that the school will become operationalat that time, or at all. The tuition paymentsof each private primary and secondary school are received in advance on asemester basis, and revenue is recognized ratably over the applicable period asthe education services are delivered. As is the case with most private schoolsin China, our tuition rates are subject to review and approval by the pricingauthority and education authority and is set for a particular entering class ofstudents and remain the same through completion of the students’ studies.

 

***Net Revenue***

 

Our revenue is reported net of business taxes and related surchargesthat are levied on our total revenue. Most of our revenue, except those fromprimary and secondary schools, is subject to Chinese business tax at rates ofup to 5.5%. Our primary and secondary schools are exempted from business tax. Asmall percentage of revenue from our online degree program services is subjectto VAT, but we are eligible to receive rebates for a portion of the VAT we paypursuant to applicable PRC tax regulations. All rebates received or receivableby us and not subject to future return or reimbursement are included in our netrevenue. We incurred business taxes of RMB2.3 million, RMB4.4 million, RMB6.2million and RMB7.4****million ($1.0****million) in the years ended December 31, 2004, 2005,2006 and 2007, respectively.

 

**Cost of Revenue**

 

We record cost of revenue separately for each of our reportablesegments. The following table sets forth our cost of revenue for each segmentand as a percentage of our net revenue for the periods indicated.

 
| ** **                             | ** ** | **Years ended December 31,**           | ** ** |
|----------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                             | ** ** | **2005**                                              | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                             | ** ** | **RMB**                                               | ** ** | **% of net  revenue** | ** ** | **RMB** | ** ** | **% of net  revenue** | ** ** | **RMB** | ** ** | **$** | ** ** | **% of net  revenue** | ** ** |
| ** **                             | ** ** | **(In thousands, except percentages)** | ** ** |
| Cost of revenue:                       |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Online degree programs                 |       | 38,748                                                |       | 30.7 | % | 51,215 |   | 24.0 | % | 58,027 |   | 7,956 |   | 21.9 | % |
| International curriculum  programs     |       | 3,627                                                 |       | 2.9 | % | 17,212 |   | 8.1 | % | 23,503 |   | 3,222 |   | 8.9 | % |
| Online tutoring programs               |       | 2,902                                                 |       | 2.3 | % | 3,452 |   | 1.6 | % | 3,875 |   | 531 |   | 1.5 | % |
| Private primary and secondary  schools |       | 7,861                                                 |       | 6.2 | % | 8,429 |   | 3.9 | % | 10,944 |   | 1,500 |   | 4.1 | % |
| Total                                  |       | 53,138                                                |       | 42.1 | % | 80,308 |   | 37.6 | % | 96,349 |   | 13,209 |   | 36.4 | % |

 

The share-based compensation cost for employees directly engaged inrevenue generation is included in our cost of revenue. Those costs wereRMB0.4 million in 2004, RMB0.4 million in 2005, RMB0.5 millionin 2006, and RMB0.35 million ($0.05 million) in 2007, representing 1.0%, 0.7%,0.6%, and 0.4% of our total cost of revenue in each of these periods,respectively.

 

The amortization ofintangible assets acquired through business combinations directly used inrevenue generation is included in our cost of revenue. Those costs were RMB2.1million in 2005, RMB4.2 million in 2006 and RMB4.0 million ($0.54 million) in2007, representing 3.9%, 5.2% and 4.1% of our total cost of revenue in each ofthese periods, respectively. There were no intangible assets acquired throughbusiness combination during 2004.

 

*Online degree programs*.    Cost of revenue for our online degree servicesconsists primarily of employee compensation and benefits, includingperformance-based compensation, for our project management teams and technicalpersonnel that directly support our university partners’ programs. Theperformance-based compensation is payable by the collaborative alliance to itsmanagement annually if certain annual performance targets set by the board ofthe collaborative alliance are met. Our cost of revenue also includes rent,academic program development and other direct costs associated with maintainingour service offerings. Depreciation of facilities and equipment andamortization of intangible assets acquired through business combination arealso included in cost of revenue for this segment.

 

*International curriculumprograms.    *Cost ofrevenue for international curriculum program services consists primarily ofcompensation and benefits for the native English-speaking teachers contractedfor the program and licensing and registration fees payable to WITT and BCIT.The licensing fees payable to WITT are generally determined on the basis of afixed fee for each participating student. The registration fees that we pay toBCIT are determined on the basis of the number of students enrolled in theprogram, and the licensing fees we pay to BCIT are based on the number andselection of subjects provided to the polytechnic schools. We also incur traveland lodging costs of students participating in the summer and winter programsabroad and travel and lodging related to training for senior employees in ourBCIT program and our FEC program, as well as costs associated with theamortization of intangible assets acquired through business combination.

 

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*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.

 

*Private primary andsecondary schools.    *Cost of revenue for our private primary and secondary schools consistsprimarily of employee compensation and benefits for the teachers andadministrative staff employed at the schools, depreciation for the facilitiesand equipment and lease payments for premises and payments of user fees for theuse by our Anqing School of certain facilities of the Fourth Middle School ofAnqing.

 

***OperatingExpenses***

 

Our operating expenses consist of generaland administrative expenses, selling and marketing expenses, research anddevelopment expenses, and share-based compensation is allocated to each itembased on the nature of the service rendered by the employees who received thebenefit. The following table sets forth our operating expenses for each item andas a percentage of net revenue for the periods indicated.

 
| ** **                 | ** ** | **Years ended December 31,** | ** ** |
|----------------------------|------------|-----------------------------------|------------|
| ** **                 | ** ** | **2005**                          | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                 | ** ** | **RMB**                           | ** ** | **% of net  revenue** | ** ** | **RMB** | ** ** | **% of net  revenue** | ** ** | **RMB** | ** ** | **$** | ** ** | **% of net  revenue** | ** ** |
| ** **                 | ** ** | ** **                        | ** ** | ** ** | ** ** | **(In thousands, except  percentages)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating  expenses        |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| General and administrative |       | 44,089                            |       | 34.9 | % | 48,846 |   | 22.9 | % | 76,893 |   | 10,541 |   | 29.0 | % |
| Selling and marketing      |       | 6,116                             |       | 4.8 | % | 12,893 |   | 6.0 | % | 14,277 |   | 1,957 |   | 5.4 | % |
| Research and development   |       | 11,842                            |       | 9.4 | % | 14,263 |   | 6.7 | % | 21,021 |   | 2,882 |   | 7.9 | % |
| Goodwill impairment        |       | —                            |       | — |   | — |   | — |   | 16,192 |   | 2,220 |   | 6.1 | % |
| Total                      |       | 62,047                            |       | 49.1 | % | 76,002 |   | 35.6 | % | 128,383 |   | 17,600 |   | 48.4 | % |

 

*General and administrative*

 

Our general and administrative expensesconsist primarily of employee compensation and benefits, rent, administrativeoffice expenses and depreciation. Our general and administrative expenses alsoinclude the amortized portion of deferred share-based compensation foremployees not directly engaged in revenue generation. Our share-basedcompensation included in general and administrative expenses was RMB2.7 millionin 2004, RMB2.0 million in 2005, RMB1.9 million in 2006 and RMB3.0million ($0.41****million) in 2007, representing10.1%, 4.5%, 4.0% and****3.8% of ourtotal general and administrative 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 requirementsthat are applicable to us as a public company listed in the United States.

 

*Selling and marketing*

 

Our selling and marketing expenses consistprimarily of employee compensation and benefits, advertising, industryconferences and travel. Other significant components include marketingactivities and research, consulting fees and costs of maintaining sales anddistribution offices.

 

Our selling and marketing expenses includethe share-based compensation for employees working in sales and marketing. Ourshare-based compensation included in selling and marketing expenses wasRMB0.2 million ($0.03 million) in each of the years ended December 31,2006 and 2007, representing 1.6% of our total selling and marketing expenses inthese periods. We had no share-based compensation applicable to sales andmarketing personnel in 2004 or 2005.

 

Ourselling and marketing expenses also include the amortization of intangibleassets acquired through business combination which benefited our sales andmarketing efforts. Those costs were RMB1.1 million in 2005, RMB3.3 million in2006 and RMB3.3 million ($0.45 million) in the year ended December 31,2007, representing 18.4%, 25.4% and 23.0% of our total selling and marketingexpenses in each of these periods, respectively.

 

*Research and development*

 

Our research and development expenses consistprimarily of employee compensation and benefits and other personnel-relatedcosts associated with development of new or enhanced technologies, products andservices. Our research and development expenses also include share-basedcompensation for employees working in research and development. In 

 

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2006 and 2007, our research and developmentexpenses largely have related to our online degree programs. We expense allresearch and development costs when incurred.

 

Ourshare-based compensation expenses included in research and development wereRMB0.04 million, RMB0.1 million and RMB0.1 million ($0.02 million) in theyears ended December 31, 2005, 2006 and 2007, respectively. These amountsrepresent less than****1% of ourtotal research and development expenses in each of these periods.

 

**Share-Based CompensationExpenses**

 

We grant share options to our employees anddirectors. Prior to January 1, 2006, we accounted for employee share-basedcompensation in accordance with Accounting Principles Board Opinion No. 25,*Accounting for Stock Issued to Employees*,or APB Opinion 25, and its related interpretations which required us to recorda compensation charge for the excess of the fair value for the share at the grantdate over the amount an employee must pay to acquire the share. Thecompensation expense is recognized on a straight-line basis over the applicableservice period, which is usually the vesting period.

 

In December 2004, the FinancialAccounting Standards Board, or FASB, issued Statements of Financial AccountingStandard No. 123R, or 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, weadopted SFAS No. 123R and recognized compensation cost on a straight-linebasis over the requisite service period which is the vesting period. We usedthe prospective method. Under this method, share-based compensation expenserecognized includes: compensation expense for all share-based compensationawards granted prior to, but not yet vested as of January 1, 2006 based onthe intrinsic value as of the grant date, and compensation expense for allshare-based compensation awards granted on or subsequent to January 1,2006, based on grant-date fair value.

 

For share-based compensation awards thatwere granted prior to January 1, 2006 that are not yet vested and continueto be reported under APB Opinion 25, the following is our pro forma net incomethat would have been reported if such awards were accounted for under SFAS No. 123R:

 
| ** **                                                            | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                            | ** ** | **2005**                          | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                                            | ** ** | **RMB**                           | ** ** | **RMB** | ** ** | **RMB** | ** ** | **$** | ** ** |
| ** **                                                            | ** ** | **(In thousands)**                | ** ** |
| Net  income, as reported                                              |       | (2,850                            | )          | 25,539 |   | 2,487 |   | 341 |   |
| Add: Share-based compensation as reported                             |       | 2,378                             |       | 2,711 |   | 3,643 |   | 499 |   |
| Less: Share-based compensation determined  usingthe fair value method |       | 7,596                             |       | 7,355 |   | 7,108 |   | 974 |   |
| Pro forma net income (loss) attributable  toordinary shareholders     |       | (8,068                            | )          | 20,895 |   | (978 | ) | (134 | ) |

 

Wehad share-based compensation expenses of RMB3.1 million, RMB2.4 million,RMB2.7 million and RMB3.6 million ($0.5 million) for the years ended December 31,2004, 2005, 2006, and 2007, respectively. At December 31, 2007, ourunrecognized share-based compensation costs totaled RMB9.1 million ($1.25million), which is expected to be recognized over a weighted average vestingperiod of 2.06 years.

 

Our share-based compensation charges havebeen allocated to cost of revenue, general and administrative, selling andmarketing and research and development expenses in line with the nature of theservice rendered by the employee who received the benefit.

 

The allocation of share-based compensationexpenses is listed in the table below:

 
| ** **                          | ** ** | **Years ended December 31,**       | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|
| ** **                          | ** ** | **2005**                                | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                          | ** ** | **RMB**                                 | ** ** | **% of net  revenue** | ** ** | **RMB** | ** ** | **% of net  revenue** | ** ** | **RMB** | ** ** | **$ ** | ** ** | **% of net  revenue** | ** ** |
| ** **                          | ** ** | **(In thousands, except  percentages)** | ** ** |
| Share-based  compensation expenses: |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenue                     |       | 369                                     |       | 0.3 | % | 468 |   | 0.2 | % | 346 |   | 47 |   | 0.1 | % |
| General and administrative          |       | 1,965                                   |       | 1.6 | % | 1,942 |   | 0.9 | % | 2,960 |   | 406 |   | 1.1 | % |
| Selling and marketing               |       | —                                  |       | — |   | 205 |   | 0.2 | % | 222 |   | 30 |   | 0.08 | % |
| Research and development            |       | 44                                      |       | 0.0 | % | 96 |   | — |   | 115 |   | 16 |   | 0.04 | % |
| Total                               |       | 2,378                                   |       | 1.9 | % | 2,711 |   | 1.3 | % | 3,643 |   | 499 |   | 1.3 | % |

 

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**Taxation**

 

***Cayman Islands***

 

We are incorporated in the Cayman Islands.Under the current laws of the Cayman Islands, we are not subject to tax onincome or capital gain. In addition, upon payments of dividends by us to ourshareholders, no Cayman Islands withholding tax will be imposed.

 

***PRC***

 

Prior to January 1, 2008, Chinesedomestic enterprises were subject to enterprise income tax at the rate of 33%,and foreign-invested enterprises, or FIEs, that are incorporated in China weresubject to enterprise income tax at the rate of 30% and a local income tax atthe rate of 3%. As discussed below, effective January 1, 2008, generallyChinese domestic enterprises are subject to enterprise income tax at the rateof 25%, and foreign-invested enterprises, or FIEs, that are incorporated inChina are subject to enterprise income tax at the rate of 25%.****However, Chinese law provides favorable tax treatments toenterprises that satisfy certain conditions. For example, enterprises thatqualify as “high and new technology enterprises” and are registered and operatein specified high-tech zones in China are subject to a reduced enterpriseincome tax rate of 15%. Moreover, some local rules provide furtherfavorable tax treatments to those “high and****new technologyenterprises,” including income tax exemptions of 50% or 100%. Eight of ourChinese subsidiaries and one of our Chinese affiliated entities have qualifiedas “high and****new technology enterprises”****and as a result have been granted income tax exemptions, ortax holidays, under local rules. As a result, each of these entities is or wasentitled to a two- or three-year enterprise income tax exemption from thecommencement of its tax holiday and a 7.5% enterprise income tax rate for thesubsequent three years. These entities will also be subject to a reduced incometax rate of 15% for so long as they continue to qualify as a “high and****new technology enterprise,” and the law authorizing thesereduced tax rates remains in effect. Local income taxes (at the rate of 3%)apply only to one of our subsidiaries, Beijing BCIT Science and EducationManagement Consulting Limited, or BCIT Management. Our other subsidiaries havebeen exempted from local income taxes. The table below sets forth the nationalincome tax benefits applicable to these entities.

 
| **Entity**                                              | ** ** | **Applicable  Chinese united income   tax rate********%** | ** ** | **Concession from  Chinese unified income tax**                                                       |
|---------------------------------------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|
| CMR Web                                                 |       | 15                                                        |       | Full exemption for the period from 1999 to 2001  and a 50% reduction for the period from 2002 to 2004 |
|                                                    |       |                                                      |       |                                                                                                  |
| Hongcheng Technology                                    |       | 15                                                        |       | Full exemption for the period from 2001 to 2003  and a 50% reduction for the period from 2004 to 2006 |
|                                                    |       |                                                      |       |                                                                                                  |
| Hongcheng Liye                                          |       | 15                                                        |       | Full exemption for the period from 2003 to 2005  and a 50% reduction for the period from 2006 to 2008 |
|                                                    |       |                                                      |       |                                                                                                  |
| Hongcheng Education                                     |       | 15                                                        |       | Full exemption for the period from 2005 to 2007  and a 50% reduction for the period from 2008 to 2010 |
| .                                                       |       |                                                      |       |                                                                                                  |
| Dalian Dongcai  Technology Co., Ltd                     |       | 15                                                        |       | Full exemption for the period from 2003 to 2004  and a 50% reduction for the period from 2005 to 2007 |
|                                                    |       |                                                      |       |                                                                                                  |
| Chongqing Chongda  Yuanxing Technology Co., Ltd.        |       | 15                                                        |       | Full exemption for the period from 2006 to 2007  and a 50% reduction for the period from 2008 to 2010 |
|                                                    |       |                                                      |       |                                                                                                  |
| Beijing Xuezhi Times  Education Science Co., Ltd.  |       | 15                                                        |       | Full exemption for the period from 2002 to 2004  and a 50% reduction for the period from 2005 to 2007 |
|                                                    |       |                                                      |       |                                                                                                  |
| Beijing WITT Education  Consultant Management Co., Ltd. |       | 15                                                        |       | Full exemption for the period from 2003 to 2005  and a 50% reduction for the period from 2006 to 2008 |

 

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| Zhong Nongda Networks  Development Co., Ltd. |   | 15     |   | Full exemption for the period from 2002 to 2004  and a 50% reduction for the period from 2005 to 2007 |
|----------------------------------------------|--------|--------|--------|-------------------------------------------------------------------------------------------------------|
|                                         |   |   |   |                                                                                                  |
| Beijing Ming Dao Yuan  Technology Co., Ltd.  |   | 15     |   | Full exemption for the period from 2007 to 2009  and a 50% reduction for the period from 2010 to 2012 |
|                                         |   |   |   |                                                                                                  |
| Beijing Beiyu Da  Technology Co., Ltd.       |   | 15     |   | Full exemption for the period from 2006 to 2008  and a 50% reduction for the period from 2009 to 2011 |

 

Preferential tax treatments granted to ourChinese entities by Chinese governmental authorities are subject to review andmay be adjusted or revoked at any time. The expiration of our remaining taxexemptions will cause our effective tax rate to increase. In addition, so longas we continue to recognize share-based compensation expense in future periods,our effective tax rate will exceed the statutory tax rate, since share-basedcompensation is not deductible for Chinese tax purposes.

 

The amount of income tax payable by ourChinese subsidiaries in the future will depend on various factors, including,among other things, their results of operations and taxable income, and thestatutory tax rate. Our effective tax rate depends in part on the extent ofeach of our subsidiaries’ relative contribution to our consolidated taxableincome. As our business expands, we may establish new entities from time totime 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, someof our Chinese subsidiaries and Chinese affiliated entities have accumulatedtax loss carryforwards that have not previously been recognized as deferred taxassets because there was significant uncertainty as to whether we would be ableto realize the benefit from those tax loss carryforwards. To the extentpermitted by Chinese tax rules, we will seek to undertake furtherreorganizations or transactions among our subsidiaries and Chinese affiliatedentities or with third parties to utilize some or all of these tax losscarryforwards before they expire, or qualify for additional tax benefits, butthere is no assurance we will be able to do so.

 

In March 2007, the National People’sCongress of China enacted a new Enterprise Income Tax Law, which becameeffective on January 1, 2008. The new tax law imposes a unified income taxrate of 25% on all domestic enterprises and foreign-invested enterprises,unless they qualify for lower rates under certain limited exceptions. The newtax law permits companies to continue to enjoy their existing preferential taxtreatment until those treatments expire in accordance with their current terms.Under the new tax law, “high and new technology enterprises” speciallysupported by the Chinese government continue to enjoy a reduced nationalenterprise tax rate of 15%. Pursuant to Circular 172, which was issued on April 14,2008, in order 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”. If our subsidiaries andaffiliated companies fail to maintain their status as a “high and newtechnology enterprises” or fail to qualify for special support from the Chinesegovernment, our Chinese subsidiaries will be subject to the 25% unifiedenterprise income tax rate beginning in 2008.

 

We expect that our applicable Chinesesubsidiaries and Chinese affiliated entities will apply for the “new and hightechnology enterprises” status once the new implementation rules areissued. But under applicable accounting rules, until these subsidiaries andaffiliated entities receive official approval as “high and new technologyenterprises strongly encouraged by the State,” they must now use the uniformenterprise income taxed rate of 25% in the calculation of their deferred taxliabilities. This resulted in an increase in our deferred taxexpense for the year ended December 31, 2007 of RMB4.9 million ($0.7million).

 

Under the previous Chinese tax law, dividendpayments to foreign investors made by FIEs, such as our Chinese subsidiaries,were exempt from PRC withholding tax. Pursuant to the new Chineseenterprise income tax law that became effective on January 1, 2008, the implementation rules and other recently issued regulations,dividends payable by an FIE to its foreign 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), and dividends declaredfrom earnings through December 31, 2007 are exempted from Chinesewithholding tax. The CaymanIslands, where we are incorporated, does not have a tax treaty with China. TheChinese tax authorities have also clarified that distributions made from pre-January 1,2008 retained earnings will not be subject to the withholding tax. In addition,under the new tax law, enterprises organized 

 

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under the law of jurisdictions outside Chinathat have their “de facto management bodies” located within China may beconsidered to be Chinese resident enterprises and therefore subject to Chineseenterprise income tax at the rate of 25% on their worldwide income. The new taxlaw, however, does not define the term “de facto management bodies.” If amajority of the members of our management team continue to be located in Chinaafter the effective date of the new tax law, we may be considered to be aChinese resident enterprise and therefore subject to Chinese enterprise incometax at the rate of 25% on our worldwide income. We do not plan to declareor pay any dividends 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 for use in the operation and expansion of our business. As of December 31,2007, we have notdeclared or paid any dividends on our ordinary shares or ADSs.

 

**Critical AccountingPolicies**

 

We prepare financial statements inconformity with U.S. GAAP, which requires us to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, disclosure ofcontingent assets and liabilities on the date of the financial statements, andthe reported amounts of revenue and expenses during the financial reportingperiod. We continually evaluate these estimates and assumptions based on themost recently available information, our own historical experience and variousother assumptions that we believe are reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Since the use of estimates is an integral component of the financial reportingprocess, actual results could differ from those estimates. Some of ouraccounting policies require higher degrees of judgment than others in theirapplication. We believe the following accounting policies involve the mostsignificant judgments and estimates used in the preparation of our financialstatements.

 

Since we generate all of our revenue fromcustomers in China, we do not account for our results of operations on ageographical basis.

 

***RevenueRecognition***

 

Our revenue is principally derived from fourprimary sources: (i) the provision of bundled online education technicaland consulting services; (ii) the provision of traditional classroomeducation services; (iii) the provision of online tutoring services; and (iv) thelicensing of online education technology platform and courseware for onlineeducation purposes. Revenue is recognized when earned and is reported net ofbusiness taxes which totaled RMB2.3 million, RMB4.4 million, RMB6.2 million andRMB7.4 million ($1.0 million) for the years ended December 31, 2004, 2005,2006 and 2007, respectively.

 

*Online education technicaland consulting services*

 

Our primary business is to provide onlineeducation technical and consulting services to the online degree programs ofleading Chinese universities. These services include academic programdevelopment, technology services, enrollment marketing, student support services,and finance operations. Since each of the services does not have a stand-alonevalue to the universities, these services are accounted for as one unit ofaccounting and the related revenue is recognized ratably over the serviceperiod. We primarily host the online education technology on our system andprovide access to the universities to whom we provide services and theirstudents. Any universities that prefer hosting the online education platform orcourseware on their own systems must enter into separate arrangements with us.

 

We receive service fees from theuniversities each semester covering services to be provided to the universitiesduring that semester. The amount of service fees to be received by us isderived from tuition fees the universities collect from their students at thebeginning of each semester adjusted for the universities’ costs and expensessuch as refunds to students, fees to other service providers, and otheroperating costs and expenses.

 

Fees received are initially recorded asdeferred revenue and are recognized as revenue ratably over the six-monthschool semester during which we provide the services. The semesters generallybegin in April and October of each calendar year. We do not provideservices directly to the students and do not have obligations to the students.

 

*Traditional classroomeducation services*

 

We operate a number of private primary andsecondary schools, market and support international post-secondary and Englishlanguage curriculum programs to established learning institutions. Fees fromprivate and secondary schools operations are initially recorded as deferredrevenue at the time the students register for their classes and we receivepayments. Students must register and pay for their classes at the beginning ofeach semester. Revenue is recognized ratably 

 

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over the service period, which is six monthsfor each school semester, as the education services 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 andEnglish language curriculum programs, students must register and pay for theirclasses at the beginning of each semester. Fees collected from the provision ofteaching and other support services to the learning institutions are recognizedwhen such services are provided, or recognized on a straight-line basis overthe service period, which is typically the six-month school semester.

 

*Online tutoring services*

 

We offer online interactive tutoringservices to primary and secondary students. These services allow the customersaccess to the online education services over a fixed period of time, generallyranging from one month to three years, through the use of prepaid cards. Theprepaid cards are sold to distributors, from whom we collect payments when theprepaid cards are delivered to the distributors. The distributors then resellthe cards to end users. All prepaid fees received from distributors areinitially recognized as deferred revenue and revenue is recognized ratably overthe applicable period that we provide services.

 

*Licensing of onlineeducation technology platform and courseware*

 

We license our online education technologyplatform and courseware to universities and other education companies and alsoprovides post contract customer support, or PCS, which includes telephonesupport and unspecified upgrades on a when-and-if available basis. We recognizerevenue from licensing of online education technology platform and coursewarewhen persuasive evidence of an agreement exists, delivery of the services hasoccurred, the fee is fixed or determinable, and collectability is probable. Aswe do not have vendor-specific objective evidence to establish the fair valuesof the undelivered elements, we recognize revenue from the licensing of onlineeducation technology platform and courseware over the PCS period, which istypically 12 months.

 

Revenue from the licensing of onlineeducation technology network platform and courseware also includes the rebateof value added taxes. The value added taxes rebate program is part of theChinese government’s strategy to encourage high technology development inChina. Because we cannot estimate when or if a rebate will be provided by theChinese tax authorities, rebates are recorded as a component of revenue whenreceived and are not subject to future return or reimbursement. Rebatesreceived by us during 2004, 2005, 2006 and the year ended December 31,2007 were RMB1.0 million, RMB1.1 million, RMB1.7 million and RMB2.4 million($0.3 million), respectively.

 

***NetRevenue from Related Parties***

 

A majority of our revenue is revenue fromrelated parties. Our revenue from related parties is derived primarily fromproviding services to the online degree programs of universities in China. Wecurrently have service contracts with four universities whereby we have formeda subsidiary with a minority interest held by the universities, which in turnprovides services to the universities’ online degree programs. Because theseuniversities are the minority shareholders of our subsidiaries, theseuniversities are considered related parties to us, and we record the revenuereceived by the subsidiaries that provide services to such universities’ onlinedegree programs as revenue from related parties.

 

***NetRevenue from Third Parties***

 

Until 2005, our net revenue from thirdparties consisted of the provision of online education technical and consultingservices and the licensing of online education technology platform andcourseware. Since 2005, our services to third parties have expanded to includethe following components: online interactive tutoring services to primary andsecondary students, and operating private primary and secondary schools,marketing and supporting international post-secondary and English languagecurriculum programs.

 

***IncomeTaxes***

 

We account for income taxes under theprovisions of SFAS No. 109, *Accountingfor Income Taxes*, with the required disclosures as described in Note12 to our consolidated financial statements. Accordingly, our deferred incometaxes are recognized for temporary differences between the tax basis of assetsand liabilities and their reported amounts in the consolidated financialstatements, net operating loss carryforwards, and credits by applying enactedstatutory tax rates applicable to future years. Deferred tax assets are reducedby a valuation allowance when, in the opinion of management, it is more likelythan 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, 2005, 2006 and 2007,

 

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valuation allowances recognized were RMB0.6million, RMB0.7 million and RMB0.4 million, respectively.  Valuation allowances were provided forbecause it was more likely than not that we would not be able to utilizecertain tax loss carryforwards generated by our subsidiaries and consolidatedvariable interest entities before expiration. As of December 31, 2005,2006, and 2007, we have recorded deferred tax assets, net of valuationallowances, of RMB8.0 million, RMB7.4 million and RMB10.9 million,respectively.  We do not believe anyfurther valuation allowances to reduce our net deferred tax assets arenecessary as we currently anticipate future taxable profits that will allow usto fully utilize our net deferred tax assets in the foreseeable future. If afuture event not currently contemplated were to occur and prevent us fromrealizing all or part of our net deferred tax assets in the future, anadjustment to the valuation allowance will decrease our net income when thoseevents occur.

 

As a result of the implementation of FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes - aninterpretation of FASB Statement No. 109” (“FIN 48”), we recognized anincrease in the liability for unrecognized tax benefits of RMB3.7 million ($0.5million), which was accounted for as a reduction to our January 1, 2007balance of accumulated deficits.

 

Wehave adopted the accounting policy that interest recognized in accordance withparagraph 15 of FIN 48 and penalties recognized in accordance with paragraph 16of FIN 48 are classified as part of our income taxes. As a result, interest ofRMB0.5 million****($0.07 million) and penalties ofRMB0.09 million ($0.01 million) were recognized in our consolidated financialstatements for the year ended December 31, 2007.

 

***Share-BasedCompensation***

 

Effective January 1, 2006, we adoptedthe fair value recognition provisions of SFAS No. 123R, using theprospective transition method. Under this method, share-based compensationexpense recognized beginning January 1, 2006 includes: compensationexpense for all share-based compensation awards granted prior to, but not yetvested as of, January 1, 2006 based on the intrinsic value as of the grantdate under APB 25, and compensation expense for all share-based compensationawards granted on or subsequent to January 1, 2006 based on grant-datefair value under SFAS No. 123R. We recognize share-based compensationcosts on a straight-line basis over the requisite service period which isgenerally the vesting period. For share-based compensation awards that weregranted 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.

 

As of December 31, 2007, under ourequity incentive plan there were options outstanding for the purchase of9,435,000 shares, and options for the purchase of 161,621 shares available forfuture grants. The share-based compensation expenses arising from the grantingof the options we have granted is being recognized over the applicable vestingperiod, which typically is three years.

 

Our share-based compensation charges havebeen allocated to cost of revenue, general and administrative, selling andmarketing and research and development expenses in line with the nature of theservice rendered by the employee who received the benefit.

 

With respect to all share-based compensationpaid prior to our initial public offering, we engaged American Appraisal ChinaLimited, or American Appraisal, an independent third party appraiser, to assistin our determination of the fair value of our ordinary shares and our shareoptions as of each relevant grant date.

 

American Appraisal used a combination of (i) thediscounted cash flow, or DCF, method, as the income approach and (ii) themarket approach to assess the fair value of ordinary shares underlying theoptions we granted from 2004 to 2007. The determination of the fair value ofour ordinary shares requires complex and subjective judgments to be maderegarding our projected financial and operating results, our unique businessrisks, the liquidity of our shares and our operating history and prospects atthe time of each grant.

 

The major assumptions used in calculatingthe fair value of our ordinary shares included:

 

·                  *Weighted average cost of capital, or WACC.*    WACCs of between 18% and****19%were used. The WACC used increased from 18% in 2004 to 19% in 2007. ** **This increase was theresult of a rapid expansion of our business through acquisitions andcollaborative alliances with new university partners.

 

·                  *Comparable companies.*    In deriving discount rates and market multiples,the following companies in the education industry publicly traded on securitiesmarkets in the United States were selected for reference as our guidelinecompanies: Apollo Group, Inc., Career Education Corporation, CorinthianColleges, Inc., DeVry, Inc., eCollege.com, Laureate Education Inc.,Strayer Education, Inc. and ITT Educational Services, Inc.

 

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·                  *Capital market valuation multiples.*    American Appraisal obtained and assessed updatedcapital market data of the selected comparable companies and used multiples ofenterprise value to revenue, or EV/Revenue, enterprise value to EBITDA, orEV/EBITDA, and enterprise value to EBIT, or EV/EBIT, for its valuations.

 

·                  *Discount for lack of marketability, orDLOM.    *American Appraisal quantified DLOM using the Black-Scholesoption-pricing model. This method treats the right to sell a company’s sharesfreely before a liquidity event as a put option. The further the valuation dateis from an expected liquidation event, the higher the put option value and thusthe higher the implied DLOM. DLOMs of between 10% and 31% were used in thevaluations.

 

The income approach involves applyingappropriate discount rates to estimated cash flows that are based on earningsforecasts. Our revenue and earning growth rates, as well as major milestonesthat we have achieved, contributed significantly to the increase in the fair valueof our ordinary shares. However, these fair values are inherently uncertain andhighly subjective. The assumptions used in deriving the fair values areconsistent with our business plan. These assumptions include: no materialchanges in the existing political, legal and economic conditions in China; nomajor changes in the tax rates applicable to our subsidiaries and affiliatedentities in China; our ability to retain competent management, key personneland staff to support our ongoing operations; and no material deviation inmarket conditions from economic forecasts. These assumptions are inherentlyuncertain. The risks associated with achieving our forecasts were assessed inselecting the appropriate discount rates, which ranged from 18% to 19%.

 

American Appraisal used the option-pricingmethod to allocate enterprise value to preferred and ordinary shares, takinginto account the guidance prescribed by the AICPA Audit and Accounting PracticeAid *Valuation of Privately-Held-CompanyEquity Securities Issued as Compensation,* or the Practice Aid. Thismethod involves making estimates of the anticipated timing of a potentialliquidity event, such as a sale of our company or an initial public offering,and estimates of the volatility of our equity securities. The anticipatedtiming is based on the plans of our board and management. Estimating thevolatility of the share price of a privately held company is complex becausethere is no readily available market for the shares. American Appraisalestimated the volatility of our shares based on historical volatility ofcomparable companies’ shares. Had we used different estimates of volatility,the allocations between preferred and ordinary shares would have beendifferent.

 

In assessing the fair value of our ordinaryshares, American Appraisal considered the following principal factors:

 

·                  Our financial and operating results;

 

·                  The economic outlook in general and the specific economic andcompetitive elements affecting our business, industry and market;

 

·                  The nature and prospects of the industry we operate in;

 

·                  The market-derived investment returns of entities engaged in a similarline of business and returns from other similar types of projects;

 

·                  The stage of development of our operation;

 

·                  Our business risks; and

 

·                  The assumptions and basis of the financial projections that we developed.

 

Because our option plan covers all of ouremployees, the change in the amount of share-based compensation expenses willprimarily affect our reported net income, earnings per share and all line itemsof our operating costs and expenses, which include cost of revenue, general andadministrative expenses, selling and marketing expenses and research anddevelopment expenses.

 

Since January 1, 2004, we have grantedoptions to our employees and directors under our share option plan as set forthin the following table. All of these grants were subject to retrospectivevaluations made by American Appraisal.

 
| ** **              | ** ** | **Shares   Underlying   Options   Granted** | ** ** | **Option Exercise Price** | ** ** | **Fair value of Ordinary  Shares** | ** ** |
|-------------------------|------------|---------------------------------------------|------------|-------------------------------------|------------|---------------------------------------------------|------------|
| March 19,  2008    |       | 730,000                                     |       | $                                   | 2.13       |                                              | $          | 2.13 |   |
| January 21,  2008  |       | 154,000                                     |       | $                                   | 2.07       |                                              | $          | 2.07 |   |
| December 11,  2007 |       | 40,000                                      |       | $                                   | 2.66       |                                              | $          | 2.66 |   |
| April 23,  2007    |       | 885,000                                     |       | $                                   | 2.86       |                                              | $          | 2.86 |   |
| March 14,  2006    |       | 1,056,350                                   |       | $                                   | 1.85       |                                              | $          | 1.85 |   |
| December 31,  2005 |       | 1,046,350                                   |       | $                                   | 1.58       |                                              | $          | 1.58 |   |
| August 31,  2005   |       | 610,000                                     |       | $                                   | 1.26       |                                              | $          | 1.26 |   |
| July 13,  2005     |       | 50,000                                      |       | $                                   | 1.26       |                                              | $          | 1.26 |   |
| April 30,  2005    |       | 350,000                                     |       | $                                   | 1.26       |                                              | $          | 1.26 |   |
| April 12,  2005    |       | 1,792,700                                   |       | $                                   | 1.26       |                                              | $          | 1.26 |   |
| December 10,  2004 |       | 660,000                                     |       | $                                   | 1.48       |                                              | $          | 0.86 |   |
| December 10,  2004 |       | 510,400                                     |       | $                                   | 0.86       |                                              | $          | 0.86 |   |
| December 10,  2004 |       | 294,000                                     |       | $                                   | 0.86       |                                              | $          | 0.86 |   |
| May 20,  2004      |       | 5,000                                       |       | $                                   | 1.09       |                                              | $          | 1.09 |   |
| March 14,  2004    |       | 1,536,600                                   |       | $                                   | 1.09       |                                              | $          | 1.09 |   |

 

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Since January 1, 2006, we haveaccounted for share-based compensation in accordance with SFAS No. 123R.Under the fair value recognition provision of SFAS 123R, share-basedcompensation cost is measured at the grant date based on the fair value of theaward and is recognized as an expense on a straight-line basis, net ofestimated forfeitures, over the requisite service period, which is generallythe vesting period.

 

American Appraisal used the Black-Scholesoption pricing model to determine the fair value of the employee share optionsat each option grant date since 2004 under assumptions outlined in thefollowing table:

 
| ** **                                | ** ** | **Options Granted  2004** | ** ** | **Options   Granted  2005** | ** ** | **Options   Granted  2006** | ** ** | **Options   Granted  2007** | ** ** |
|-------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Risk-free  interest rate range            |       | 3.1% - 4.0%     |       | 4.0% - 4.4%       |       | 4.7                         | %          | 4.5                         | %          |
| Expected  life range (number of years)(1) |       | 5.5 - 6.5       |       | 6.5                         |       | 4.8                         |       | 5.0                         |       |
| Expected  dividends                       |       | 0%                        |       | 0%                          |       | 0                           | %          | 0                           | %          |
| Expected  volatility(2)                   |       | 0%                        |       | 0%                          |       | 47.6                        | %          | 44.1                        | %          |

 

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(1)  Many ofour options are granted at-the-money, with an averaged vesting term of twoyears and a contractual term of 10 years. Based on this and the “simple” method(i.e. expected term = (vesting term + original contractual term) / 2) as setout in the Staff Accounting Bulletin No. 107*, Valuation of Share-Based Payment Arrangements for Public Companies,*issued by the SEC, the expected term of our options would be around six years.Since we recently completed our initial public offering, we believe ouremployees would most likely exercise their outstanding options well before theexpiry of the contractual term. Therefore, our estimate for the averageexpected term is shorter than six years.

 

(2)  Accordingto paragraph A22 of SFAS No. 123(R), a nonpublic entity will need toexercise judgment in selecting a method to estimate expected volatility andmight do so by basing its expected volatility on the average volatilities ofotherwise similar public entities. In determining our expected share pricevolatility, American Appraisal considered the averaged share price volatilityof public companies engaged in the educational business in the United Statesthat are similar to our business.

 

The determination of the fair value ofshare-based compensation awards as of the date of the grant using anoption-pricing model is affected by our share price as well as assumptionsregarding a number of complex and subjective variables, including our expectedshare price volatility over the term of the awards, actual and projectedemployee share option exercise behavior, risk-free interest rates and expecteddividends. When estimating the fair value of our ordinary shares, both internaland external sources of information are reviewed. While we were a privatecompany, the sources utilized to determine the fair value of the underlyingshares at the date of measurement were subjective in nature. Furthermore, weare required to estimate forfeitures at the time of grant and recordshare-based compensation expenses only for those awards that are expected tovest. If actual forfeitures differ from these estimates, we may need to revisethose estimates used in subsequent periods.

 

American Appraisal appraised the value ofour ordinary shares in respect of the following dates: March 14, 2004, December 10,2004, July 14, 2005, November 18, 2005, March 14, 2006 and April 23,2007.

 

The decrease in the fair value of ourordinary shares from $1.09 to $0.86 per share during the period of March 2004to December 2004 is a combined result of increased equity value anddilutive effect of issuance of new preferred shares and ordinary shares. Duringthe period the equity value (fair value of equity as a whole) of the Companyincreased from $21 million to $36 million due to the following factors:

 

·                  In December 2004, we increased our existing ownership of HongchengLiye from 60% to 100%, as a result of which our ownership interest in theservice provider to the online degree program of Dongbei University of Financeand Electronics increased from 42% to 70%. The Dongbei University online degreeprogram accounted for 18.6% of our net revenue in 2004.

 

·                  Our net revenue increased from RMB46.5 million in 2003 to RMB100.9million in 2004.

 

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·                  In December 2004, we completed a financing through the issuance of Series Bpreferred shares, resulting in net proceeds of RMB133 million.

 

                In the Series B preferred shares financing, we issued 12,140,495 Series Bpreferred shares. We also issued 4,432,000 ordinary shares in 2004. Thecombined result of these share issuances caused a decrease in the fair value ofour ordinary shares, from $1.09 in March 2004 to $0.86 in December 2004.

 

The increase in the fair value of ourordinary shares from $0.86 in December 2004 to $1.26 in July 2005primarily was attributable to the following developments during the period:

 

·                  In January 2005, we acquired an 80% equity interest in the 101Online School, thereby entering the online tutoring programs segment. The 101Online School, originally founded in 1996, already had an establishedreputation in its market when we acquired it.

 

·                  In May 2005, we acquired the Anqing School, thereby entering theprivate primary and secondary schools segment. The Anqing School is regarded asone of the leading schools in the market that it serves.

 

The increase in the fair value of ourordinary shares from $1.26 in July 2005 to $1.58 in November 2005primarily was attributable to the following developments during the period:

 

·                  In November 2005, we acquired a 55% equity interest in the existingservice provider to the online degree program of China Agricultural University.At the time of this acquisition, there were approximately 26,500 studentsregistered in China Agricultural University’s online degree program.

 

·                  Total revenue students (not including students in China AgriculturalUniversity’s online degree program) recruited by the other university onlinedegree programs serviced by us increased during this period, from 42,800 in thesecond quarter of 2005 to 48,700 in the fourth quarter of 2005.

 

·                  We acquired our FEC program in September 2005. At the time of thisacquisition, the FEC program had 18 participating secondary schools and 3,800enrolled students.

 

·                  We entered into a partnership with the Jingzhou High School to build andoperate a new private secondary school, Jingzhou School (Southern Campus), inHubei province.

 

The increase in the fair value of ourordinary shares from $1.58 in November 2005 to $1.85 in March 2006primarily was attributable to the following developments during the period:

 

·                  Our net revenue increased 25.2% from RMB100.9 million in 2004 toRMB126.4 million in 2005, primarily due to our acquisition of our onlinetutoring programs, the FEC program and our private and primary secondaryschools.

 

·                  In February 2006, we entered into a collaborative alliance withBeijing Language and Culture University, or BLCU, to provide services to BLCU’sonline degree program. At this time, we expected BLCU to be able to quicklycommence and expand its program. BLCU in fact was able to expand its programquickly, registering 4,700 online students in 2006.

 

The increase in fair value of our ordinaryshares from $1.85 in March 2006 to $2.86 in April 2007 primarily wasattributable to the following developments during the period:

 

·                  Our net revenue increased 69% from RMB126 million in 2005 to RMB213million in 2006. Our net operating income also increased from RMB11 million in2005 to RMB57 million in 2006.

 

·                  In February 2007, we received a provisional approval from the MOEto operate learning centers in China for a trial period of up to 18 months. Webelieve that opening learning centers will allow us to significantly enhanceour brand recognition, increase access to potential students for online degreeprograms.

 

·                  In May 2007, we hired an experienced chief financial officer tolead our accounting and finance team, who resigned from his position with theCompany effective March 31, 2008.

 

If factors change and we employ differentassumptions for estimating share-based compensation expense in future periodsor if we decide to use a different valuation model, our share-basedcompensation in future periods may differ 

 

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significantly from what we have recorded inprior periods and could materially affect our operating income, net income andnet income per share.

 

The Black-Scholes option-pricing model wasdeveloped for use in estimating the fair value of traded options that have novesting restrictions and are fully transferable, which are characteristics notpresent in our option grants. Existing valuation models, including theBlack-Scholes model, may not provide reliable measures of the fair value of ourshare-based compensation. Consequently, there is a risk that estimates of the fairvalues of our share-based compensation awards on the grant dates may besignificantly different from the actual values realized upon the exercise,expiration, early termination or forfeiture of those share-based payments inthe future. Certain share-based compensation awards, such as employee shareoptions, may expire worthless or otherwise result in zero intrinsic value ascompared to the fair value originally estimated on the grant date and reportedin our financial statements. Alternatively, values that are significantlyhigher than fair values originally estimated on the grant date and reported inour financial statements may be realized from these instruments. There iscurrently no market-based mechanism or other practical application to verifythe reliability and accuracy of the estimates stemming from these valuationmodels, nor is there a means to compare and adjust the estimates to actualvalues.

 

The application of the principles providedin SFAS 123R and Staff Accounting Bulletin No. 107 may be subject tofurther interpretation and refinement. There are significant differences amongvaluation models and there is a possibility that we will adopt differentvaluation models in the future. This may result in a lack of consistency infuture periods and materially affect the fair value estimates of share-basedcompensation awards. It may also result in a lack of comparability with othercompanies that use different models, methods and assumptions.

 

***Basis forConsolidation and Our Relationships with Our Chinese Affiliated Entities***

 

Substantially all of our operations areconducted in China through our three principal Chinese subsidiaries and throughcontractual arrangements with our Chinese affiliated entities. Our corporatestructure is designed to comply with current Chinese limitations on foreignownership of, and participation in, companies engaging in the education andtelecommunication sectors in China. We consolidate 100% of the interests of oursubsidiaries and Chinese affiliated entities.

 

We conduct some of our operations throughtwo Chinese affiliated entities, Xiandai Technology and Hongcheng Education, inwhich we do not directly hold any equity interest. We entered into contractualarrangements with these entities and their shareholders pursuant to which wemaintain effective control over these entities, bear all of their economic riskand receive substantially all of their economic rewards. In our consolidatedfinancial statements, we have consolidated all of the interests of XiandaiTechnology and Hongcheng Education under FASB Interpretation No. 46(Revised), *Consolidation of VariableInterest Entities, an Interpretation of ARB No. 51*, or FIN 46R.

 

FIN 46R requires a “variable interest entity”to be consolidated by the primary beneficiary of such entity. An entity isconsidered to be a variable interest entity if certain conditions are 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 primarybeneficiary of these two entities and all of their interests, including 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.

 

For additional information with respect toour relationships with Xiandai Technology and Hongcheng Education, see “Item 4.Information on the Company—C. Organizational Structure.”

 

***Allowance for Doubtful Accounts***

 

Accounts receivable relate to the online education and consultingservices provided to certain university customers. The minority shareholders ofa number of our majority-owned subsidiaries are universities who also purchaseexclusive online education technical and consulting services from us. Theseuniversities are considered our related parties and the services provided tothem are recorded in the amounts due from related parties. 

 

We conduct credit evaluations of our customers and generally do notrequire collateral or other security from them. To date, we primarily collect fees for our services up front and has notexperienced significant losses from uncollectible accounts.  Therefore, no allowance for doubtful accountswas established as of December 31, 2006 and 2007.  We will continue to evaluate the ourcollection experience and will provide for an allowance for doubtful accountsas appropriate.

 

***Long-livedAssets***

 

Our accounting for long-lived assets,including property and equipment, is described in Note 2 to our consolidatedfinancial statements included in this annual report. The recorded value oflong-lived assets is affected by a number of management estimates, includingestimated useful lives, residual values and impairment charges. We assessimpairment for long-lived assets whenever the net book value for these assetsis more than the estimated future undiscounted cash flows attributable to them.For the years ended December 31, 2005, 2006 and 2007, we did not recordany impairment charges.

 

 

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***BusinessCombinations, Goodwill and Intangible Assets***

 

We account for business combinations inaccordance with SFAS No. 141, *BusinessCombinations*, which requires that the purchase method of accountingbe used for all business combinations. SFAS 141 requires intangible assetsacquired in a business combination to be recognized and reported separatelyfrom goodwill.

 

Goodwill represents the cost of the acquiredbusinesses in excess of the fair value of identifiable tangible and intangiblenet assets purchased. We generally seek the assistance of independent valuationexperts in determining the fair value of the identifiable tangible andintangible net assets of the acquired business. We assign all the assets andliabilities of the acquired business, including goodwill, to reporting units inaccordance with SFAS No. 142, *Goodwilland Other Intangible Assets*.

 

We test goodwill for impairment on an annualbasis. In this process, we rely on a number of factors including operatingresults, business plans and future cash flows. Recoverability of goodwill isevaluated using a two-step process. The first step involves a comparison of thefair value of a reporting unit with its carrying value. If the carrying amountof the reporting unit exceeds its fair value, the second step of the processinvolves a comparison of the fair value and carrying value of the goodwill ofthat reporting unit. If the carrying value of the goodwill of a reporting unitexceeds the fair value of that goodwill, an impairment loss is recognized in anamount equal to the excess. Goodwill of a reporting unit will be tested forimpairment between annual tests if an event occurs or circumstances change thatwould more likely than not reduce the fair value of the reporting unit belowits carrying amount.****During theyear ended December 31, 2007, weincurred a goodwill impairment charge of RMB16.2 million ($2.2 million).****Thisimpairment charge relates to our FEC program, as our management hassignificantly adjusted downward our profitability forecast for this portion ofour business. We now expect future net revenue from our FEC program to be lowerthan we had previously forecast as a result of lower student numbers and lowerper student amounts payable to us under our contractual arrangements withparticipating schools. These developments are the result of increasedcompetition, increased bargaining power of the schools participating in theprogram and our expansion of the program into less affluent areas of China,where tuition fees tend to be lower. In addition to these charges, we expectthat these developments will adversely affect the future financial results forour FEC program.

 

We amortize intangible assets over theirrespective individual estimated useful lives in proportion to the economicbenefits consumed in each period. Our estimates of the useful lives ofidentified intangible assets are based on a number of factors, including theeffects of obsolescence, demand, competition, and other economic factors (suchas the stability of the industry, and known technological advances), and thelevel of maintenance expenditures required to obtain the expected futureundiscounted cash flows from the asset.

 

We evaluate intangible assets forrecoverability whenever events or changes in circumstances indicate that theircarrying amounts may not be recoverable. Recoverability of assets to be heldand used is measured by a comparison of the carrying amount of an asset to thefuture undiscounted net cash flows expected to be generated by the asset. Ifthese assets are considered to be impaired, the impairment to be recognized ismeasured by the amount by which the carrying value of the assets exceeds thefair value of the assets.

 

In evaluating goodwill and intangible assetsfor impairment, we may seek the assistance of independent valuation experts,perform internal valuation analyses and consider other information that ispublicly available. The results of our evaluation may be dependent on a numberof factors, including estimates of future market growth and trends, forecastedrevenue and costs, discount rates and other variables. While we use assumptionsthat we believe are fair and reasonable, actual future results may differ fromthe estimates arrived at using the assumptions.

 

**Royalty Fees**

 

Royalty fees payable to a middle schoolincreases each year from the 2005 calendar year to the 2024 calendar year.Royalty fees during this period were aggregated and recognized as royaltyexpense on a straight-line basis. The difference between royalty fees paid andthe amount reported as expenses was included as a component of accrued expensesand other current liabilities in the consolidated financial statements.

 

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**Results of Operations**

 

The following table sets forth selected datafrom our consolidated statements of operations for the periods indicated.

 
| ** **                                                           | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                           | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                                           | ** ** | **RMB**                           | ** ** | **RMB** | ** ** | **RMB** | ** ** | **% of net********revenue** | ** ** | **RMB** | ** ** | **$** | ** ** | **% of net********revenue** | ** ** |
| ** **                                                           | ** ** | ** **                        | ** ** | ** ** | ** ** | **(In thousands, except for  percentages)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenue:                                                         |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Online degree programs                                               |       | 100,896                           |       | 98,527 |   | 156,845 |   | 73.5 | % | 202,185 |   | 27,718 |   | 76.3 | % |
| International curriculum programs                                    |       |                              |       | 4,854 |   | 28,428 |   | 13.3 | % | 31,434 |   | 4,309 |   | 11.9 | % |
| Online tutoring programs                                             |       |                              |       | 14,390 |   | 17,384 |   | 8.1 | % | 18,013 |   | 2,469 |   | 6.8 | % |
| Private primary and secondary schools                                |       |                              |       | 8,591 |   | 10,874 |   | 5.1 | % | 13,356 |   | 1,831 |   | 5.0 | % |
| Total net revenue                                                    |       | 100,896                           |       | 126,362 |   | 213,531 |   | 100.0 | % | 264,988 |   | 36,327 |   | 100.0 | % |
| Cost of revenue:                                                     |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Online degree programs                                               |       | 38,014                            |       | 38,748 |   | 51,215 |   | 24.0 | % | 58,027 |   | 7,956 |   | 21.9 | % |
| International curriculum programs                                    |       | —                            |       | 3,627 |   | 17,212 |   | 8.1 | % | 23,503 |   | 3,222 |   | 8.9 | % |
| Online tutoring programs                                             |       | —                            |       | 2,902 |   | 3,452 |   | 1.6 | % | 3,875 |   | 531 |   | 1.5 | % |
| Private primary and secondary schools                                |       | —                            |       | 7,861 |   | 8,429 |   | 3.9 | % | 10,944 |   | 1,500 |   | 4.1 | % |
| Total cost of revenue                                                |       | 38,014                            |       | 53,138 |   | 80,308 |   | 37.6 | % | 96,349 |   | 13,209 |   | 36.4 | % |
| Gross profit:                                                        |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Online degree programs                                               |       | 62,882                            |       | 59,779 |   | 105,630 |   | 49.5 | % | 144,158 |   | 19,762 |   | 54.4 | % |
| International curriculum programs                                    |       | —                            |       | 1,227 |   | 11,216 |   | 5.3 | % | 7,931 |   | 1,087 |   | 3.0 | % |
| Online tutoring programs                                             |       | —                            |       | 11,488 |   | 13,932 |   | 6.5 | % | 14,138 |   | 1,938 |   | 5.3 | % |
| Private primary and secondary schools                                |       | —                            |       | 730 |   | 2,445 |   | 1.1 | % | 2,412 |   | 331 |   | 0.9 | % |
| Total gross profit                                                   |       | 62,882                            |       | 73,224 |   | 133,223 |   | 62.4 | % | 168,639 |   | 23,118 |   | 63.6 | % |
| Gross profit margin:                                                 |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Online degree programs                                               |       | 62.3                              | %          | 60.7 | % | 67.3 | % | — |   | 71.3 | % | 71.3 | % | — |   |
| International curriculum programs                                    |       | —                            |       | 25.3 | % | 39.5 | % | — |   | 25.2 | % | 25.2 | % | — |   |
| Online tutoring programs                                             |       | —                            |       | 79.8 | % | 80.1 | % | — |   | 78.5 | % | 78.5 | % | — |   |
| Private primary and secondary schools                                |       | —                            |       | 8.5 | % | 22.5 | % | — |   | 18.1 | % | 18.1 | % | — |   |
| Total gross profit margin                                            |       | 62.3                              | %          | 57.9 | % | 62.4 | % | — |   | 63.6 | % | 63.6 | % | — |   |
| Operating expenses:                                                  |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| General and administrative                                           |       | 26,924                            |       | 44,089 |   | 48,846 |   | 22.9 | % | 76,893 |   | 10,541 |   | 29.0 | % |
| Selling and marketing                                                |       | 751                               |       | 6,116 |   | 12,893 |   | 6.0 | % | 14,277 |   | 1,957 |   | 5.4 | % |
| Research and development                                             |       | 12,905                            |       | 11,842 |   | 14,263 |   | 6.7 | % | 21,021 |   | 2,882 |   | 7.9 | % |
| Goodwill impairment                                                  |       | —                            |       | — |   | — |   | — |   | 16,192 |   | 2,220 |   | 6.1 | % |
| Total operating expenses                                             |       | 40,580                            |       | 62,047 |   | 76,002 |   | 35.6 | % | 128,383 |   | 17,600 |   | 48.4 | % |
| Income from operations                                               |       | 22,302                            |       | 11,177 |   | 57,221 |   | 26.8 | % | 40,256 |   | 5,518 |   | 15.2 | % |
| Operating margin                                                     |       | 22.1                              | %          | 8.8 | % | 26.8 | % | — |   | 15.2 | % | 15.2 | % | — |   |
| Other income                                                         |       | —                            |       | — |   | — |   | — |   | 394 |   | 54 |   | 0.1 | % |
| Interest income                                                      |       | 266                               |       | 1,078 |   | 1,172 |   | 0.5 | % | 4,118 |   | 565 |   | 1.6 | % |
| Interest expense                                                     |       | —                            |       | (1,242 | ) | (2,279 | ) | (1.1 | )% | (2,130 | ) | (292 | ) | (0.8 | )% |
| Income before income tax (benefits) provisions and minority interest |       | 22,568                            |       | 11,013 |   | 56,114 |   | 26.2 | % | 42,638 |   | 5,845 |   | 16.1 | % |
| Income tax (benefits) provisions                                     |       | (846                              | )          | 3,994 |   | 6,994 |   | 3.3 | % | 15,003 |   | 2,057 |   | 5.7 | % |
| Minority interest, net of taxes                                      |       | (11,465                           | )          | (9,869 | ) | (23,581 | ) | (11.0 | )% | (25,148 | ) | (3,447 | ) | (9.5 | )% |
| Net income (loss)                                                    |       | 11,949                            |       | (2,850 | ) | 25,539 |   | 12.0 | % | 2,487 |   | 341 |   | 0.9 | % |
| Deemed dividends on preferred shares                                 |       | (15,959                           | )          | — |   | — |   | — |   | — |   | — |   | — |   |
| Net (loss) income attributable to ordinary shareholders              |       | (4,010                            | )          | (2,850 | ) | 25,539 |   | 12.0 | % | 2,,487 |   | 341 |   | 0.9 | % |

 

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***Yearended December 31, 2007 compared to the year ended December 31, 2006***

 

*NetRevenue.    *Our net revenue increased 24.1% from RMB213.5 million for the year endedDecember 31, 2006 to RMB265.0 million ($36.3 million) for the year ended December 31,2007.

 

*Online degree programs.*    Our net revenue from online degree programsincreased 28.9% from RMB156.8 million for the year ended December 31, 2006to RMB202.2 million ($27.7 million) for the year ended December 31, 2007.This increase was mainly attributable to following factors:

 

·                  Our university partners’ online degree programs experienced significantgrowth in revenue students in the year ended December 31, 2007 as comparedto the year ended December 31, 2006. In aggregate, our universitycustomers had approximately 51,000 more paying students during the year ended December 31,2007 than during the same period in 2006, representing a 36% increase over suchperiod. This growth was primarily attributable to more extensive marketing andrecruiting efforts by our university partners to recruit new students and toencourage inactive students to renew their studies. This growth in revenuestudents was partially offset by increased payments to independent learningcenters by our university partners. The aggregate payment to third-party learningcenters by our university partners in 2007 increased to 40% of gross tuitionreceipts in 2007, from 39% in 2006. This increase was attributable mainly toincreases in demand by universities for services provided by a limited numberof learning centers.

 

·                  A non-recurring RMB8.4 million ($1.2 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 tothe Company during the previous years.

 

*International curriculumprograms*.    Netrevenue from our international curriculum programs increased approximately10.6% from RMB28.4 million for the year ended December 31, 2006 to RMB31.4million ($4.3 million) for the same period in 2007. This increase was mainlyattributable to the increase in student enrollment due to an expansion of ouroperations in this business line and an increase in the number of overseas student academictours in fiscal year 2007 as compared to fiscal year 2006. Students participating in the BCIT program increased from 633 for theyear ended December 31, 2006 to 1,026 for the year ended December 31,2007, while students participating in our FEC program decreased slightly from4,069 for the year ended December 31, 2006 to 4,014 for the same period in2007.

 

*Private primary and secondary schools.*    Netrevenue for this business line increased approximately 22.8% from RMB10.9million for the year ended December 31, 2006 to RMB13.4 million ($1.8million) for the same period in 2007. This was primarily due to an increase inenrollments at our Anqing school as a result of including an additional grade 9to the school for the 2006-2007 academic year.

 

*Online tutoring*.    Netrevenue from our online tutoring business increased approximately 3.6% fromRMB17.4 million for the year ended December 31, 2006 to RMB18.0 million ($2.5million) for the year ended December 31, 2007. The increase was mostlyattributable to the development of a sales channel for our online tutoringservices through Lenovo Group Limited, a personal computer manufacturer inChina, whereby Lenovo will distribute these services through various lines ofLenovo personal computers.

 

*Cost ofRevenue.    *Our total cost of revenue increased approximately 20% from RMB80.3 millionfor the year ended December 31, 2006 to RMB96.3 million ($13.2 million)for the year ended December 31, 2007. This increase was primarily due toincreased costs associated with our international curriculum programs, privateprimary and secondary schools and online tutoring program.

 

*Online degree programs.*    The cost of revenue for our online degreeprograms increased approximately 13.3% from RMB51.2 million for the year ended December 31,2006 to RMB58.0 million ($8 million) for the same period in December 31,2007. The increase was attributable primarily to an increase in the number ofstudents enrolled in our university partners’ online degree programs andincreased student recruiting-related expenses. Our cost of revenue, which primarily comprises personnel relatedexpenses, did not increase to the same extent as our revenues did because ourcost of revenue is more closely related to the number of online degree programswe service and the number of courses those online degree programs offer than thenumber of students who are enrolled in those online degree programs. Incontrast to our cost of revenue, our service fees and revenue for online degreeprograms are directly associated with the number of students in our customers’online degree programs.

 

*International curriculumprograms*.    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 ($3.2****million) for the same period in2007. This increase was primarily attributable to the following: (i) weorganized overseas training tours 

 

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for the teachers and the senior managementof the participating schools in the year ended December 31, 2007, while nosuch tours were conducted in the year ended December 31, 2006; (ii) wepaid higher registration fees to BCIT in response to the higher number ofparticipating students; and (iii) in response to more students enrolled inthe programs, we hired additional native English speaking teachers.

 

*Online tutoringprograms.    *Our cost of revenue for our online tutoring program increasedapproximately 12.3% from RMB3.5 million in the year ended December 31,2006 to RMB3.9 million ($.05 million) in the year ended December 31, 2007.This increase was the result of our hiring of additional personnel and thepayment of higher employee benefits during the year ended December 31,2007 than during the same period in 2006.

 

*Private primary andsecondary schools*.    Ourcost of revenue for our private primary and secondary schools increasedapproximately 29.8% from RMB8.4 million for the year ended December 31,2006 to RMB10.9 million ($1.5 million) for the same period in 2007. This wasmostly attributable to the growth in headcount of teachers in our AnqingSchool.

 

*Operating Expenses*.    Our operating expenses consist of general andadministrative expenses, selling and marketing expenses, and research anddevelopment expenses. Our operating expenses increased approximately 68.9% fromRMB76.0 million for the year ended December 31, 2006 to RMB128.4 million($17.6 million) for the year ended December 31, 2007.

 

*General and administrativeexpenses*.    Ourgeneral and administrative expenses increased approximately 57.4% from RMB48.8million for the year ended December 31, 2006 to RMB76.9 million ($10.5million) for the year ended December 31, 2007. The increase was mainlyattributable to our hiring of additional personnel due to expansion of ourbusiness and the demands imposed by the annual audit of our financialstatements.****To better manage and control ourdiversified and geographically dispersed business lines, we significantlyincreased the size of our accounting staff and hired more senior management inaccounting.

 

*Selling and marketingexpenses*.    Ourselling and marketing expenses increased approximately 10.7% from RMB12.9million for the year ended December 31, 2006 to RMB14.3 million ($2.0million) for the year ended December 31, 2007. The increase was mainlyattributable to an increase in the number of sales and marketing personnel infiscal year 2007 in response to the continuous expansion of our business. Theaverage headcount grew from 54 personnel in 2006 to 75 in 2007.

 

*Research andDevelopment.    *Our research and development expenses increased approximately 47.4% fromRMB 14.3 million for the year ended December 31, 2006 to RMB21.0 million($2.9 million) for the year ended December 31, 2007. The growth was drivenprimarily by increased research and development activities in some of theCompany’s collaborative alliances, and increased bonus and compensation paid toresearch and development personnel.

 

*Interest income*.    We recorded RMB4.1 million ($0.6****million)****in interestincome in the year ended December 31, 2007****ascompared to****RMB1.2 million for the year endedDecember 31, 2006.

 

*Income tax provision.*    Our income tax provision increased byapproximately 114.5% from RMB7.0 million for the year ended December 31,2006 to RMB15.0 million ($2.1 million) for the same period in 2007. Thisincrease was mainly attributable to following:

 

·                  Change inpermanent tax rate used to calculate long-term tax liabilities. On March 16,2007, the National People’s Congress adopted a new income tax law, which becameeffective on January 1, 2008, pursuant to which the statutory tax rate forall enterprises in China is 25% except for “new and high technology enterprisesstrongly supported by the State,” which enjoy a favorable tax rate of 15%. Mostof our subsidiaries and affiliate companies were qualified under prior tax lawsand regulations as “new and high technology enterprises,” and therefore weresubject to only a 15% rate.****However, asthe procedures for obtaining classification as “high and new technologyenterprises strongly supported by the State” have not yet been finalized, wecannot assure you that any of our subsidiaries or affiliated companiescurrently enjoying preferential tax rates will be approved as “high and newtechnology enterprises strongly supported by the State” entitled topreferential tax treatments. We expect that our applicable subsidiaries andaffiliated companies will re-apply for the “new and high technology enterprisesstrongly supported by the State” status once the approval procedure ispromulgated. Under applicableaccounting rules, however, until these subsidiaries and affiliated companiesreceive official approval for this status, they must use the statutory 25% taxrate in their calculation of their deferred tax balances. Had we been able touse a 15% rate to calculate our deferred tax, our tax provision would have beenreduced by RMB4.9 million for the year ended December 31, 2007.

 

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·                  The adoption of FIN48 resulted in a total tax provision of RMB0.6million ($0.08) for the year ended December 31, 2007.

 

*Decrease in income.*   Our income from operations decreased by approximately29.6%from RMB57.2 million in the year ended December 31, 2006 to RMB40.3million ($5.5 million) in the year ended December 31, 2007. This decreasewas primarily attributable to a goodwill impairment loss of RMB16.2****million($2.2 million)****and an accounts receivable write-off of RMB7.0 million ($0.97 million)in the year ended 2007.

 

*Minority Interest*.    Ourminority interest increased by 6.6% from RMB23.6 million in the year ended December 31,2006 to RMB25.1 million ($3.4 million) in the year ended December 31,2007.  This increase was primarily due toimproved performance of our majority-owned subsidiaries.

 

***Yearended December 31, 2006 compared to Year ended December 31, 2005***

 

*Net revenue*.    Our net revenue increased 69.0% fromRMB126.4 million for the year ended December 31, 2005 toRMB213.5 million for the year ended December 31, 2006. This increasewas primarily due to the increased revenue from both online degree programs andinternational curriculum programs.

 

·                  *Online degree programs*.    Net revenue from online degree programsincreased 59.3% from RMB98.5 million for the year ended December 31,2005 to RMB156.8 million for the year ended December 31, 2006. Theincrease was mainly attributable to the acquisition of our collaborativealliance with China Agricultural University in November 2005, forming anew collaborative alliance with Beijing Language and Culture University in April 2006and organic growth of our other online degree programs. In the year ended December 31,2006, we recorded net revenue of RMB40.4 million from our programs with ChinaAgricultural University and Beijing Language and Culture University, while forthe year ended December 31, 2005 we recorded net revenue ofRMB2.75 million from our China Agricultural University program. Weserviced significantly more revenue students (the students who have paidtuition in the applicable period) in 2006 than in 2005, with increases in bothnew revenue students (those students paying tuition for the first time in therelevant period) and paying existing students (those students paying tuition inthe relevant period who also had paid tuition in prior period(s)). The increasein revenue students was mainly as a result of:

 

·                  The new collaborative alliances with China Agricultural University andBeijing Language and Culture University resulted in 15,300 new revenue studentsin 2006, and increases of 11,400 paying existing students for the first sixmonths of 2006 and 15,800 paying existing students for the second six months of2006. These additional revenue students contributed approximately RMB37.5million out of the RMB57 million growth in our net revenue from 2005 to 2006.

 

·                  Our collaborative alliances formed before November 2005 alsoexperienced significant growth in the number of new revenue students in 2006.Approximately 20,200 more new revenue students were enrolled in these programsin 2006 than in 2005. This growth was as a result of two of our universitypartners regaining rights to enroll new students after these schools weresuspended by the MOE from enrolling new students in 2004 and 2005 for violatingrules governing new student recruitment by online degree programs. Thegrowth in new revenue students from these previously existing collaborativealliances contributed RMB20.0 million out of the RMB57.0 million growth in ournet revenue from 2005 to 2006. The number of revenue students, either new orexisting, in any of these periods does not necessarily correspond to the numberof students who actually took classes that period, as students customarilyprepay tuition for use in future periods. We recognize revenue,however, on the basis of our share of cash tuition that is paid in therelevant period and not on the classes that are actually taken in the period.

 

·                  *International curriculum programs*.    Net revenue from our international curriculumprograms increased 485.6% from RMB4.9 million for the year ended December 31,2005 to RMB28.4 million for the year ended December 31, 2006. Thegrowth was primarily driven by the acquisition of our BCIT program in February 2006,the acquisition of our FEC program in September 2005 and organic growth ofthe FEC program in 2006. For the year ended December 31, 2005, we recordednet revenue of RMB4.9 million from the FEC program, which we acquired in September 2005,while for the year ended December 31, 2006, we recorded net revenue ofRMB24.1 million for the FEC program. For the year ended December 31,2005, we recorded no revenue from the BCIT program. Students enrolled in theFEC program increased to approximately 4,100 in 2006 from approximately 3,800in 2005.

 

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·                  *Private primary and secondary schools*.    Net revenue from our private schools increased26.5% from RMB8.6 million in 2005 to RMB10.9 million in 2006. Thisgrowth was primarily due to the gradual increase in enrollments at our Anqingand Pingdingshan schools.

 

·                  *Online tutoring programs*.    Net revenue from our online tutoring programsincreased 20.8% from RMB14.4 million for 2005 to RMB17.4 million for2006 due to the enhanced sales efforts we made for this line of business in2006.

 

*Cost of revenue*.    Our total cost of revenue increased 51.2% fromRMB53.1 million for the year ended December 31, 2005 toRMB80.3 million for the year ended December 31, 2006. This increasewas primarily due to the increased costs associated with our online degreeprograms and English curriculum programs.

 

·                  *Online degree programs*.    The cost of revenue for our online degreeprograms increased 32.3% from RMB38.7 million for the year ended December 31,2005 to RMB51.2 million for the year ended December 31, 2006. Thisincrease was mainly attributable to additional personnel we added to supportour programs with China Agricultural University and Beijing Language andCulture University, which were added in 2005. For these two programs, we added70 employees and incurred RMB8.1 million of additional costs in 2006. In2006, we also incurred RMB2.6 million in additional salary and benefitcosts for the project teams supporting our other online degree programs dueprimarily to the payment of performance bonuses and salary increases to keepour compensation level on par with prevailing labor market conditions. Thebalance of this increase is primarily related to the amortization of intangibleassets acquired through business combination related to our acquisition ofZhong Nongda Networks Development Co., Ltd., or Zhong Nongda Networks, whichprovides online educational, technical and consulting services to ChinaAgricultural University.

 

·                  *International curriculum programs*.    Our cost of revenue for our internationalcurriculum programs increased 374.6% from RMB3.6 million in 2005 to RMB17.2million in 2006. This increase was primarily due to the fact that we acquiredthe BCIT program in 2006 and the FEC program in September 2005. In 2006,the BCIT program incurred costs of RMB2.6 million. We recorded cost of revenueof RMB3.3 million in 2005 relating to our FEC program, whereas in 2006 werecorded a full year of costs of revenues of RMB12.7 million. The balanceof this increase is primarily due to the amortization of intangible assetsacquired through business combination related to the our acquisition of theBCIT and FEC programs.

 

*Operating expenses*.    Our operating expenses consist of general andadministrative expenses, selling and marketing expenses and research anddevelopment expenses. Our operating expenses increased 22.6% fromRMB62.0 million for the year ended December 31, 2005 toRMB76.0 million for the year ended December 31, 2006.

 

Our operating expenses consisted of:

 

·                  *General and administrative expenses*.    Our general and administrative expensesincreased 10.7% from RMB44.1 million for the year ended December 31, 2005to RMB48.8 million for the year ended December 31, 2006. The increase wasmainly attributable to our acquisition of the FEC program, the BCIT program andZhong Nongda Networks in September 2005, February 2006, and November 2005,respectively.

 

·                  *Selling and marketing expenses*.    Our selling and marketing expenses increased111.5% from RMB6.1 million for the year ended December 31, 2005 toRMB12.9 million for the year ended December 31, 2006. This increase wasmainly attributable to incremental selling and marketing expenses for ouronline tutoring programs, which incurred RMB2.3 million more in marketingexpenses in 2006 than in 2005 as a result of our establishment of a dedicatedsales company to market our online tutoring programs. We incurredRMB0.8 million of selling and marketing expenses in 2006 relating to ourinternational curriculum programs, which was the first full year that werecorded expenses for these programs. Selling and marketing expenses for ouronline degree programs increased by RMB0.8 million due to our sponsorshipof a distance learning summit. We also incurred RMB0.2 million of share-basedcompensation in 2006, while none was incurred in 2005. The balance of thisincrease resulted from the amortization of intangible assets acquired throughbusiness combination related to our acquisition of Zhong Nongda Networks.

 

·                  *Research and development expenses*.    Our research and development expenses increased20.3% from RMB11.8 million for the year ended December 31, 2005 toRMB14.3 million for the year ended December 31, 2006. This increasewas mostly attributable to our acquisition in September 2005 of ourinterest in the China Agricultural University online degree program. In 2006,this program incurred RMB4.3 million of research and 

 

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development expenses primarily due toincreased headcount, which partially were offset by the reduction of researchand development expenses for our program with Dongbei University of Finance andEconomies.

 

*Income tax (benefits)provisions*.    Ourincome tax provisions increased 75.1% from RMB4.0 million for the year ended December 31,2005 to RMB7.0 million for the year ended December 31, 2006. This increasewas mainly attributable to incremental profit derived from our ChinaAgricultural University online program, which was acquired by us in November 2005,and the improved profitability of our other online degree programs, especiallyour program with Renmin University of China. In 2006, our programs with ChinaAgricultural University and Renmin University of China together wereresponsible for an additional RMB4.5 million of income tax provisions.

 

*Minority interest, net oftaxes*.    Our minorityinterests increased 139.0% from RMB9.9 million for the year ended December 31,2005 to RMB23.6 million for the year ended December 31, 2006. This increasewas primarily due to improved performance of our university partners’ onlinedegree programs, the formation of a new collaborative alliance with BeijingLanguage and Culture University and the acquisition of certain entities whichare included in our minority interests, including a collaborative allianceinterest in the online degree program of China Agricultural University andcompanies providing services for our international curriculum programs.

 

*Net income (loss)*.    As a result of the above factors, we had a netincome of RMB25.5 million in 2006 compared to a net loss of RMB2.9 million in2005.

 

 

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B.             Liquidity and Capital Resources

 

To date, we have financed our operationsprimarily through cash flows from operations, convertible debt and equitycontributions by our shareholders. As of December 31, 2007, we hadRMB497.1 million ($68.1 million) in cash and cash equivalents,respectively, and no outstanding short-term borrowings. Our cash and cashequivalents primarily consist of cash on hand, demand deposits and termdeposits with remaining maturities of three months or less at the time ofpurchase that are placed with banks and other financial institutions. Althoughwe consolidate the results of our Chinese affiliated entities, HongchengEducation and Xiandai Technology, and their subsidiaries, we do not have directaccess to the cash and cash equivalents or future earnings of these entities. Aportion of the cash balances of our two Chinese affiliated entities and theirsubsidiaries may be paid to us pursuant to our contractual arrangements withthese two entities and their subsidiaries for our technical and teachingsupport, enrollment system and other services. We may fund the cash needs of ourChinese affiliated entities from time to time through loan arrangements withintermediary banks, which provide loans to the Chinese affiliated entities inamounts equal to corresponding cash deposits that we make with the banks.

 

We expect that our future capitalexpenditures primarily will be for the payment of rent for learning centerfacilities, the construction of new campuses at our Anqing School and JingzhouSchool (Southern Campus). We opened one learning center in August 2007 andan additional nine learning centers during the first quarter of 2008.****We also plan to complete the construction of new campusesat the Anqing and Jingzhou schools by 2009.****We expect thatapproximately RMB259.0 million of cash resources will be required for theseprojects, the majority of which, approximately RMB141.4 million, will beincurred for the construction of the new campuses. We have not encountered anydifficulties in meeting our cash obligations to date.  In addition, we expect that the Anqing Schoolwill significantly increase its student enrollment by the Fall of 2008 and theJingzhou School will begin student enrollment in 2009 after the completion ofthe first phase of the construction. Since we do not expect to make other significant capital expendituresduring this period, we believe that our current cash and cash equivalents,anticipated cash flow from operations as well as the net proceeds we receivedfrom our initial public offering will be sufficient to meet our presentlyanticipated cash needs through the end of 2009. ** **We may, however, require additionalcash due to changing business conditions or other future developments,including any investments or acquisitions we may decide to pursue. If ourexisting cash is insufficient to meet our requirements, we may seek to selladditional equity securities or debt securities or borrow from lendinginstitutions.

 

The following table sets forth a summary ofour cash flows for the periods indicated:

 
| ** **                                           | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                           | ** ** | **RMB**                           | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **$** | ** ** |
| ** **                                           | ** ** | **(In thousands)**                | ** ** |
| Net cash (used in) provided by operating  activities |       | (5,246                            | )          | (22,318 | ) | 82,798 |   | 83,127 |   | 11,395 |   |
| Net cash (used in) investing activities              |       | (27,017                           | )          | (7,950 | ) | (82,776 | ) | (95,899 | ) | (13,146 | ) |
| Net cash (used in) provided by financing  activities |       | 103,559                           |       | 81,090 |   | (6,808 | ) | 366,501 |   | 50,241 |   |
| Effect of exchange rate changes                      |       | (2                                | )          | (1,846 | ) | (811 | ) | (4,930 | ) | (674 | ) |
| Net changes in cash and cash equivalents             |       | 71,294                            |       | 48,976 |   | (7,597 | ) | 348,799 |   | 47,816 |   |
| Cash and cash equivalents at beginning of  period    |       | 35,642                            |       | 106,936 |   | 155,912 |   | 148,315 |   | 20,332 |   |
| Cash and cash equivalents at end of period           |       | 106,936                           |       | 155,912 |   | 148,315 |   | 497,114 |   | 68,148 |   |

 

***Operating Activities***

 

Inthe year ended December 31, 2007, we generated positive cash flow fromoperating activities of RMB83.1 million ($11.4 million), which was primarilyderived from our net income of RMB2.5 million, plus additional positive cashflow of RMB70.5 million from a number of factors, including minority interestof RMB25.1 million, share-based compensation expenses of RMB3.6 million,depreciation of RMB8.2 million, goodwill impairment of RMB16.2 million, andamortization of acquired intangible assets of RMB8.5 million. These positivecash flows were also derived from aggregate changes in our current assets andliabilities of RMB10.1 million, which included a RMB20.9 million increase inaccrued expenses and other current liabilities, a RMB25.0 million increase inamounts due to related parties, a RMB 7.9 million increase in deferred revenueand a RMB11.3 decrease in accounts receivable. Those positive factors werepartially offset by changes in growth in amounts due from related parties ofRMB52.5 million**. **Theincrease in amounts due from related parties 

 

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reflectedhigher service fees payable to us by our university partners in the year ended December 31,2007 than those paid to us in the same period in 2006.

 

Priorto 2006, we financed our operating activities and our growth primarily throughthe proceeds from private placements of equity securities. 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.

 

In 2005, our cash used in operatingactivities was RMB22.3 million. This amount reflected our net loss of RMB2.9million, plus adjustments of non-cash items totaling RMB19.4 million, primarilybecause of minority interest, depreciation and amortization, which were morethan offset by aggregate negative changes in our current assets and liabilitiesof RMB41.0 million. The most important of these adjustments were a decrease in amountsdue to related parties and an increase in amounts due from related parties,which were offset in part by other changes, including an increase in ourdeferred revenue which was primarily due to our acquisition of new businessesin 2005.

 

Net cash used in operating activities forthe year ended December 31, 2004 was RMB5.2 million. This amount resultedfrom our net income of RMB11.9 million, plus positive adjustments of RMB17.2million being more than offset by aggregate negative changes in our assets andliabilities of RMB34.4 million. The most important changes in our assets andliabilities were an increase in the amounts due from related parties and adecrease in the amount due to related parties, which were offset in part byother changes, including increases in our deferred revenue and prepaid expensesand other current assets.

 

***Investing Activities***

 

Historically our net cash provided byoperating activities has been insufficient to finance our investing activities,and we have financed our investing activities through issuances of convertiblepreferred shares and convertible notes.

 

In the year ended December 31, 2007,net cash used in investing activities was RMB95.9 million ($13.1 million),which is primarily related to our purchase of office space for our newheadquarters in the amount of RMB31 million, to our acquisition of additionalequity interests in our subsidiaries in the amount of RMB22.5 million and toour investment in the construction of our Anqing School in the amount ofRMB27.1 million. Net cash used in investing activities was RMB82.8 millionfor the year ended December 31, 2006, as compared to RMB8.0 millionand RMB27.0 million for the years ended December 31, 2005 and December 31,2004, respectively. Net cash used in investing activities in 2006 relatedprimarily to our purchase of business, net of cash acquired of RMB30.7 million,which related to our acquisition of interests in the China AgriculturalUniversity online degree program and our FEC program as well as our purchase ofland use rights and property and equipment of RMB37.6 million, primarilyin connection with our private primary and secondary schools. Net cash used ininvesting activities for the year ended December 31, 2005 wasRMB8.0 million, which was primarily related to our acquisition of propertyand equipment of RMB10.7 million and the acquisition of our interest in acollaborative alliance with a new university partner of RMB6.9 million, whichwas partially offset by the cash acquired of RMB9.6 million in the collaborativealliance.

 

***Financing Activities***

 

Netcash provided by financing activities was RMB366.5 million ($50.2 million) for the year ended December 31, 2007. This isprimarily attributable to the net proceeds that we received from our initialpublic offering, which was completed in this period. Net cash used in financingactivities was RMB6.8 million for the year ended December 31, 2006,as compared to net cash provided by financing activities ofRMB81.1 million in 2005 and RMB103.6 million in 2004. Net cash usedin financing activities in 2006 was primarily attributable to cash dividends ofRMB12.9 million paid to some of our shareholders, which was partially offset bycapital contributions of RMB6.0 million by other shareholders. Net cashreceived in financing activities in 2005 was RMB81.1 million and was primarilyattributable to proceeds received by us 

 

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fromthe issuance of Series C preferred shares and convertible loans issued inconjunction with those preferred shares. Net cash provided by financingactivities in 2004 was RMB103.6 million and was primarily attributable toRMB132.8 million of proceeds received from the issuance of Series Bpreferred shares, which was partially offset by the amount ofRMB31.3 million that we paid to repurchase certain Series A preferredshares and ordinary shares that we reissued to investors subscribing to Series Bpreferred shares.

 

**Capital Expenditures**

 

We made capital expenditures of RMB6.3million, RMB10.7 million, RMB37.6 million and RMB71.9 million ($9.9million) for the years ended December 31, 2004, 2005, 2006 and 2007,respectively. In the past, our capital expenditures were used primarily foracquisitions of land and buildings for our private primary and secondaryschools and additional office space in Beijing, Shanghai, Wuxi, Chongqing andDalian relating to our online degree programs. We also incurred additionalcapital expenditures of approximately RMB31****million inacquiring a new office building that we purchased in November of 2007 tohouse our corporate headquarters.  Eachof our three private schools, Pingdingshan School, Anqing School and JingzhouSchool (Southern Campus), have associated properties that we own or lease. Weestimate that our capital expenditures in 2008 will be approximately RMB111.9million, primarily relating to the construction of ten new learning centers andfor new campuses at the Jingzhou School and Anqing School.

 

C.             Research and Development, Patents and Licenses, Etc.

 

**IntellectualProperty and Proprietary Rights**

 

Weregard our copyrights, trademarks, trade secrets and other intellectualproperty rights as critical to our business. We rely on trademark and copyrightlaw, trade secret protection, non-competition and confidentiality and/orlicensing agreements with our executive officers, clients, contractors andothers to protect our intellectual property rights. We have registered our *chinaedu.com*, *prcedu.com* and *chinaedu.net*Internet domain names, some of which are held by our Chinese affiliatedentities.

 

Wehave directly, or indirectly through our Chinese affiliated entities,registered for trademark protection for certain intellectual property relatingto our brand and our websites with the Trademark Office of the Chinese StateAdministration for Industry and Commerce, and we are currently applyingfor similar protection in the United States with the U.S. Patent and TrademarkOffice. We have also registered some of the computer software that we havedeveloped for copyright protection with the Chinese National Copyright Office.

 

We,together with our university customers, have developed courseware for ouruniversity partners’ online degree programs. All of this courseware isproprietary to us or the collaborative alliances we form with theseuniversities.

 

Ourintellectual property is subject to risks of theft and other unauthorized use,and our ability to protect our intellectual property from unauthorized use islimited. In addition, we may be subject to claims that we have infringed theintellectual property rights of others. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—If we areunable to prevent others from using our intellectual property, our business maybe materially and adversely affected” and “—We may be exposed to infringementor misappropriation claims by third parties, which, if successful, could causeus to pay significant damage awards.”

 

**Technology**

 

Weprovide end-to-end technology solutions to our customers providing online degreeprograms. Our technology consists of a series of systems and tools, includingour Learning Management System, which enables the online universities to managethe entire student lifecycle from student application to graduation byproviding system support to the student’s learning process and the universitystaff’s daily management process. We also provide a learning content creationand management system, which enables the team working on courseware developmentto bring the courseware from the concept and design stage to production andimplementation, as well as manage courseware content, and various delivery andmanagement systems and tools. Our strategy is to develop, integrate and deliverthe most suitable, stable, efficient and cost-effective systems to ourcustomers in the online education market in China. Our in-depth understandingof the online education market and the operational model of online educationprograms helps us develop technology solutions suited to the needs of ourcurrent and future customers. Our accumulated experience and proprietarytechnology have further strengthened our leading position in the onlineeducation service market.

 

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Our technology is based on a Microsoft platform.Microsoft technologies are utilized and deployed according to architecture andusage models. Application software and databases are further supported bystorage and back-up technologies. In addition to providing software solutions,along with maintenance support and customized development, we providecentralized system and network management services to our online degree programcustomers. Our production servers are hosted at a data center operated by ChinaTelecom. In addition to the services provided by the data center (such asuninterrupted power supply), the servers are supported by advanced technologiesto ensure security, scalability, reliability and expandability. Additionally,our bandwidth is scalable to accommodate spikes in user activity.

 

Using advanced technologies, our system can identifyerrors and isolate failed servers automatically to minimize the interruption ofour customers’ access to our services. Our websites are hosted at a third partyfacility in Beijing. This facility provides redundant utility systems, aback-up electric generator and 24-hour server support. All our servers haveredundant power supplies to maximize system and date availability. We regularlyback-up our database on a server hosted at an Internet data center to minimizethe impact of data loss due to system failures and we maintain back-up filesoffsite to facilitate disaster recovery.

 

D.            Trend Information

 

Other than as disclosed elsewhere in this annualreport, we are not aware of any trends, uncertainties, demands, commitments orevents that are reasonably likely to have a material adverse effect on our netrevenues, income, profitability, liquidity or capital resources, or that causedthe disclosed financial information to be not necessarily indicative of futureoperating results or financial conditions.

 

E.              Off-Balance Sheet Arrangements

 

We have not enteredinto any 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 ofour various agreements with Xiandai Technology and Hongcheng Education andtheir respective shareholders, we are considered the primary beneficiary ofXiandai Technology 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 Contractual Obligations

 

**ContractualObligations**

 

The following tablesets forth our contractual obligations and commercial commitments as of December 31,2007.

 
| ** **                                                        | ** ** | **Payment Due by December 31** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                        | ** ** | **Total**                                          | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** |
| ** **                                                        | ** ** | **(In RMB thousands)**                             | ** ** |
| Operating  lease obligations                                      |       | 15,714                                             |       | 6,971 |   | 3,828 |   | 2,965 |   | 1,227 |   | 723 |   | — |   |
| Funding  obligations to university partners(1)                    |       | 5,000                                              |       | 4,000 |   | 1,000 |   | — |   | — |   | — |   | — |   |
| Facility  fees to a middle school(2)                              |       | 19,800                                             |       | 1,000 |   | 1,000 |   | 1,000 |   | 1,200 |   | 1,200 |   | 14,400 |   |
| Capital  obligations for private primary and secondary schools(3) |       | 141,434                                            |       | 110,634 |   | 30,800 |   | — |   | — |   | — |   | — |   |
| Long-term  debt obligations(4)                                    |       | 25,724                                             |       | 4,404 |   | 4,847 |   | 5,322 |   | 5,845 |   | 5,306 |   | — |   |
| Unrecognized  tax benefits(5)                                     |       | 4,332                                              |       | — |   | — |   | — |   | — |   | — |   | — |   |

 

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(1)  Weestimate that this amount will be required to fund the operating cost for ourcollaborative alliances with university partners. We are not obligated to make anypayments at specific times, so we are unable to estimate when we will berequired to make these contributions.

 

 

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

(3)  Theseamounts represent the remaining portion of our committed capital expendituresto the Anqing government and the Jingzhou government for the expansion of theAnqing School and the Jingzhou School (Southern Campus), respectively, of whichRMB19.8 million has been contracted for with third-party contractors in 2007.

(4)  Thisamount represents the aggregate outstanding balance of the loan incurred tofund the acquisition of a new office building for our corporate headquarters.

(5)   This amount represents unrecognized tax benefitspursuant to FIN 48. Since there is a high degree of uncertainty regarding thetiming of future cash outflows, we are unable to make reasonable estimates regardingthe timing of settlement 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.

 

G.             Safe Harbor

 

This annual report contains forward-lookingstatements that involve risks and uncertainties. All statements other thanstatements of historical facts are forward-looking statements. These statementsinvolve known and unknown risks, uncertainties and other factors that may causeour actual results, performance or achievements to be materially different fromthose expressed or implied by the forward-looking statements.

 

You can identify these forward-looking statements bywords or phrases such as “may,” “will,” “expect,” “is expected to,” “anticipate,”“aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to” or othersimilar expressions. We have based these forward-looking statements largely onour current expectations and projections about future events and financialtrends that we believe may affect our financial condition, results ofoperations, business strategy and financial needs. These forward-lookingstatements include:

 

•                  our anticipated growth strategies;

 

•                  our future business development, results ofoperations and financial condition;

 

•                  expected changes in our revenues and certaincost and expense items;

 

•                  our ability to increase student enrollmentsand course fees 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 neweducational programs, services and products and the expansion of our geographicreach;

 

•                  the expected increase in expenditures oneducation in China; and

 

•                  PRC laws, regulations and policies relatingto private education and providers of private educational services.

 

You should read thoroughly this annual report andthe documents that we refer to herein with the understanding that our actualfuture results may be materially different from and/or worse than what weexpect. We qualify all of our forward-looking statements by these cautionarystatements. Other sections of this annual report include additional factorswhich could adversely impact our business and financial performance. Moreover,we operate in an evolving environment. New risk factors emerge from time totime and it is not possible for our management to predict all risk factors, norcan we assess the impact of all factors on our business or the extent to whichany factor, or combination of factors, may cause actual results to differmaterially from those contained in any forward-looking statements.

 

This annual report also contains third-party datarelating to the education market in China that includes projections based on anumber of assumptions. The education market may not grow at the rates projectedby market data, or at all. The failure of this market to grow at the projectedrates may have a material adverse effect on our business and the market priceof our ADSs. Furthermore, if any one or more of the assumptions underlying themarket data turns out to be incorrect, actual results may differ from theprojections based on these assumptions. You should not place undue reliance onthese forward-looking statements.

 

You should not rely upon forward-looking statementsas predictions of future events. The forward-looking statements made in this

 

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annual report relate only toevents or information as of the date on which the statements are made in thisannual report. We undertake no obligation to update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

 

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

## ** **

A.  Directors and Senior Management

 

**Directorsand Executive Officers**

 

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

 

The following tablesets forth information concerning our directors and executive officers. Thebusiness address of each of our directors and executive officers listed belowis 4th Floor-A, GeHuaBuilding, No. 1 QinglongHutong, Dongcheng District, Beijing, 100007,People’s Republic of China.

 
| **Name**      | ** ** | **Age** | ** ** | **Positions**                                                          |
|---------------|------------|---------|------------|------------------------------------------------------------------------|
| Julia Huang   |       | 39      |       | Chairman, Chief Executive Officer and Acting  Chief  Financial Officer |
| Shawn Ding    |       | 43      |       | Director, President and Chief Operating Officer                        |
| Zonglian Gu   |       | 52      |       | Director                                                               |
| Samuel Yen    |       | 36      |       | Director                                                               |
| Min Fan       |       | 42      |       | Director                                                               |
| Shasha Chang  |       | 49      |       | Director                                                               |
| Xiaohong Chen |       | 37      |       | Director                                                               |
| Changqing Xie |       | 44      |       | Vice President                                                         |

 

***Julia Huang***has served as our chairman since September 2007, our chiefexecutive officer since June 2000 and our acting chief financial officersince March 2008. Prior to joining us, she was a senior manager at Ernst &Young Management Consulting (New York) Group from 1996 to 1999. Ms. Huangalso served as a project manager at Merck & Co. from 1993 to 1995. Ms. Huangholds an MBA from Columbia Business School with concentrations in finance andinternational business and a master’s degree in chemical engineering andmicrobiology from University of Tennessee, Knoxville.

 

***Shawn Ding***has served as our director, president and chief operating officer since December 2004.Mr. Ding joined us in July 2001 as our chief technology officer. From2000 to 2001, Mr. Ding was the chief technology officer of InfostreamTechnologies Inc., a U.S. company specializing in the development andimplementation of packaged and customized enterprise resource planningsoftware. He also served as a director of Internet application development atAutomatic Data Processing, Inc. from 1999 to 2000 and was a director ofsystem architecture at Prudential Insurance Company of America from 1992 to1998. Mr. Ding received a bachelor’s degree in environmental science fromPeking University, a bachelor’s degree in computer science from RutgersUniversity, and a master’s degree in computer science from New Jersey Instituteof Technology.

 

***Zonglian Gu***has served as one of our directors since March 2005. Mr. Gujoined CMR Web as general manager in November 2001. Mr. Gu alsocurrently serves as the dean of Renmin University of China’s Online EducationCollege, and was previously a professor at Renmin University of China and servedas the vice dean of Renmin University of China Online Education College andvice dean of the Adult Education College Department of Renmin University ofChina. Mr. Gu holds a bachelor’s degree in international politics fromRenmin University of China and has over 19 years of experience in the publiceducation sector.

 

***Shasha Chang***has served as one of our directors since August 2006. Ms. Changcurrently serves as the General Manager of the China division of TheMcGraw-Hill Companies, Inc. Ms. Chang joined The McGraw-HillCompanies in 2003 as the Director of Standard and Poor’s Beijing office. Priorto joining the McGraw-Hill Companies, Ms. Chang was a corporate bankerwith Bank One and First National Bank of Chicago. Ms. Chang holds a master’sdegree in comparative literature from the State University of New York and abachelor’s degree from Guangdong Foreign Languages University.

 

***Xiaohong Chen***has served as one of our directors since December 2004. Ms. Chenis currently a managing director of Tiger Global Investment Consulting(Beijing) Co., Ltd., or Tiger Consulting. Prior to joining Tiger Consulting, Ms. Chen

 

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served as a vice president of Joyo.com Limited from February 2004to September 2004. From July 1994 to February 2004, Ms. Chenwas at Veronis Suhler Stevenson, most recently as managing director. Ms. Chenreceived her bachelor’s degree in history from Peking University and a master’sdegree from Rutgers University.

 

***Min Fan*** was electedas a director of our company in October 2007. Mr. Fan is one of theco-founders and the current chief executive officer of Ctrip.com InternationalLtd., a leading travel services firm in China. From 2000 to 2004, Mr. Fanserved as Ctrip’s chief operating officer and executive vice president. Priorto founding Ctrip in 1999, Mr. Fan was the chief executive officer ofShanghai Travel Service Company, a leading domestic travel agency in China, andfrom 1990 to 1997 served in a number of senior management positions at ShanghaiNew Asia Hotel Management Company. Mr. Fan holds a master’s and a bachelor’sdegree from Shanghai Jiao Tong University and has studied at the Lausanne HotelManagement School of Switzerland.

 

***Samuel Yen*** was electedas a director of our company in October 2007. Mr. Yen is the vicepresident of finance and reporting at Alibaba Group, a leading China basede-commerce company operating online marketplaces and services for businessesand consumers. From 2004 to 2005, Mr. Yen served as financial controller andcompany secretary 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.

 

***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 an MBA degree from the University ofGeorgia.

 

**EmploymentAgreements**

 

We have entered intoemployment agreements with each of our executive officers. The terms of theseagreements are substantially similar to each other. Under these agreements, wehave agreed to employ each of our executive officers for a period of threeyears, provided that their respective employment relationship with our companymay be terminated by us or the executive officer under certain circumstances.These agreements do not provide for any special termination or severancebenefits beyond what is required under the relevant laws of China, nor do wehave other arrangements with these executive officers regarding such matters.Under these agreements, each executive officer has agreed not to disclose ourconfidential information and to abide by certain non-competition restrictionsduring his or her tenure with our company and for a period of two yearsthereafter.

 

B.  Compensation

 

**Compensationof Directors and Executive Officers**

 

For the year ended December 31,2007, we paid aggregate cash compensation of approximately RMB1.8 million($0.3 million) to our executive officers as a group, which includes all salary,cash bonuses, and housing allowances paid by us. Other than the grant ofoptions to purchase an aggregate of 530,810 of our ordinary shares, we did notprovide any other non-cash compensation to our executive officers as a group.See “—Share-Based Compensation Plans” for additional information with respectto these option grants. For the year ended December 31, 2007, we did notpay any cash compensation to our directors for serving as directors, and,although we occasionally compensate certain of our board members through thegrant of stock options, other than the grant of options to our independentdirectors to purchase an aggregate of 40,000 of our ordinary shares provided onthe date of closing of our initial public offering, we did not provide anyother non-cash compensation to our directors (except in their capacity asexecutive officers).

 

**Stock-BasedCompensation Plans**

 

We adopted ourequity incentive plan in November 2007. Our equity incentive plan replacedour amended and restated stock option plans adopted by us in March 2007and December 2004, which had amended and restated our original stockoption plan adopted in 2000. Our equity incentive plan provides for the grantof options as well as restricted share and restricted stock units, referred toas “awards.” The purpose of the plan is to attract and retain the bestavailable personnel for positions of substantial responsibility, provideadditional incentive to employees, directors and consultants, and promote thesuccess of our business.

 

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*Administration.*    Ourboard of directors administers the plan. Upon completion of our December 14,2007 offering and the establishment of our compensation committee, the boardupon resolution delegated all of its powers with respect to the administrationof the plan to the compensation committee. Subject to the provisions of theplan and subject to the approval of any relevant authorities, the compensationcommittee has the authority in its discretion, within certain parameters, todetermine among other things, the provisions, terms and conditions of eachaward, including, but not limited to, the exercise price for the options, thepurchase price for restricted stock and restricted stock units (if any),vesting schedule, forfeiture provisions, form of payment of exercise price orpurchase price and other applicable terms. Unless specifically approved by theboard of directors, the minimum vesting schedule for any option grant is threeyears and acceleration of vesting is not permitted.

 

*Option Terms.*    Shareoptions granted under our equity incentive plan may be incentive share options,or ISOs, which are intended to qualify for favorable U.S. federal incometax 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 equity incentive plan, theexercise price of ISOs cannot be less than the fair market value of ourordinary shares on the date of grant. However, in the case of an ISO granted toa grantee who at the time of grant owned shares possessing more than 10.0% ofthe combined voting power of all classes of our share capital (including anyequity of any of our Chinese subsidiaries), the option price may not be lessthan 110.0% of the fair market value of our ordinary shares on the date ofgrant of such ISO and the option period may not be greater than five years fromthe date of grant. The exercise price for NSOs is determined by the board ofdirectors but may not be less than the fair market value of ordinary shares onthe date of grant.

 

*Eligibility.    *Under our equity incentive plan, awards may be issued to employees,non-employee directors or consultants of our company or our Chinesesubsidiaries, although ISOs may only be issued to our employees or theemployees of our Chinese subsidiaries.

 

*Option Exercise and Termination of Awards.*    Share options granted under the plan may beexercised within the option period specified by our board of directors or thecompensation committee (after it is established), which shall not be more thanten years from the date of option grant. If an option holder’s serviceterminates due to the option holder’s death or disability, the unvested portionof a share option is forfeited and the vested portion is still exercisable fora period of one year following the option holder’s death or disability or untilthe expiration of the option period (if sooner). If an option holder’s serviceends for reasons other than death or disability, the unvested portion of ashare option will be forfeited and the vested portion will be exercisable for aperiod of ninety days following the option holder’s termination or until theexpiration of the option period (if sooner). Awards of restricted stock orrestricted stock units that are unvested will be forfeited at the time oftermination of service.

 

*Third Party Acquisition.    *If a third party acquires us through a merger or consolidationtransaction in which we are not the surviving corporation, all outstandingshare options will be substituted by the surviving or resulting corporation. Weare authorized to cancel any outstanding options upon the effective date of anysuch transaction, provided that we notify each option holder of our intentionto do so at least 30 days prior to the effective date of the transaction andpermit the optionees to exercise their options in full during this period. Weare also authorized to cancel any outstanding awards and pay or deliver to theholder an amount in cash or securities having a value equal to the formula orfixed price per share paid to shareholders in the case of restricted stock orrestricted stock units. In the case of options, the holder will receive anamount equal to the product of the number of shares subject to the optionmultiplied by the amount, if any, by which the formula or fixed price per sharepaid to shareholders in the transaction exceeds the option exercise priceapplicable to such award.

 

*Amendment and Termination of Plan.*    Our board of directors may at any time amend,suspend or terminate our equity incentive plan. Amendments to our equity incentiveplan are subject to shareholder approval, to the extent required by law, or bystock exchange rules or regulations. Any amendment, suspension ortermination of our equity incentive plan must not adversely affect awardsalready granted without consent of the recipient of such awards. Unlessterminated earlier, our equity incentive plan shall continue in effect for aterm of ten years from the date of adoption.

 

As of the date ofthis report, our board of directors has authorized the issuance of up to 14,015,310ordinary shares upon exercise of awards granted under our equity incentiveplan, with an increase each year equal to two percent of the outstanding numberof shares as of the immediately preceding year ended December 31st. As ofthe date of this annual report options to purchase****9,976,667ordinary shares were outstanding and options to purchase 788,643 ordinaryshares remained available for future option grants.****The following table summarizes, as of the date of this annualreport, the option grants made to our directors and executive officers pursuantto our equity incentive plan:

 

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| **Name**         | ** ** | **Ordinary Shares   Underlying Option  Grant** | ** ** | **Exercise   Price**** ****($ /share)** | ** ** | **Grant Date**         | ** ** | **Expiration Date**    | ** ** |
|------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Julia Huang      |       | 600,000                                                       | (1)        | 0.20                                                   |       | November 28, 2001 |       | November 28, 2011 |       |
|             |       | 800,000                                                       | (1)        | 0.20                                                   |       | December 15, 2001      |       | December 15, 2011      |       |
|             |       | 300,000                                                       | (1)        | 0.20                                                   |       | December 31, 2003      |       | December 31, 2013      |       |
|             |       | 300,000                                                       | (1)        | 0.20                                                   |       | December 31, 2003      |       | December 31, 2013      |       |
|             |       | 768,300                                                       | (2)        | 1.09                                                   |       | March 14, 2004    |       | March 14, 2014         |       |
|             |       | 405,900                                                       | (2)        | 1.26                                                   |       | April 12, 2005         |       | April 12, 2015         |       |
|             |       | 275,175                                                       | (2)        | 1.58                                                   |       | December 31, 2005 |       | December 31, 2015 |       |
|             |       | 268,905                                                       | (2)        | 1.85                                                   |       | March 14, 2006         |       | March 14, 2016         |       |
|             |       | 250,000                                                       | (2)        | 2.86                                                   |       | April 23, 2007         |       | April 23, 2017         |       |
|             |       |                                                          |       |                                                   |       |                        |       |                        |       |
| Shawn Ding       |       | 200,000                                                       | (3)        | 0.20                                                   |       | November 28, 2001      |       | November 28, 2011      |       |
|             |       | 500,000                                                       | (3)        | 0.20                                                   |       | August 1, 2002         |       | August 1, 2012         |       |
|             |       | 500,000                                                       | (3)        | 0.20                                                   |       | August 1, 2003         |       | August 1, 2013         |       |
|             |       | 768,300                                                       | (4)        | 1.09                                                   |       | March 14, 2004         |       | March 14, 2014         |       |
|             |       | 100,000                                                       | (4)        | 0.86                                                   |       | December 10, 2004      |       | December 10, 2014      |       |
|             |       | 405,900                                                       | (4)        | 1.26                                                   |       | April 12, 2005         |       | April 12, 2015         |       |
|             |       | 275,175                                                       | (4)        | 1.58                                                   |       | December 31, 2005      |       | December 31, 2015      |       |
|             |       | 268,905                                                       | (4)        | 1.85                                                   |       | March 14, 2006         |       | March 14, 2016         |       |
|             |       | 250,000                                                       | (4)        | 2.86                                                   |       | April 23, 2007         |       | April 23, 2017         |       |
|             |       |                                                          |       |                                                   |       |                        |       |                        |       |
| Zonglian Gu      |       | *                                                             |       | 0.50                                                   |       | August 1, 2003         |       | August 1, 2013         |       |
|             |       | *                                                             |       | 2.86                                                   |       | April 23, 2007         |       | April 23, 2017         |       |
|             |       |                                                          |       |                                                   |       |                        |       |                        |       |
| Ge (Michael) Xu+ |       | *                                                             |       | 2.86                                                   |       | April 23, 2007         |       | April 23, 2017         |       |
|             |       |                                                          |       |                                                   |       |                        |       |                        |       |
| Changqing Xie    |       | *                                                             |       | 0.86                                                   |       | December 10, 2004      |       | December 10, 2014      |       |
|             |       |                                                          |       |                                                   |       |                        |       |                        |       |
| Samuel Yen       |       | *                                                             |       | 3.05                                                   | (5)        | December 14, 2007      |       | December 14, 2017      |       |
|             |       |                                                          |       |                                                   |       |                        |       |                        |       |
| Min Fan          |       | *                                                             |       | 3.05                                                   | (6)        | December 14, 2007      |       | December 14, 2017      |       |

 

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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 of the date of this annual report.

+  Mr. Xu resigned from his position withthe Company effective March 31, 2008.

(1)  Theseoptions were transferred for no consideration by Ms. Huang to MLP HoldingsLimited, a British Virgin Islands company, on December 5, 2004, and wereexercised by MLP Holdings Limited on December 31, 2004. Qing Li is thesole shareholder of MLP Holdings Limited. See “—E.  Share Ownership.”

(2)  Ms. Huangis holding her stock options through her wholly-owned British Virgin Islandscompany, South Lead Technology Limited.

(3)  Theseoptions were transferred for no consideration by Mr. Ding to New ValueTechnology Limited, a British Virgin Islands company, on December 1, 2003,700,000 of these options were exercised by New Value Technology Limited on December 31,2004 and the remaining 500,000 were exercised by New Value Technology on February 23,2006. Qing Li is the sole shareholder of New Value Technology Limited. See “—E.  Share Ownership.”

(4)  Mr. Dingholds his options through his wholly-owned British Virgin Islands company,Moral Known Industrial Limited.

(5)  Mr. Yenwas granted options to purchase ordinary shares on the date of the closing ofour initial public offering at an exercise price of US$3.05.  The exercise price represents the closingmarket price of an ADS as quoted on the Nasdaq Global Market on the date ofgrant (which was the date of closing of our initial public offering), dividedby three (since each ADS represents three ordinary shares).

(6)  Mr. Fanwas granted options to purchase ordinary shares on the date of the closing ofour initial public offering at an exercise price of US$3.05.  The exercise price represents the closingmarket price of an ADS as quoted on the Nasdaq Global Market on the date ofgrant (which was the date of closing of our initial public offering), dividedby three (since each ADS represents three ordinary shares).

 

**Pension and Similar Benefits**

 

Full time employees of the Group in the PRCparticipate in a government-mandated multi-employer defined contribution planpursuant to which certain pension benefits, medical care, unemploymentinsurance, employee housing fund and other welfare benefits are provided toemployees. Chinese labor regulations require the Group to accrue for thesebenefits based on certain percentages of the employees’ salaries. The totalamount we have accrued under such employee benefits plans as of December 31,2007 was approximately RMB14.7 million ($2.0 million).

 

C.  Board Practices

 

**BoardComposition**

 

Our board ofdirectors consists of seven directors, two of whom satisfy the “independent”requirements of the Nasdaq corporate governance rules and the SECregulations. We will rely on a Nasdaq rule that permits a foreign privateissuer to be exempted from the requirement that a majority of its board ofdirectors must be “independent.” We intend to comply, however, with the otherNasdaq corporate governance rules, in particular, the independent requirementsfor the relevant board committees discussed below.  There are no family relationships between anyof our directors and executive officers.

 

**Committeesof the Board of Directors**

 

To enhance ourcorporate governance, we established, upon completion of our initial publicoffering, three committees under the board of directors: the audit committee,the compensation committee and the nominating committee. We adopted chartersfor each of these committees. The committees will have the following functionsand members.

 

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*** ***

***AuditCommittee***

 

Our audit committeecharter will require that the members of the audit committee satisfy applicableNasdaq corporate governance rules on independence. Our audit committeeconsists of Samuel Yen, Min Fan and Xiaohong Chen, with Samuel Yen serving asthe chairman of the committee, and with Samuel Yen and Min Fan beingindependent directors. We expect that within one year of our initial publicoffering our audit committee will consist solely of independent directors.

 

Our audit committeeis responsible for, among other things:

 
| • |   | the appointment,  evaluation, compensation, oversight and termination of the work of our  independent registered public accounting firm (including the resolution of  disagreements between our management and the independent registered public  accounting firm regarding financial reporting);                                                                           |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| • |   | ensuring that it  receives from our independent registered public accounting firm a formal  written statement attesting to the registered public accounting firm’s  independence and describing all relationships 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 public accounting firm in accordance with Nasdaq  rules;                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| • |   | reviewing our  annual audited financial statements and, if deemed appropriate by the audit  committee, other publicly disclosed financial information;                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| • |   | reviewing with our  independent registered public accounting firm all critical accounting policies  and practices to be used by us in preparing our financial statements, all  alternative treatments of financial information within U.S. GAAP, and  other material communications between our independent registered public  accounting firm and management;         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| • |   | reviewing our  policies with respect to risk assessment and risk management;                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| • |   | reviewing, with  management and counsel, any legal matters that may have a material impact on  us and any material reports or inquiries from regulatory or governmental agencies;  and                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| • |   | ensuring that we  have established procedures for the receipt, retention and treatment of  complaints regarding accounting, internal accounting controls, auditing  matters or potential violations of law, and the confidential, anonymous submission  by our employees of concerns regarding questionable accounting or auditing  matters or potential violations of law. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |

 ***Compensation Committee***

 

Our compensationcommittee charter will require that the members of the compensation committeesatisfy applicable Nasdaq corporate governance rules on independence. Ourcompensation committee consists of Samuel Yen, Min Fan and Xiaohong Chen, withXiaohong Chen serving as the chairman of the committee, and with Samuel Yen andMin Fan being independent directors. We expect that within one year of ourinitial public offering our compensation committee will consist solely ofindependent directors.** **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 total compensation package for our executives;                                                                                                                                                                                                                                          |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                  |
| • |   | reviewing and  making recommendations to the board with respect to the compensation of our  directors;                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                  |
| • |   | reviewing and approving  corporate goals and objectives relevant to the compensation of our chief  executive officer, evaluating the performance of our chief executive officer  in light of those goals and objectives, and setting the compensation level of  our chief executive officer based on this evaluation; |
|   |   |                                                                                                                                                                                                                                                                                                                  |
| • |   | reviewing the  results of, and procedures for, the evaluation of the performance of other  executive officers;                                                                                                                                                                                                        |

 

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| • |   | reviewing  periodically and making recommendations to the board regarding any long-term  incentive compensation or equity plans, programs or similar arrangements, and  administering these plans; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                               |
| • |   | reviewing and  making recommendations to the board regarding all new employment, consulting,  retirement and severance agreements and arrangements proposed for our  executives; and               |
|   |   |                                                                                                                                                                                               |
| • |   | selecting peer  groups of companies to be used for purposes of determining competitive  compensation packages.                                                                                     |

 

***NominatingCommittee***

 

Our nominatingcommittee charter will require that the members of the nominating and corporategovernance committee satisfy applicable Nasdaq corporate governance rules onindependence. Our nominating and corporate governance committee consists ofSamuel Yen, Min Fan and Xiaohong Chen, with Min Fan serving as the chairman ofthe committee, and with Samuel Yen and Min Fan being independent directors. Weexpect that within one year of our initial public offering our nominating andcorporate governance committee will consist solely of independent directors.****The nominating committee assists the board in selectingindividuals qualified to become our directors and in determining thecomposition of the board and its committees. Our nominating committee isresponsible for, among other things:

 
| • |   | selecting and  recommending to the board nominees for election or re-election to the board;  and                                                                                           |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                       |
| • |   | reviewing annually  with the board the current composition of the board with regards to  characteristics such as independence, skills, experience, age and availability  of service to us. |

 

***Code ofBusiness Conduct and Ethics***

 

Our board ofdirectors has adopted a code of business conduct and ethics, which will beapplicable to all of our directors, officers and employees. We have made ourcode of business conduct and ethics publicly available on our website.

 

**Dutiesof Directors**

 

Under Cayman Islandslaw, our directors have a duty to act honestly, in good faith and with a viewto our best interests. Our directors also have a duty to exercise the care,diligence and skills that a reasonably prudent person would exercise incomparable circumstances. In fulfilling their duty of care to us, our directorsmust ensure compliance with our memorandum and articles of association. We havethe right to seek damages if a duty owed by our directors is breached.

 

The functions andpowers of our board of directors include, among others:

 
| • |   | supervising and  directing the business and affairs of our company in the interest, and for  the benefit, of our shareholders in order to enhance shareholder value over  the long term; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                     |
| • |   | exercising its  business judgment to act in a manner which it reasonably believes to be in  the best interests of our company and shareholders consistent with its  fiduciary duties;    |
|   |   |                                                                                                                                                                                     |
| • |   | reviewing and,  where appropriate, approving our major strategic, financial and business  objectives, plans and actions;                                                                 |
|   |   |                                                                                                                                                                                     |
| • |   | establishing  policies and principles for the selection, and possible succession planning,  of directors, the chief executive officer and other senior management  officers;             |
|   |   |                                                                                                                                                                                     |
| • |   | convening  shareholders’ annual general meetings and reporting its work to shareholders  at such meetings;                                                                          |
|   |   |                                                                                                                                                                                     |
| • |   | declaring  dividends and distributions;                                                                                                                                                  |
|   |   |                                                                                                                                                                                     |
| • |   | appointing  officers and determining the term of office of the officers;                                                                                                                 |
|   |   |                                                                                                                                                                                     |
| • |   | exercising the  borrowing powers of our company and mortgaging the property of our company;  and                                                                                         |
|   |   |                                                                                                                                                                                     |
| • |   | approving the  transfer of shares in our company, including the registering of such shares  in our share register.                                                                       |

 

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**InterestedTransactions**

 

A director may votein respect of any contract or transaction in which he is interested, providedthat the nature and extent of the interest of any director in any such contractor transaction shall be disclosed by him at or prior to the consideration andany vote 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 anyspecified firm or company and is to be regarded as interested in anytransaction with such firm or company will be sufficient disclosure, and, aftersuch general notice, it will not be necessary to give special notice relatingto 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.

 

**Termsof Directors and Executive Officers**

 

At each annualgeneral meeting of the shareholders of our company, one-third of our directorsat such time are required to retire from office and are eligible forre-election. All of these directors will retain office until the close of suchgeneral meeting.

 

**Limitationon Liability and Other Indemnification Matters**

 

Cayman Islands lawallows us to indemnify our directors, officers, auditors and trustee acting inrelation to any of our affairs against actions, costs, charges, losses, damagesand expenses incurred by reason of any act done or omitted in the execution oftheir duties as our directors, officers, auditors and trustee.

 

Under our fifthamended and restated memorandum and articles of association adopted upon theclosing of our initial public offering, we indemnified our directors, officers,auditors, trustees and their heirs, executors, administrators and personalrepresentatives respectively to the maximum extent permitted by law out of ourassets from and against all actions, proceedings, costs, charges, losses,damages and expenses which they or any of them shall or may incur or sustain byreason of any act done or omitted in or about the execution of their duty intheir respective offices or trusts, except such (if any) as they shall incur orsustain by or through their own willful default.

 

D.  Employees

 

We had 393 employees, 816 employees, 813 employeesand 1,078 employees as of December 31, 2004, 2005, 2006 and 2007. ** **The increase in thenumber of our employees from 2004 to 2007 was primarily due to our acquisitionof new businesses, establishment of collaborative alliances with new universitypartners and the increase in general and administrative employees as a resultof our initial public offering over the same period.  The following table sets forth the number ofour employees categorized by function and the percentage of each category ofour total employees as of December 31, 2007.

 
| ** **                     | ** ** | **Employees** | ** ** | **Percentage** | ** ** |
|--------------------------------|------------|---------------|------------|----------------|------------|
| Operations and program support |       | 614           |       | 56.96          | %          |
| Management and administration  |       | 256           |       | 23.74          | %          |
| Research and development       |       | 133           |       | 12.32          | %          |
| Selling and marketing          |       | 75            |       | 6.98           | %          |
| **Total number of employees**  |       | **1,078**     | ** ** | **100.0**      | **%**      |

 

We believe that our relations with our employees aregood, and we have not experienced any significant labor disputes. Our employeesare not represented by any collective bargaining agreements or labor unions.

 

We are required by PRC law to participate in variousgovernment sponsored benefit and pension programs for our employees. We arerequired to accrue a portion of the salaries, bonuses and certain otherpayments to our employees for these benefits. The total amount we have accruedunder our employee benefits plans as of December 31, 2007 wasapproximately RMB14.7 million ($2.0 million).

 

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Under our equity incentive plan, we granted certainemployees options to purchase our ordinary shares. For a description of ourequity incentive plan, see “—B. Compensation—Share-Based Compensation Plans.”

 

E.  Share Ownership

 

The following tablesets forth information, as of the date of this annual report, with respect tothe beneficial ownership of our ordinary shares by:

 

•                  each person known to us to own beneficially more than 5% of our ordinaryshares; and

 

•                  each of our directors and executive officers who beneficially own ourordinary shares.

 

Beneficial ownershipis determined in accordance with the rules of the Securities and ExchangeCommission and includes voting or investment power with respect to thesecurities. Except as indicated below, and subject to applicable communityproperty laws, the persons named in the table below have sole voting andinvestment power with respect to all ordinary shares shown as beneficiallyowned by them. A shareholder is also deemed to be, as of any date, thebeneficial 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.

 
| ** **                                       | ** ** | **Ordinary Shares Beneficially Owned** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                       | ** ** | **Number(1)**                                         | ** ** | **%(2)** | ** ** |
| **Directors  and Executive Officers**            |       |                                                  |       |   |   |
| Julia Huang(3)                                   |       | 1,620,253                                             |       | 2.7 |   |
| Shawn Ding(4)                                    |       | 1,720,253                                             |       | 2.9 |   |
| Shasha Chang(5)                                  |       | 3,377,336                                             |       | 5.8 |   |
| Xiaohong Chen(6)                                 |       | 10,132,934                                            |       | 16.8 |   |
| Zonglian Gu                                      |       | *                                                     |       | * |   |
| Changqing Xie                                    |       | *                                                     |       | * |   |
| Samuel Yen                                       |       | *                                                     |       | * |   |
| Min Fan                                          |       | *                                                     |       | * |   |
| All directors and executive  officersAs a  group |       | 17,257,443                                            |       | 27.0 |   |

 

----

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

 

(1)  Beneficialownership of each listed person includes the shares such person has the rightto acquire within 60 days after the date of this annual report.

(2)  Percentageof beneficial ownership of each listed person is based on 58,434,407****ordinary shares outstanding as of June 23, 2008 andthe ordinary shares underlying options and warrants exercisable by such personwithin 60 days of the date of this annual report.

(3)  Representsordinary shares underlying stock options from us held by South Lead TechnologyLimited, a British Virgin Islands company, and exercisable by South LeadTechnology Limited within 60 days of the date of this annual report. Ms. Huangis the beneficial owner of all the outstanding stock of South Lead TechnologyLimited.

(4)  Representsordinary shares underlying stock options exercisable within 60 days of the dateof this annual report held by Mr. Ding through his wholly-owned BritishVirgin Islands Company, Moral Known Industrial Limited.

(5)  Represents3,377,336 ordinary shares held by The McGraw-Hill Companies, Inc. Ms. Changis the general manager of the China division of The McGraw-Hill Companies, Inc.Ms. Chang disclaims beneficial ownership of all of our shares held by TheMcGraw-Hill Companies, Inc., except to the extent of her pecuniaryinterest therein.

(6)  Represents8,357,884 ordinary shares and warrants to purchase 1,766,873 ordinary shares(which warrants are exercisable in full within 60 days of the date of thisannual report), held by Tiger Global Private Investment Partners II, L.P., aCayman Islands limited partnership, and 6,750 ordinary shares and warrants topurchase 1,427 ordinary shares (which warrants are exercisable in full within60 days of the date of this annual report), held by Tiger Global II, L.P., aDelaware limited partnership. Ms. Chen is managing director at TigerGlobal Private Investment Partners II, L.P. Ms. Chen disclaims beneficialownership of all of our shares held by entities affiliated with Tiger GlobalPrivate Investment Partners II, L.P., except to the extent of her pecuniaryinterest therein.

 

As of the date of this annual report, warrants topurchase 2,254,786 of our ordinary shares that are exercisable within 60 daysof the date of this annual report are held by record holders in the UnitedStates, which represents 3.3% of our total share capital. We have a total of 14record holders in the United States.

 

None of our existing shareholders has voting rightsthat differ from the voting rights of other shareholders after the closing ofour initial public offering.

 

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**Item 7. Major Shareholders and Related Party Transactions**

 

A.  Major Shareholders

 

Pleaserefer to “Item 6. Directors, Senior Management and Employees — E. ShareOwnership.”

 

B.  Related Party Transactions

 

**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.”

 

***ContractualArrangements with respect to Hongcheng Education***

 

Under the currentChinese legal framework, foreign invested companies are not permitted to investin K-12 schools in China. We operate the three private primary and secondaryschools through Hongcheng Education, and have entered into a series ofagreements with Hongcheng Education and its shareholders, Mr. ChangqingXie, one of our officers, and Mr. Xueshan Yang, one of our directors, tomaintain effective 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.

 

*ChinaEdu and Changqing Xie Loan Agreement*.    We entered into a loan agreement with Mr. Xieon January 3, 2005 (and amended such agreement on July 12, 2005 and July 18,2007), pursuant to which we loaned Mr. Xie approximately $4.8 million tofund the registered capital requirements of Hongcheng Education. The term ofthe loan is 20 years and may be extended with the consent of the parties. Tothe extent permitted by Chinese law, the loan may only be repaid by Mr. Xietransferring all of his equity interests in Hongcheng Education to us (or ourdesignee). Mr. Xie has agreed that we have the right to appoint alldirectors to the board of directors of Hongcheng Education that Mr. Xie isentitled to appoint in his capacity as a shareholder of the entity.

 

*ChinaEdu and Xueshan Yang Loan Agreement*.    We entered into a loan agreement with Mr. Yangon January 3, 2005 (and amended such agreement in June 2005 and July 18,2007), pursuant to which we loaned Mr. Yang approximately $1.8 million tofund the registered capital requirements of Hongcheng Education. The term ofthe loan is 20 years and may be extended with the consent of the parties. Tothe extent permitted by Chinese law, the loan may only be repaid by Mr. Yangtransferring all of his equity interests in Hongcheng Education to us (or ourdesignee). Mr. Yang has agreed that we have the right to appoint alldirectors to the board of directors of Hongcheng Education that Mr. Yangis entitled to appoint in his capacity as a shareholder of the entity.

 

*Hongcheng Education, Changqing Xie, Xueshan Yang and HongchengTechnology Shareholder’s Voting Rights Entrustment Agreement.*    Hongcheng Education, Mr. Xie and Mr. Yangand Hongcheng Technology entered into a shareholder’s voting rights entrustmentagreement dated on July 12, 2005, pursuant to which Mr. Xie and Mr. Yangirrevocably entrusted Hongcheng Technology with the right to act as theirproxies and vote their shares in Hongcheng Education. Mr. Xie entered intoa second similar agreement with Hongcheng Education and Hongcheng Technology onDecember 20, 2005. These agreements will remain effective as long as Mr. Xieor Mr. Yang, respectively, remains a shareholder in Hongcheng Education.

 

*Changqing Xie, 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.

 

*Changqing Xie, Xueshan Yang and Hongcheng Technology Equity Pledge Agreement*.    As security for Mr. Xie and Mr. Yang’sobligations under their Call Option Agreements and Shareholder Voting RightsEntrustment Agreements with 

 

 

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Hongcheng Technology and Hongcheng Education’s obligations under thetechnical consulting and services agreement with Hongcheng Technology, Mr. Xieand Mr. Yang pledged all of their equity interests in Hongcheng Educationand all distributions arising from those interests to Hongcheng Technology underequity pledge agreements dated July 12, 2005 and December 20, 2005,as amended on July 18, 2007.

 

*Power of Attorney by Changqing Xie and XueshanYang.    *For purposesof securing their performance under the various agreements that they haveentered into with us and Hongcheng Technology, both Mr. Xie and Mr. Yanghave irrevocably appointed Hongcheng Technology as their attorneys-in-fact andhave authorized Hongcheng Technology to take all actions on their behalf (asshareholders of Hongcheng Education) that are deemed appropriate by HongchengTechnology.

 

*Hongcheng Technology and Hongcheng Education Exclusive TechnicalConsulting and Services Agreement.*    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.

 

***ContractualArrangements with respect to Xiandai Technology***

 

On July 12,2005, we entered into a series of agreements with Xiandai Technology, the ICPlicense holder for operating our website www.chinaedu.net, and itsshareholders, our former 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.

 

*Hongcheng Technology and Gongquan Wang Loan Agreement*.    Hongcheng Technology and Mr. Wang enteredinto a loan agreement on July 12, 2005 (and amended such agreement on August 30,2006) under which Hongcheng Technology loaned Mr. Wang RMB0.3 million tofund the registered capital requirements of Xiandai Technology. The term of theloan is 20 years and may be extended with the consent of the parties. To theextent permitted by Chinese law, the loan may be repaid by Mr. Wang usingthe proceeds from the transfer all of his equity interests in XiandaiTechnology to Hongcheng Technology or its designee. The parties have agreedthat Hongcheng Technology has the right to appoint all directors to the boardof directors of Xiandai Technology that Mr. Wang is entitled to appoint inhis capacity as a shareholder of the entity.

 

*Hongcheng Technology and Xueshan Yang Loan Agreement*.    Hongcheng Technology and Mr. Yang enteredinto a loan agreement on July 12, 2005 (and amended such agreement on August 30,2006) under which Hongcheng Technology loaned Mr. Yang RMB0.3 million tofund the registered capital requirements of Xiandai Technology. The term of theloan is 20 years and may be extended with the consent of the parties. To theextent permitted by Chinese law, the loan may be repaid by Mr. Yang usingthe proceeds from the transfer all of his equity interests in XiandaiTechnology to Hongcheng Technology or its designee. The parties have agreedthat Hongcheng Technology has the right to appoint all directors to the boardof directors of Xiandai Technology that Mr. Yang is entitled to appoint inhis capacity as a shareholder of the entity.

 

*Xiandai Technology, Gongquan Wang, Xueshan Yang andHongcheng Technology Shareholders’ Voting Rights Entrustment Agreement.*    Xiandai Technology, Mr. Wang, Mr. Yangand Hongcheng Technology entered into a shareholder’s voting rights entrustmentagreement pursuant to which Mr. Wang and Mr. Yang irrevocablyentrusted Hongcheng Technology with the right to act as their proxies and voteall of their shares in Xiandai Technology. This agreement will remain effectiveas long as either of Messrs. Wang or Yang remains a shareholder in XiandaiTechnology.

 

*Gongquan Wang, Xueshan Yang and Hongcheng Technology Call OptionAgreement.*    Mr. Wang and Mr. Yangalso entered into call option agreements with Hongcheng Technology under whicheach of them granted to Hongcheng Technology or its designee irrevocableoptions to purchase all of their respective equity interests in XiandaiTechnology at the lowest price permitted under applicable Chinese laws.

 

*Gongquan Wang, Xueshan Yang and Hongcheng Technology Equity PledgeAgreement.    *Mr. Wangand Mr. Yang also pledged all of their equity interests in XiandaiTechnology and all distributions arising from those interests to HongchengTechnology under equity pledge agreements dated July 12, 2005, as amendedon July 18, 2007, to secure their 

 

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performance under their Call Option Agreements and Shareholder VotingRights Entrustment Agreements with Hongcheng Technology and the performance ofXiandai Technology under the Technical Consulting and Services Agreement withHongcheng Technology.

 

*Power of Attorney by Gongquan Wang and XueshanYang.    *Each of Mr. Wangand Mr. Yang has appointed Hongcheng Technology as his attorney-in-factwith and has authorized Hongcheng Technology to take all the actions on hisbehalf (as a shareholder of Xiandai Technology) that are deemed appropriate byHongcheng Technology.

 

*Hongcheng Technology and Xiandai Technology Exclusive TechnicalConsulting and Services Agreement.    *We, through our wholly-owned subsidiary Hongcheng Technology, enteredinto an exclusive technical consulting and services agreement with XiandaiTechnology. Under this agreement Hongcheng Technology provides networktechnology development services, website design services, maintenance andsecurity services, employee training services and any other services that maybe agreed upon by the parties to Xiandai Technology. As consideration for theseservices Xiandai Technology pays Hongcheng Technology a service fee equal to80% of its annual gross revenue.

 

**StockOption Grants**

 

We have grantedoptions to purchase our ordinary shares to certain of our employees, directorsand officers under our equity incentive plan. As of the date of this annualreport, there were outstanding options to purchase an aggregate of**** 9,976,667 ordinaryshares.** **Fora description of our equity incentive plan and these option grants, see “Item 6. Directors, Senior Management and Employees Management—B. Compensation—Stock-Based Compensation Plans.”

 

**RegistrationRights**

 

Pursuant to our fourth amended and restatedregistration rights agreement entered into in March 2007, we have grantedcertain registration rights to holders of our registrable securities, whichinclude our preferred shares and ordinary shares converted from our preferredshares as well as ordinary shares owned by certain of our early shareholders,or founders, as of August 18, 2000. As of December 31,2007, the holders of an aggregate of 29,536,862 ordinary shares will beentitled to the registration rights provided under this registration rightsagreement. Set forth below is adescription of the registration rights granted under the agreement.

 

*Demand Registration Rights*.    Holders of at least25% of registrable securities (excluding for such purposes the shares held bythe founders) have the right to demand that we file a registration statementcovering the offer and sale of their securities as long as the securities to beregistered have an aggregate offering price of at least $5.0 million. We,however, are not obligated to effect a demand registration (1) if we havealready effected two demand registrations, (2) during the period beginningon the 60th day prior to our good faith estimate of the filing date of, andending on the 180th day after the effective date of, a public offering of oursecurities initiated by us, or (3) if the securities to be registered canbe immediately registered on Form S-3 or Form F-3, as applicable. Wehave the right to defer filing of a registration statement for up to 60 days ifour board of directors determine in good faith that filing of a registrationwill be detrimental to us, but we cannot exercise the deferral right more thanonce in any 12 month period.

 

*Form F-3 or S-3 RegistrationRights*.    Whenwe are eligible to register our shares using Form F-3 or Form S-3,holders of registrable securities then outstanding have the right to requestthat we file a registration statement under Form F-3 or Form S-3 aslong as the aggregate amount of securities to be sold under the registrationstatement exceeds $1.50 million. We may defer filing of a registrationstatement on Form F-3 or Form S-3 for up to 60 days if our board ofdirectors determine in good faith that filing such a registration statementwill be detrimental to us and our shareholders, provided that we cannotexercise the deferral right more than once in any 12 month period. We are notobligated to file a registration statement on Form F-3 or Form S-3 ifwe have already effected two registrations on Form F-3 or Form S-3within the 18 month period preceding the date of such request.

 

*Piggyback Registration Rights.*    If we propose to filea registration statement for a public offering of our securities other than asrequired by the agreement granting holders of our registrable securities theregistration rights or pursuant to a registration statement relating to thesale or issuance of securities under an employee benefit plan or in connectionwith a corporate reorganization, then we must offer holders of registrablesecurities an opportunity to include in such registration all or any part oftheir registrable securities. We must use our best effort to cause theunderwriters in any underwritten offering to permit these shareholders who sorequested to include their shares on the same terms and conditions as oursecurities to be registered.

 

*Expenses ofRegistration.    *We will pay all expenses relating to any demand, piggyback or F-3 orS-3 registration other than underwriting commissions and discounts, and feesand disbursements for counsel for selling shareholders, if applicable.

 

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

 

**ShareholdersAgreement**

 

We entered into ashareholders agreement with certain holders of our ordinary shares andpreferred shares, and this shareholders agreement has been amended and restatedfrom time to time in connection with our issuance of additional ordinary orpreferred shares. The shareholders agreement contains certain restrictions ontransfers of our shares by these shareholders, including rights of first offerin favor of our company and the preferred holders on transfers by the ordinaryholders, rights of co-sale in favor of the preferred holders with respect totransfers by the ordinary holders and restrictions on the transfer of equityinterests of, and the incurring of indebtedness by, certain shareholders thatare not natural persons. In addition, the shareholders agreement grants theshareholders certain rights to information with respect to our company andcontains provisions requiring the shareholders to vote their shares so as toelect designees of certain of the shareholders to our board of directors. Theshareholders agreement automatically terminated upon the consummation of ourinitial public offering.

 

**Employment Agreements**

 

See “Item 6. Directors, Senior Management andEmployee—A. Directors and Senior Management” for a description of theemployment agreements we have entered into with our senior executive officers.

 

**Share Incentives**

 

See “Item 6. Directors, Senior Management andEmployee—B. Compensation—Compensation of Directors and Executive Officers” fora description of share options and stock purchase rights we have granted to ourdirectors, officers and other individuals as a group.

 

C. Interests ofExperts and Counsel

 

Not applicable.

 

**Item8.  Financial Information**

 

A. ConsolidatedStatements and Other Financial Information

 

Pleaserefer to Item 18 for a list of our annual consolidated financial statementsfiled as part of this annual report. The financial statements containedin this annual report begin on page F-1.

 

**DividendPolicy**

 

Since theincorporation of our company in 1999, we have not declared or paid anydividends on our ordinary shares or ADSs. We have no present plan to declare or payany dividends 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. We rely on dividends from our subsidiariesin China. Current Chinese regulations permit our subsidiaries to pay dividendsto us only out of their accumulated profits, if any, determined in accordancewith Chinese accounting standards and regulations. In addition, oursubsidiaries in China are required to set aside a certain amount of theiraccumulated after-tax profits each year, if any, to fund certain statutoryreserves. These reserves may not be distributed as cash dividends. Further, ifour subsidiaries in China incur debt on their own behalf, the instrumentsgoverning the debt may restrict their ability to pay dividends or make otherpayments 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 thenew Chinese enterprise income tax law that became effective on January 1,2008, the implementation rules and other recently issued regulations,dividends payable by an FIE to its foreign investors are subject to a 10%withholding tax (unless the foreign investor’s jurisdiction of incorporationhas a tax treaty with China that provides for a different withholdingarrangement), and dividends declared from earnings through December 31,2007 are exempted from Chinese withholding tax.

 

Our board ofdirectors has complete discretion as to whether to distribute dividends,subject to the approval of our shareholders. Even if our board of directorsdecides to pay dividends, the form, frequency and amount will depend upon ourfuture operations and earnings, capital requirements and surplus, our generalfinancial condition, contractual restrictions 

 

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and other factors that the board of directors may deem relevant. If wepay any dividends, we will pay our ADS holders to the same extent as holders ofour ordinary shares, subject to the terms of the deposit agreement, includingthe fees and expenses payable thereunder. Cash dividends on our ADSs andordinary shares, if any, will be paid in U.S. dollars.

 

**LegalProceedings**

 

There are nomaterial legal proceedings, regulatory inquiries or investigations pending, orto our knowledge, threatened against us.

One of our former employees hasrecently threatened to take legal action against us in respect of options forthe purchase of our ordinary shares that he claims to own. This formeremployee, from whom we acquired the FEC and the BCIT programs in 2005 and 2006,respectively, worked in the business unit responsible for those programs untilhis departure from our company in May of 2007. He claims to own options topurchase 140,000 of our shares, 60,000 exercisable at $1.26 per share and80,000 exercisable at $1.58 per share. Although 140,000 share options weregranted to him under our share option plan, at the time of his departure fromour company only 46,667 of these options had vested. Under the agreementsgoverning our share option plan, he was required to exercise those vestedoptions within 30 days of leaving our company, which he did not do.Consequently, we do not believe that his claim in respect of these options hasany merit. We cannot, however, assure you that the resolution of this matterwill not have a material adverse effect on our results of operations orfinancial condition.

 

**Item 9.  TheOffer and Listing**

 

A. Offering andListing Details

 

Notapplicable.

 

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 to June 23,****2008 the trading price of our ADSs on the Nasdaq GlobalMarket has ranged from US$4.51 to US$9.20 per ADS. The following table providesthe high and low trading prices for our ADSs on the Nasdaq Global Market foreach of the months since our initial public offering:

 
| ** **                                  | ** ** | **Trading Price** | ** ** |
|---------------------------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **High**               | ** ** | **Low** | ** ** |
| ** **                                  | ** ** | **US$**                | ** ** | **US$** | ** ** |
| **Monthly  Highs and Lows**                 |       |                   |       |   |   |
| **2007**                                    |       |                   |       |   |   |
| December 2007 (from  December 14) |       | 9.20                   |       | 7.75 |   |
| **2008**                                    |       |                   |       |   |   |
| January 2008                           |       | 8.58                   |       | 6.32 |   |
| February 2008                          |       | 8.00                   |       | 6.20 |   |
| March 2008                             |       | 7.90                   |       | 6.04 |   |
| April 2008                             |       | 8.05                   |       | 6.23 |   |
| May 2008                               |       | 7.40                   |       | 5.46 |   |
| June 2008 (through  June 23)      |       | 5.75                   |       | 4.51 |   |

 

D. SellingShareholders

 

Not applicable.

 

E. Dilution

 

Not applicable.

 

F. Expenses ofthe Issue

 

Not applicable.

 

**Item 10.  Additional Information**

 

A. Share Capital

 

Not applicable.

 

B. Memorandum and Articles of Association

 

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We incorporate byreference into this annual report our fifth amended and restated memorandum ofassociation and our fifth amended and restated articles of association, both of whichbecame effective upon the closing of our initial public offering, filed as Exhibits 3.1 and 3.2, respectively, to our F-1 registrationstatement (File No. 333-147620), as amended, initially filed with theSecurities and Exchange Commission on November 26, 2007.

 

C. MaterialContracts

 

We have not enteredinto any material contracts other than in the ordinary course of business andother than those described in “Item 4. Information on the Company” and “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions” or elsewhere in this annual report on Form 20-F.

 

D. ExchangeControls

 

See “Item 4.Information on the Company—B. Business Overview—Regulation—Regulation ofForeign Currency Exchange and Dividend Distribution.”

 

E. Taxation

 

**Cayman Islands Taxation**

 

The Cayman Islands currently levy no taxes onindividuals or corporations based upon profits, income, gains or appreciationand there is no taxation in the nature of inheritance tax or estate duty. Thereare no other taxes likely to be material to our company levied by theGovernment of the Cayman Islands except for stamp duties that may be applicableon instruments executed in, or after execution brought within the jurisdictionof, the Cayman Islands. The Cayman Islands are not party to any double taxationtreaties. There are no exchange control regulations or currency restrictions inthe Cayman Islands.

 

**United States Federal Income Taxation**

 

The following is a discussion of material U.S.federal income tax consequences of purchasing, owning and disposing of shares andADSs. This discussion does not purport to be a comprehensive description of allof the U.S. tax considerations that may be relevant to a particular person’sdecision to acquire the shares or ADSs (including any state, local or non-U.S.tax consequences of the ownership of the shares or ADSs).

 

**INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORSCONCERNING THE U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OFPURCHASING, OWNING AND DISPOSING OF SHARES AND ADSs IN THEIR PARTICULARSITUATION.**

 

This discussion applies to only to those investorsthat hold shares or ADSs as capital assets for U.S. tax purposes (generally,for investment). This section does not apply to holders that may be subject tospecial tax rules, including but not limited to:

 

·                  adealer in securities or currencies;

 

·                  atrader in securities that elects to use a mark-to-market method of accountingfor your securities holdings;

 

·                  abank, insurance company or other financial institution;

 

·                  atax-exempt organization;

 

·                  aholder liable for alternative minimum tax;

 

·                  aholder that actually or constructively owns 10% or more by voting power orvalue of our stock;

 

·                  aholder that holds equity shares or ADSs as part of a straddle, hedging orconversion transaction; or

 

·                  a U.S. holder whose functional currency is not the U.S. Dollar.

 

This section is based on the U.S. Internal RevenueCode of 1986, as amended, or the Code, its legislative history, existing andproposed U.S. Treasury regulations, published rulings and other administrativeguidance of the U.S. Internal 

 

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Revenue Service and courtdecisions, all as in effect on the date hereof. These laws are subject tochange or different interpretation by the U.S. Internal Revenue Service or acourt, possibly on a retroactive basis.

 

You are a “U.S. holder” if you are a beneficialowner of shares or ADSs and you are:

 

·                  acitizen or resident individual of the United States;

 

·                  aU.S. domestic corporation, or other entity treated as a domestic corporationfor U.S. federal income tax purposes;

 

·                  an estate whose income is subject to U.S.federal income tax regardless of its source; or

 

·                  atrust if a U.S. court can exercise primary supervision over the trust’sadministration and one or more U.S. persons are authorized to control allsubstantial decisions of the trust or if the trust has a valid election ineffect under applicable U.S. Treasury regulations to be treated as a UnitedStates person.

 

If a partnership (including for this purpose anyentity treated as a partnership for U.S. tax purposes) is a beneficial owner ofthe shares or ADSs, the U.S. tax treatment of a partner in the partnershipgenerally will depend on the status of the partner and the activities of thepartnership. A holder of the shares or ADSs that is a partnership and partnersin such a partnership should consult their own tax advisors about the U.S.federal income tax consequences of holding and disposing of the shares or ADSs.

 

A “non-U.S. holder” is a beneficial owner of sharesor ADSs that is not a U.S. person for U.S. federal income tax purposes.

 

For U.S. federal income tax purposes, holders ofADSs will be treated as the owners of shares represented by such ADSs.

 

*Taxationof Dividends*

 

*U.S. Holders*.    Subject to thepassive foreign investment company (“PFIC”) rules referred to below, underthe U.S. federal income tax laws, if you are a U.S. holder, you must include inyour gross income the gross amount of any dividend paid by us out of ourcurrent or accumulated earnings and profits (as determined for U.S. Federalincome tax purposes). The dividend is ordinary income that you must include inincome when you receive the dividend, actually or constructively. Dividendsreceived by a non-corporate taxpayer during taxable years beginning before January 1,2011 will be taxed at a maximum rate of 15%, where certain holding period andother requirements are satisfied, if such dividends constitute qualifieddividend income. Qualified dividend income includes dividends paid by a “qualifiedforeign corporation” (as defined in the Code), and we believe that we are, andwill continue to be, a Qualified Foreign Corporation.

 

Dividends will not be eligible for thedividends-received deduction generally allowed to U.S. corporations in respectof dividends received from other U.S. corporations. If we distribute non-cashproperty as a dividend (other than pro rata distributions of our shares), yougenerally will include in income an amount equal to the fair market value ofthe property, in U.S. Dollars, on the date that it is distributed.

 

Distributions in excess of current and accumulatedearnings and profits, as determined for U.S. federal income tax purposes, willbe treated as a non-taxable return of capital to the extent of your basis inthe equity shares and ADSs and thereafter as capital gain. However, we do notplan on calculating our earnings and profits for U.S. federal income taxpurposes, and U.S. holders therefore should generally assume that anydistributions paid by us are paid out of our earnings and profits for thispurpose.

 

*Non-U.S. Holders*.    Dividends paid tonon-U.S. holders generally will not be subject to U.S. income tax unless thedividends are “effectively connected” with your conduct of a trade or businesswithin the United States, and the dividends are attributable to a permanentestablishment (or in the case of an individual, a fixed place of business) thatyou maintain in the United States if that is required by an applicable incometax treaty as a condition for subjecting you to U.S. taxation on a net incomebasis. In such cases, you generally will be taxed in the same manner as a U.S.holder, and will not be subject to U.S. Federal withholding tax. If you are acorporate non-U.S. holder, “effectively connected” dividends may, under certaincircumstances, be subject to an additional “branch profits tax” at a 30% rateor a lower rate if you are eligible for the benefits of an income tax treatythat provides for a lower rate.

 

*Taxationof Capital Gains*

 

*U.S. Holders.*    Subject to the PFIC rules referredto below, if you are a U.S. holder and you sell or otherwise dispose of yourshares or ADSs, you will recognize capital gain or loss for U.S. Federal incometax purposes equal to the difference 

 

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between the U.S. Dollarvalue of the amount that you realize and your tax basis, determined in U.S.Dollars, in your shares or ADSs. For taxable years beginning before January 1,2011, capital gains of a non-corporate U.S. holder are generally taxed at amaximum rate of 15% where the property is held for more than one year. The gainor loss will generally be income or loss from sources within the United Statesfor foreign tax credit limitation purposes, unless it is attributable to anoffice or other fixed place of business outside the United States and certainother conditions are met. Your ability to deduct capital losses is subject tolimitations.

 

*Non-U.S. Holders*.    If you are anon-U.S. holder, you will not be subject to U.S. federal income tax on gainrecognized on the sale or other disposition of your shares or ADSs unless:

 

·                  thegain is “effectively connected” with your conduct of a trade or business in theUnited States, and the gain is attributable to a permanent establishment (or inthe case of an individual, a fixed place of business) that you maintain in theUnited States if that is required by an applicable income tax treaty as acondition for subjecting you to U.S. taxation on a net income basis; or

 

·                  youare an individual, you are present in the United States for 183 or more days inthe taxable year of the sale and certain other conditions are met.

 

In the first case, the non-U.S. holder will be taxedin the same manner as a U.S. holder. In the second case, the non-U.S. holderwill be subject to U.S. Federal income tax at a rate of 30% on the amount bywhich the non-U.S. holder’s U.S.-source capital gains exceed such non-U.S.holder’s U.S.-source capital losses.

 

If you are a corporate non-U.S. holder, “effectivelyconnected” gains that you recognize may also, under certain circumstances, besubject to an additional “branch profits tax” at a 30% rate or at a lower rateif you are eligible for the benefits of an income tax treaty that provides fora lower rate.

 

*PFIC Rules*

 

We believe that our shares and ADSs will not betreated as stock of a PFIC for U.S. federal income tax purposes for the currenttax year, and we do not expect to become a PFIC in the foreseeable future,although we can provide no assurances in this regard for the reasons discussedbelow. The determination of whether or not we are a PFIC in respect of any ofour taxable years is a factual determination that cannot be made until theclose of the applicable tax year and that is based on the types of income weearn and the value of our assets (including goodwill), both of which aresubject to change. In calculating goodwill for this purpose, we will determinethe total value of our assets by reference to the then-current market price ofthe equity and ADSs, and will make determinations regarding the amount of thistotal value allocable to goodwill. The value of our goodwill, and the totalvalue of our assets, therefore will change as the market prices of our sharesand ADSs change. Therefore, we can make no assurances that we will not be aPFIC in respect of our current taxable year or in the future.

 

In general, if you are a U.S. holder, we will be aPFIC with respect to you if for any taxable year in which you held the equityshares or ADSs:

 

·                  atleast 75% of our gross income for the taxable year is passive income; or

 

·                  atleast 50% of the value, determined on the basis of a quarterly average, of ourassets, is attributable to assets that produce or are held for the productionof passive income.

 

Passive income generally includes dividends,interest, royalties, rents (other than certain rents and royalties derived inthe active conduct of a trade or business), the excess of gains over lossesfrom certain types of transactions in commodities, annuities and gains fromassets that produce passive income. If a foreign corporation owns at least 25%by value of the stock of another corporation, the foreign corporation istreated for purposes of the PFIC tests as owning its proportionate share of theassets of the other corporation, and as receiving directly its proportionateshare of the other corporation’s income.

 

If we are treated as a PFIC, and you are a U.S.holder that did not make a mark-to-market election, as described below, youwill be subject to special rules with respect to:

 

·                  anygain you realize on the sale or other disposition of your shares or ADSs; and

 

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·                  anyexcess distribution that we make to you (generally, any distributions to youduring a single taxable year that are greater than 125% of the average annualdistributions received by you in respect of the shares or ADSs during the threepreceding taxable years or, if shorter, your holding period for the shares orADSs).

 

Under these rules:

 

·                  thegain or excess distribution will be allocated ratably over your holding periodfor the shares and ADSs;

 

·                  theamount allocated to the taxable year in which you realized the gain or excessdistribution will be taxed as ordinary income;

 

·                  theamount allocated to each prior year in respect of which we were, or weretreated as, a PFIC generally will be taxed at the highest tax rate in effectfor that year; and

 

·                  theinterest charge generally applicable to underpayments of tax will be imposed inrespect of the tax attributable to each such year.

 

Special rules apply for calculating the amountof the foreign tax credit with respect to excess distributions by a PFIC.

 

If you own shares in a PFIC that are treated asmarketable stock, you may make a mark-to-market election. If you make thiselection in a timely fashion, you will not be subject to the PFIC rules describedabove. Instead, in general, you will include as ordinary income each year theexcess, if any, of the fair market value of your equity shares and ADSs at theend of the taxable year over your adjusted basis in your shares and ADSs. Youwill also be allowed to take an ordinary loss in respect of the excess, if any,of the adjusted basis of your shares and ADSs over the fair market value at theend of the taxable year (but only to the extent of the net amount of previouslyincluded income as a result of the mark-to-market election). Your basis in theshares and ADSs will be adjusted to reflect any such income or loss amounts.

 

We do not intend to furnish you with the informationthat you would need in order to make a “qualified electing fund” election toinclude your share of its income on a current basis.

 

If you own shares or ADSs during any year that weare a PFIC, you must file U.S. Internal Revenue Service Form 8621 thatdescribes the distribution received on the equity shares or ADSs and the gainrealized on the disposition of the shares or ADSs. The reduced tax rate fordividend income, discussed in “Taxation of Dividends,” is not applicable todividends paid by a PFIC.

 

*InformationReporting and Backup Withholding*

 

In general, information reporting requirements willapply to dividends in respect of shares or ADSs or the proceeds received on thesale, exchange or redemption of shares or ADSs paid within the United States(and, in certain cases, outside the United States) to U.S. holders other thancertain exempt recipients, such as corporations, and backup withholding tax atthe rate of 28% may apply to such amounts if the U.S. holder fails to providean accurate taxpayer identification number (or to otherwise establish, in themanner provided by law, an exemption from backup withholding) or to reportdividends required to be shown on the U.S. holder’s U.S. federal income taxreturns.

 

Backup withholding is not an additional income tax,and the amount of any backup withholding from a payment to a U.S. holder willbe allowed as credit against the U.S. holder’s U.S. Federal income taxliability provided that the appropriate returns are filed.

 

A Non-U.S. holder generally may eliminate anyrequirement for information reporting and backup withholding by providingcertification of its foreign status to the payer, under penalties of perjury,on IRS Form W-8BEN.

 

F. Dividends andPaying Agents

 

Not applicable.

 

G. Statement byExperts

 

Not applicable.

 

H. Documents onDisplay

 

97

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We have filed withthe SEC our registration statement on Form F-1, including relevantexhibits, under the Securities Act with respect to underlying ordinary sharesrepresented by the ADSs.

 

We are subject tothe periodic reporting and other informational requirements of the SecuritiesExchange Act of 1934, as amended, or the Exchange Act. Under the Exchange Act,we are required to file reports and other information with the SEC.Specifically, we are required to file annually a Form 20-F no later thansix 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 Securities and Exchange Commission at 100 FStreet, N.E., Room 1580, Washington, D.C. 20549. The public may obtaininformation regarding the Washington, D.C. Public Reference Room bycalling the Commission at 1-800-SEC-0330. The SEC also maintains a web site at www.sec.govthat contains reports, proxy and information statements, and other informationregarding registrants that make electronic filings with the SEC using its EDGARsystem. As a foreign private issuer, we are exempt from the rules underthe Exchange Act prescribing the furnishing and content of quarterly reportsand proxy statements, and officers, directors and principal shareholders areexempt from the reporting and short-swing profit recovery provisions containedin Section 16 of the Exchange Act.

 

We will furnish TheBank of New York, the depositary of our ADSs, with our annual reports, whichwill include 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. SubsidiaryInformation

 

For a listing of oursubsidiaries, see “Item 4. Information on the Company—C. OrganizationalStructure.”

 

**Item 11.  Quantitative and Qualitative Disclosuresabout Market Risk**

 

***InterestRate Risk***

 

Our exposure tointerest rate risk for changes in interest rates relates primarily to theinterest receipts of excess cash deposited in banks. As of December 31,2007, we had cash and cash equivalents of RMB497.1 million ($68.1million).  Cash and cash equivalentsconsist of cash on hand and in banks.

 

We have not beenexposed to nor do we anticipate being exposed to material risks due to changesin interest rates, although our future interest income may fluctuate in linewith changes in interest rates. The risk associated with fluctuating interestrates is principally confined to our cash deposits in banks, and, therefore,our exposure to interest rate risk is minimal. We currently do not use anyderivative financial instruments to hedge interest rate risk.

 

***CreditRisk***

 

The carrying amountsof cash and cash equivalents, accounts receivable and other receivablesrepresent our principal exposure to credit risk in relation to our financialassets. As of December 31, 2007, substantially all of our cash and cashequivalents were held in uninsured accounts at major financial institutionslocated in China and Hong Kong that we believe are of acceptable creditquality. We have not used any derivative financial instruments to hedgeinterest rate risk.

 

***ForeignExchange Risk***

 

Substantially all ofour revenue generating operations are transacted in Renminbi, which is notfully convertible into foreign currencies and substantially all of our assetsand liabilities, other than our U.S. dollar denominated convertible note, aredenominated in Renminbi. As a result, the conversion of our revenue into foreigncurrencies is subject to PRC regulatory restrictions on currency conversion andwe are exposed to risks posed by fluctuations in the foreign exchange market.The value of the Renminbi against the U.S. dollar and other currencies mayfluctuate and is affected by, among other things, changes in China’s politicaland economic conditions. Any revaluation of the Renminbi may materially andadversely affect our cash flows, revenue and financial condition, and the valueof, and any dividends payable on, our ADSs in foreign currency terms. To theextent we hold assets denominated in U.S. dollars, any 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.

 

98

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We have not used anyforward contracts or currency borrowings to hedge our exposure to foreigncurrency risk. See “Item 3. KeyInformation—D. Risk Factors—Risks Related to the People’s Republic of China—Thefluctuation of the Renminbi may materially and adversely affect yourinvestment.”

 

***Inflationand Monetary Risk***

 

Inflation in China has not had a material impact onour results of operations in recent years. According to the National Bureau ofStatistics of China, the change in Consumer Price Index in China was 3.9%, 1.8%,1.5% and 4.8% in 2004, 2005, 2006 and 2007, respectively.

 

***RecentAccounting Pronouncements***

 

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements,” which provides enhanced guidance for using fairvalue to measure assets and liabilities. SFAS No. 157 also responds toinvestors’ requests for expanded information about the extent to whichcompanies measure assets and liabilities at fair value, the information used tomeasure fair value, and the effect of fair value measurements on earnings. SFASNo. 157 applies whenever other standards require (or permit) assets orliabilities to be measured at fair value. SFAS No. 157 does not expand theuse of fair value in any new circumstances. SFAS No. 157 is effective forfinancial statements issued for fiscal years beginning after November 15,2007 and interim periods within those fiscal years. We are currently evaluatingwhether the adoption of SFAS No. 157 will have a significant effect on ourconsolidated financial position, results of operations, or cash flows.

 

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities,Including an amendment of FASB Statement No. 115.” SFAS No. 159provides companies with an option to report selected financial assets andliabilities at fair value. The standard requires companies to provideadditional information that will help investors and other users of financialstatements to more easily understand the effect of a company’s choice to usefair value on its earnings. It also requires entities to display the fair valueof those assets and liabilities for which a company has chosen to use fairvalue on the face of the balance sheet. SFAS No. 159 is effective forfiscal years beginning after November 15, 2007. We are currentlyevaluating whether the adoption of SFAS No. 159 will have a significanteffect on our consolidated results of operations and financial position.

 

In December 2007, the FASB issued SFAS No. 160,“Non-Controlling  Interests inConsolidated Financial Statements, an amendment of ARB No. 51” to improvethe relevance, comparability, and transparency of financial informationprovided to investors by requiring all entities to report non-controlling  (minority) interests in subsidiaries in thesame way as required in the consolidated financial statements. Moreover, SFAS No. 160eliminates the diversity that currently exists in accounting for transactionsbetween an entity and non-controlling interests by requiring they be treated as equity transactions. SFAS No. 160is effective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008. Earlier adoption is prohibited.We have not yet begun the process of assessing the potential impact theadoption of SFAS No. 160 may have on our consolidated financial positionor results of operations.

 

In December 2007, the FASB issued SFAS No. 141R,“Business Combinations”, to improve reporting by creating greater consistencyin the accounting and financial reporting of business combinations. Thestandard requires the acquiring entity in a business combination to recognizeall (and only) the assets acquired and liabilities assumed in the transaction;establishes the acquisition-date fair value as the measurement objective forall assets acquired and liabilities assumed; and requires the acquirer todisclose to investors and other users all of the information they need toevaluate and understand the nature and financial effect of the businesscombination. SFAS No. 141R applies prospectively to business combinationsfor which the acquisition date is on or after the beginning of the first annualreporting period beginning on or after December 15, 2008, except forcertain tax adjustments for prior business combinations. Early adoption isprohibited. We have not yet begun the process of assessing the potential impactthe adoption of SFAS No. 141R may have on our consolidated financialposition or results of operations.

 

InMarch 2008, the FASB issued SFAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities” to improve financial reportingabout derivative instruments and hedging activities by requiring enhanceddisclosures to enable investors to better understand their effects on an entity’sfinancial position, financial performance and cash flows. The standard requiresdisclosure of fair values of derivative instruments and their gains and lossesin a tabular format as well as cross-referencing within footnotes to enablefinancial statement users to locate important information about derivativeinstruments. SFAS No. 161 also provides more information about an entity’sliquidity by requiring disclosure of derivative features that are creditrisk-related. SFAS No.161 is effective for financial statements issued forfiscal years and interim periods within those fiscal years beginning after November 15,2008, with early application encouraged. We do not expect the adoption of SFAS No. 161to have a material impact on our financial statements.

 

99

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**Item 12.  Description of SecuritiesOther than Equity Securities**

 

Not Applicable.

 

100

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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 ourinitial public offering of 6,820,000 ADSs (including 1,364,000 ADSs being soldby certain 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 ofthe registered securities were sold.

 

We received net proceeds of approximately$47.8****million from our initial publicoffering, after deducting underwriting discounts and commissions and estimatedoffering expenses. Wedid not receive any of the proceeds from the sale of ADSs by the sellingshareholders. 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 to use the netproceeds received from our initial public offering for the following purposes:

 

·                  approximately $10 million to expand our existing linesof business, including the funding of new collaborative alliances withuniversity partners, none****of which hadbeen used as of June 23, 2008;

 

·                  approximately $10 million to develop our own initialnetwork of learning centers, of which approximately $0.1 million has been usedas of June 23, 2008 in connection with the opening of nine learningcenters;

 

·                  approximately $15 million to complete the constructionof the new campuses at our Jingzhou School (Southern Campus) and Anqing School**,**of which****approximately$1 million****has been used as of June 23,2008;

 

·                  approximately $735,000 to fund our acquisition of theremaining 20% minority interest in 101 online school, all of which was used asof June 23, 2008;

 

·                  approximately $3.7 million to repay the loan incurred in connection with the acquisition of the newoffice building for our headquarters, which amounts are expected to be paid in July 2008;and

 

·                  the balance of approximately $8.4 millionfor general corporate purposes, including:

 

·                  expanding our sales efforts;

 

·                  opening new offices; and

 

·                  developing new or enhanced technologies, products and services.

 

As of June 23, 2008, approximately $1.7 million of the net offering proceeds from our initial public offering had beenapplied.

 

Bear, Stearns & Co. Inc., PiperJaffray & Co. and CIBC World Markets were the underwriters for ourinitial public offering.

 

**Item 15.  Controls and Procedures**

 

**Evaluation of DisclosureControls and Procedures**

 

Our management, with the participation ofour CEO (in her capacity as principal executive officer and interim principalfinancial officer), has performed an evaluation of the effectiveness of ourdisclosure controls and procedures within the meaning of Rules 13a-15(e) and15d-15(e) of the Exchange Act as of the end of the period covered by thisannual report. Based on such evaluation, our management has concluded that, asof the end of the period covered by this annual report, our disclosure controlsand procedures were effective.

 

 

101

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**Internal Control overFinancial Reporting**

 

Priorto our initial public offering in December 2007, we were a private companywith limited accounting personnel and other resources with which to address ourinternal control over financial reporting.****Our independent registered public accounting firm has not conducted anaudit of our internal control over financial reporting. In the course ofauditing our consolidated financial statements for the year ended December 31,2007, our independent registered public accounting firm identified andcommunicated to us two material weaknesses, two significant deficiencies andcertain other control deficiencies, each as defined in Auditing Standard No. 5,in our internal control over financial reporting as of December 31, 2007.Our management agreed with these findings.

 

The material weaknesses identified by ourindependent registered public accounting firm were:

 

·                  Inadequate financial reporting and accounting resources with a goodunderstanding of U.S. generally accepted accounting principles, or U.S. GAAP,and Securities and Exchange Commission, or SEC, reporting requirements. Inparticular, our independent registered public accounting firm determined thatwe had insufficient resources in the accounting department to properly analyzetransactions and prepare financial statements in accordance with U.S. GAAP. Wehave experienced difficulties obtaining timely and consistent financialinformation from our subsidiaries, and we have limited resources to monitor theaccounting policies and financial activities of each subsidiary. As a result, asignificant number of audit adjustments have been made to our managementfinancial statements.

 

·                  The lack of a comprehensive set of accounting policies and procedures inaccordance with U.S. GAAP, and inadequate guidance as to how transactionsshould be accounted for under U.S. GAAP. This has resulted in a significantnumber of audit adjustments in the past, and can cause material accounting andreporting errors not being detected in a timely manner.

 

The significant deficiencies identified byour independent registered public accounting firm were that we did not have aqualified internal tax team to address our income tax accounting and compliancematters from a U.S. GAAP perspective, and we had certain significantdeficiencies with respect to our management information systems.

 

Following the identification of thesematerial weaknesses and significant deficiencies and other controldeficiencies, we have taken certain measures to begin to remediate theseweaknesses and deficiencies. To begin addressing these weaknesses, we have (i) outsourced,for the time until we are able to perform these functions using our ownaccounting staff, some of our accounting functions to a third party consultantthat employs personnel experienced in U.S. GAAP reporting; (ii) hired twoqualified accounting personnel with U.S. GAAP experience; (iii) trainedour new and existing accounting staff in U.S. GAAP reporting; (iv) purchased aU.S. GAAP database to ensure that we have timely knowledge of any new update toU.S. GAAP and SEC regulations and that we have a complete database to conductresearch for the emerging accounting matters; and (v) hired an internal control director. In addition, we plan tocontinue to take measures to remediate these weaknesses and deficiencies.However, the implementation of these measures may not fully address thesematerial weaknesses and significant deficiencies and other control deficienciesin our internal control over financial reporting, and we cannot yet concludethat they have been fully remedied. Our failure to correctthese material weaknesses and significant deficiencies and other controldeficiencies or our failure to discover and address any other controldeficiencies could result in inaccuracies in our financial statements and couldalso impair our ability to comply with applicable financial reportingrequirements and related regulatory filings on a timely basis. If we fail totimely achieve and maintain the adequacy of our internal control, we may not beable to conclude that we have effective internal control over financialreporting.

 

This annual report does not include a reportof management’s assessment regarding internal control over financial reportingor an attestation report of the Company’s registered public accounting firm dueto a transition period established by rules of the SEC for newly publiccompanies. Section 404 of the Sarbanes-Oxley Act will require that weinclude a report from management on the effectiveness of our internal controlover financial reporting in our annual report on Form 20-F beginning withour annual report for the fiscal year ending December 31, 2008.

 

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**Changes in Internal Control**

 

Except as set forth above under “—InternalControl over Financial Reporting,” there were no changes in our internalcontrol over financial reporting that occurred during the period covered bythis annual report on Form 20-F that have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.****However, we completed our initial public offering in December 2007and, in connection with being a newly public company, we continue the processof reviewing our polices and procedures on internal control over financialreporting in anticipation of the requirement to comply with Section 404 ofthe Sarbanes-Oxley Act beginning with our annual report for the year ending December 31,2008.

 

**Item 16A. AuditCommittee Financial Expert**

 

Our board of directors hasdetermined that Samuel Yen, a member of our audit committee, is an auditcommittee financial expert as defined by the rules and regulations of the SEC. Samuel Yenis an independent director as defined by Nasdaq Marketplace Rule 4200(a)(15)and under Rule 10A-3 of the Exchange Act.

 

**Item 16B. Code ofEthics**

 

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 business conduct and ethics is publicly available on ourinternet website at http://ir.chinaedu.net and refer to “CorporateGovernance – Governance Policies”.

 

**Item 16C. PrincipalAccountant Fees and Services**

 

The following table sets forth the aggregatefees by categories specified below in connection with certain professionalservices rendered by Deloitte Touche Tohmatsu CPA Ltd., our independentregistered public accounting firm, for the periods indicated. We did not pay any other fees to ourindependent registered public accounting firm during the periods indicatedbelow.

 
| ** **                 | ** ** | **Years ended December 31,** | ** ** |
|----------------------------|------------|---------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                    | ** ** | **2007** | ** ** |
| ** **                 | ** ** | **(In thousands, in RMB)**   | ** ** |
| **Audit  fees(1)**         |       | 2,321                                       |       | 12,184 |   |
| **Audit-related  fees(2)** |       | —                                      |       | — |   |
| **Tax  fees(3)**           |       | —                                      |       | 639 |   |
| **All  other fees(4)**     |       | —                                      |       | — |   |

 

----

(1)  “Audit fees” means the aggregate fees billed for professionalservices rendered by Deloitte Touche Tohmatsu CPA Ltd. for the audit of ourannual financial statements and the review of our comparative interim financialstatements, which also included the issuance of the audit and review offinancial statements and other assurance services rendered in connection withour initial public offering in 2007.

(2)  “Audit-related fees” represents aggregate fees billed forprofessional services rendered by Deloitte Touche Tohmatsu CPA Ltd. for the assurance and related services that arereasonably related to the performance of the audit or review of our financialstatements and are not reported under “Audit fees.”

(3)  “Tax fees” represents the aggregated fees billed forprofessional services rendered by Deloitte Touche Tohmatsu CPA Ltd. for tax compliance, tax advice, and taxplanning.

(4) “All other fees” comprise fees for all other services providedby Deloitte Touche Tohmatsu CPA Ltd., other than those services covered infootnotes (1) to (3) above.

 

The policy of our audit committee is topre-approve all audit and non-audit services provided by Deloitte ToucheTohmatsu CPA Ltd., including audit services, audit-related services, taxservices and other services as described above. All audit and non-audit services disclosed in the table above werepre-approved by the audit committee, or the full board of directors in theevent such services were pre-approved prior to the formation of the auditcommittee.

 

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**Item 16D.  Exemptions from the Listing Standards forAudit Committees**

 

In accordance with Rule 10A-3(b)(1)(iv)(A)(2) under the Exchange Act, onemember of our audit committee, Xiaohong Chen, representing a minority of ouraudit committee, does not comply with the independence standards contained in Rule 10A-3(b)(1)(ii) underthe Exchange Act. As required by Rule 10A-3(b)(1)(iv)(A)(2) under theExchange Act, within one year from December 10, 2007, the date of theeffectiveness of our Registration Statement on Form F-1 (No. 333-147620), all members of are audit committee will comply with the independencestandards contained in Rule 10A-3(b)(1)(ii) under the Exchange Act.

 

We do not believe that our reliance on the temporary exemption materially adverselyaffect the ability of our audit committee to act independently to actindependently or to satisfy the requirement of Rule 10A-3 under theExchange Act.

 

**Item 16E.  Purchases of Equity Securities by the Issuerand Affiliated Purchasers**

 

None.

 

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**PART III**

 

**Item 17.  Financial Statements**

 

We have elected to provide the financial statements and relatedinformation specified in Item 18.

 

**Item 18. FinancialStatements**

 

The consolidated financial statements ofChinaEdu Corporation are included 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), which became effective  upon the closing of our initial public offering)                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 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), which became effective  upon the closing of our initial public offering)                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 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), which became effective upon the closing of our initial  public offering)                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 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), which became effective upon the  closing of our initial public offering)                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 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), which became effective upon the  closing of our initial public offering)                                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 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), which became effective upon the  closing of our initial public offering)  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 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), which became effective upon the  closing of our initial public offering) |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 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), which became effective upon the  closing of our initial public offering)           |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.1                 |       | Equity Incentive Plan  and forms of Incentive Stock Option Agreement and Nonqualified Stock Option  Agreement (incorporated by reference to Exhibit 10.1  from our registration statement on Form F-1 (File No. 333-147620),  which became effective upon the closing of our initial public offering)                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 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),  which became effective upon the closing of our initial public offering)                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 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),                                                                                                                                                         |

 

105

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| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                    |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       | which became effective upon the closing of our initial public  offering)                                                                                                                                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the  closing of our initial public offering)                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the  closing of our initial public offering)                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the  closing of our initial public offering)                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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),  which became effective upon the closing of our initial public offering)                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the  closing of our initial public offering)             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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),  which became effective upon the closing of our initial public offering)                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the  closing of our initial public offering)             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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),  which became effective upon the closing of our initial public offering)                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the closing of our  initial public offering)                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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),  which became effective upon the closing of our initial public offering)                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the  closing of our initial public offering)                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the  closing of our initial public offering)                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the  closing of our initial public offering) |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the  closing of our initial public offering)                            |

 

106

----

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                    |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the  closing of our initial public offering) |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the closing of our initial  public offering)                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the  closing of our initial public offering)             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the  closing of our initial public offering)                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the  closing of our initial public offering)                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the closing of our initial  public offering)                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the  closing of our initial public offering)                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the  closing of our initial public offering)                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the  closing of our initial public offering)                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the  closing of our initial public offering)                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the  closing of our initial public offering)                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the  closing of our initial public offering)               |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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), which became effective upon the  closing of our initial public offering)              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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),  which became effective upon the closing of our initial public offering)                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 4.32                |       | English Translation of  Technology Development Agreement between Renda Online School and CMR dated                                                                                                                                                                                                                                                                       |

 

107

----

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                                                                                              |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       | July 15, 2003 (incorporated  by reference to Exhibit 10.35 from our registration statement on  Form F-1 (File No. 333-147620), which became effective upon the  closing of our initial public offering)                                                                                                                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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), which became effective  upon the closing of our initial public offering)                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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), which became effective upon the  closing of our initial public offering)                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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), which became effective upon the  closing of our initial public offering)                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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 registration statement on  Form F-1 (File No. 333-147620), which became effective upon the  closing of our initial public offering)                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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), which became effective upon the  closing of our initial public offering) |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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), which became effective upon the  closing of our initial public offering)                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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), which became effective upon the  closing of our initial public offering)                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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), which became effective upon the  closing of our initial public offering)                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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), which became effective upon the  closing of our initial public offering)                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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), which became effective upon the  closing of our initial public offering)                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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), which became effective upon the  closing of our initial public offering)                                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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), which became effective upon the  closing of our initial public offering)                                                         |

 

108

----

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                                                                                 |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                  |
| 8.1                 |       | List of subsidiaries of ChinaEdu Corporation (incorporated by  reference to Exhibit 10.47 from our registration statement on  Form F-1 (File No. 333-147620), which became effective upon the  closing of our initial public offering) |
|                |       |                                                                                                                                                                                                                                                  |
| 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 and 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 Jun He Law Offices                                                                                                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                  |
| 15.2*               |       | Consent of Deloitte Touche Tohmatsu CPA Ltd.                                                                                                                                                                                                          |

 

----

*       Filed with this annual report on Form 20-F 

 

109

----

 

**SIGNATURES**

 

The registrant hereby certifies that itmeets all of the requirements for filing on Form 20-F and that it has dulycaused and authorized the undersigned to sign this annual report on its behalf.

 

 
|   | CHINAEDU CORPORATION |
|--------|----------------------|
|   |                 |
|   | By                   | /s/ Julia Huang |
|   | Name:                | Julia Huang |
|   | Title:               | Chairman, Chief Executive Officer and  Acting Chief Financial Officer |

 

 

Date: June 27, 2008

 

110

----

 

**CHINAEDU CORPORATION**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| **CONTENTS**                                                                                                                                | ** ** | **PAGE** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                                                        |       |     |
| REPORT  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                                                                    |       | F-1      |
|                                                                                                                                        |       |     |
| CONSOLIDATED  BALANCE SHEETS AS OF DECEMBER 31, 2006 AND 2007                                                                               |       | F-2      |
|                                                                                                                                        |       |     |
| CONSOLIDATED  STATEMENTS OF OPERATIONS  FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007                                                |       | F-4      |
|                                                                                                                                        |       |     |
| CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND  COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND  2007 |       | F-5      |
|                                                                                                                                        |       |     |
| CONSOLIDATED STATEMENTS OF CASH FLOWS  FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007                                                 |       | F-6      |
|                                                                                                                                        |       |     |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                                  |       | F-7      |
|                                                                                                                                        |       |     |
| SCHEDULE I                                                                                                                                  |       | F-57     |

 

----

 

**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

 

TO THE BOARD OF DIRECTORS

AND SHAREHOLDERS OFCHINAEDU CORPORATION

 

We have audited the accompanying consolidatedbalance sheets of ChinaEdu Corporation, its subsidiaries, and its variableinterest entities (collectively, the “Group”) as of December 31, 2006 and2007 and the related consolidated statements of operations, shareholders’equity and comprehensive income (loss), and cash flows for each of the threeyears in the period ended December 31, 2007, and the related financialstatement schedule included in Schedule 1. These financial statements and the related financial statement scheduleare the responsibility of the Group’s management.  Our responsibility is to express an opinionon these consolidated financial statements and the related financial statementschedule based on our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  The Group is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting.  Our audits includeconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Group’sinternal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, such consolidated financialstatements present fairly, in all material respects, the financial position ofthe Group as of December 31, 2006 and 2007 and the results of itsoperations and its cash flows for each of the three years in the period ended December 31,2007 in conformity with accounting principles generally accepted in the UnitedStates of America.  Also, in our opinion,the related financial statement schedule, when considered in relation to thebasic consolidated financial statements taken as a whole, presents fairly inall material respects, the information set forth therein.

 

As described in Note 2 to the consolidatedfinancial statements, effective January 1, 2006, the Company adoptedStatement of Financial Accounting Standards No. 123 (revised 2004) “Share-Based Payment”.  In addition, effective January 1, 2007,the Company adopted the recognition and measurement methods under FinancialAccounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No.109”.

 

Our audits also comprehended the translationof Renminbi amounts into United States dollar amounts and, in our opinion, suchtranslation has been made in conformity with the basis stated in Note 2.  Such United States dollar amounts are presentedsolely for the convenience of the readers.

 

 

Deloitte Touche Tohmatsu CPA Ltd.

Beijing, the People’s Republic of China

June 25, 2008

 

F-1

----

 

**CHINAEDU CORPORATION**

 

**CONSOLIDATEDBALANCE SHEETS**

**(In thousands, except share-related data)**

 
| ** **                                                                                                                      | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                      | ** ** | **2006**              | ** ** | **2007** | ** ** | **2007** | ** ** |
| ** **                                                                                                                      | ** ** | **RMB**               | ** ** | **RMB** | ** ** | **US$** | ** ** |
| Assets                                                                                                                          |       |                  |       |   |   |   |   |
|                                                                                                                            |       |                  |       |   |   |   |   |
| Current assets:                                                                                                                 |       |                  |       |   |   |   |   |
| Cash and cash equivalents                                                                                                       |       | 148,315               |       | 497,114 |   | 68,148 |   |
| Accounts receivable                                                                                                             |       | 12,578                |       | 1,238 |   | 170 |   |
| Term deposits                                                                                                                   |       | 10,000                |       | 6,042 |   | 828 |   |
| Prepaid expenses and other current assets                                                                                       |       | 8,999                 |       | 17,492 |   | 2,398 |   |
| Amounts due from related parties                                                                                                |       | 59,979                |       | 105,522 |   | 14,466 |   |
| Deferred tax assets                                                                                                             |       | 5,347                 |       | 9,521 |   | 1,305 |   |
| Total current assets                                                                                                            |       | 245,218               |       | 636,929 |   | 87,315 |   |
| Cost method investment                                                                                                          |       | 1,210                 |       | 1,210 |   | 166 |   |
| Land use rights, net                                                                                                            |       | 25,287                |       | 26,949 |   | 3,694 |   |
| Property and equipment, net                                                                                                     |       | 43,657                |       | 130,745 |   | 17,924 |   |
| Deposits paid for acquisition of property  and equipment                                                                        |       | —                |       | 2,025 |   | 278 |   |
| Intangible assets, net                                                                                                          |       | 102,836               |       | 105,852 |   | 14,511 |   |
| Deferred tax assets                                                                                                             |       | 2,057                 |       | 1,416 |   | 194 |   |
| Rental deposits                                                                                                                 |       | 436                   |       | 1,623 |   | 222 |   |
| Goodwill                                                                                                                        |       | 76,509                |       | 73,319 |   | 10,051 |   |
| Total assets                                                                                                                    |       | 497,210               |       | 980,068 |   | 134,355 |   |
|                                                                                                                            |       |                  |       |   |   |   |   |
| Liabilities, minority interest and  shareholders’ equity                                                                   |       |                  |       |   |   |   |   |
|                                                                                                                            |       |                  |       |   |   |   |   |
| Current liabilities:                                                                                                            |       |                  |       |   |   |   |   |
| Accounts payable                                                                                                                |       | 8,413                 |       | 2,773 |   | 380 |   |
| Deferred revenues (including deferred  revenue from related parties of RMB33,432 and RMB47,407 in 2006 and 2007,  respectively) |       | 78,746                |       | 83,816 |   | 11,490 |   |
| Accrued expenses and other current  liabilities                                                                                 |       | 21,754                |       | 42,096 |   | 5,771 |   |
| Amounts due to related parties                                                                                                  |       | 7,121                 |       | 28,316 |   | 3,882 |   |
| Income taxes payable                                                                                                            |       | 12,960                |       | 22,455 |   | 3,078 |   |
| Other taxes payable                                                                                                             |       | 3,752                 |       | 6,666 |   | 914 |   |
| Total current liabilities                                                                                                       |       | 132,746               |       | 186,122 |   | 25,515 |   |
| Long-term debt                                                                                                                  |       | —                |       | 25,724 |   | 3,526 |   |
| Deferred revenue                                                                                                                |       | 289                   |       | 3,124 |   | 428 |   |
| Convertible notes                                                                                                               |       | 30,654                |       | — |   | — |   |
| Deferred tax liabilities                                                                                                        |       | 19,879                |       | 24,036 |   | 3,295 |   |
| Unrecognized tax benefit                                                                                                        |       | —                |       | 4,332 |   | 594 |   |
| Total liabilities                                                                                                               |       | 183,568               |       | 243,338 |   | 33,358 |   |

 

F-2

----

 
| ** **                                                                                                                                                                                                                             | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                             | ** ** | **2006**              | ** ** | **2007** | ** ** | **2007** | ** ** |
| ** **                                                                                                                                                                                                                             | ** ** | **RMB**               | ** ** | **RMB** | ** ** | **US$** | ** ** |
| Commitments and contingencies (Note 19)                                                                                                                                                                                                |       |                  |       |   |   |   |   |
|                                                                                                                                                                                                                                   |       |                  |       |   |   |   |   |
| Minority interest                                                                                                                                                                                                                      |       | 49,323                |       | 57,996 |   | 7,951 |   |
|                                                                                                                                                                                                                                   |       |                  |       |   |   |   |   |
| Shareholders’ equity                                                                                                                                                                                                              |       |                  |       |   |   |   |   |
| Series A convertible preferred shares  RMB0.08 (US$0.01) par value; 5,150,000 shares authorized; 5,150,000 and nil  shares issued and outstanding in 2006 and 2007, respectively (liquidation  value of RMB49,669 (US$6,000))     |       | 426                   |       | — |   | — |   |
| Series B convertible preferred shares  RMB0.08 (US$0.01) par value; 12,140,495 shares authorized; 12,140,495 and nil  shares issued and outstanding in 2006 and 2007, respectively (liquidation  value of RMB137,310 (US$16,590)) |       | 1,005                 |       | — |   | — |   |
| Series C convertible preferred shares  RMB0.08 (US$0.01) par value; 8,614,054 shares authorized; 3,378,379 and nil  shares issued and outstanding in 2006 and 2007, respectively (liquidation  value of RMB50,312 (US$6,250))     |       | 272                   |       | — |   | — |   |
| Series D convertible preferred shares  RMB0.074 (US$0.01) par value; 2,598,503 shares authorized and issued; nil  shares outstanding in 2007 (liquidation value of RMB77,120 (US$10,004))                                         |       | —                |       | — |   | — |   |
| Ordinary shares RMB0.08 (US$0.01) par  value; 60,000,000 shares authorized; 19,007,408 and 58,434,407 shares issued  and outstanding in 2006 and 2007, respectively                                                                    |       | 1,710                 |       | 4,805 |   | 658 |   |
| Additional paid-in capital                                                                                                                                                                                                             |       | 343,167               |       | 760,858 |   | 104,304 |   |
| Subscription receivable                                                                                                                                                                                                                |       | (1,117                | )          | — |   | — |   |
| Warrants                                                                                                                                                                                                                               |       | 8,076                 |       | 6,370 |   | 873 |   |
| Statutory reserves                                                                                                                                                                                                                     |       | 4,621                 |       | 12,161 |   | 1,667 |   |
| Accumulated deficits                                                                                                                                                                                                                   |       | (94,457               | )          | (103,254 | ) | (14,154 | ) |
| Accumulated other comprehensive (loss)  income                                                                                                                                                                                         |       | 616                   |       | (2,206 | ) | (302 | ) |
| Total shareholders’ equity                                                                                                                                                                                                        |       | 264,319               |       | 678,734 |   | 93,046 |   |
| Total liabilities, minority interest, and  shareholders’ equity                                                                                                                                                                   |       | 497,210               |       | 980,068 |   | 134,355 |   |

 

See notes to consolidated financialstatements.

 

F-3

----

 

**CHINAEDU CORPORATION**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(In thousands, except share-related data)**

 
| ** **                                                                                                                                  | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                                  | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2007** | ** ** | **2007** | ** ** |
| ** **                                                                                                                                  | ** ** | **RMB**                                     | ** ** | **RMB** | ** ** | **RMB** | ** ** | **US$** | ** ** |
| Net revenue                                                                                                                                 |       |                                        |       |   |   |   |   |   |   |
| Sales to customers                                                                                                                          |       | 49,454                                      |       | 88,286 |   | 103,604 |   | 14,203 |   |
| Sales to related parties                                                                                                                    |       | 76,908                                      |       | 125,245 |   | 161,384 |   | 22,124 |   |
| Net revenue                                                                                                                                 |       | 126,362                                     |       | 213,531 |   | 264,988 |   | 36,327 |   |
| Cost of revenue - customers (including  share-based compensation of RMB81, RMB300 and RMB55 for 2005, 2006 and 2007, respectively)          |       | 29,375                                      |       | 48,305 |   | 65,759 |   | 9,015 |   |
| Cost of revenue - related  parties (including share-based compensation of RMB288, RMB168 and RMB291 for  2005, 2006 and 2007, respectively) |       | 23,763                                      |       | 32,003 |   | 30,590 |   | 4,194 |   |
| Total cost of revenue                                                                                                                       |       | 53,138                                      |       | 80,308 |   | 96,349 |   | 13,209 |   |
| Gross profit                                                                                                                                |       | 73,224                                      |       | 133,223 |   | 168,639 |   | 23,118 |   |
| Operating expenses:                                                                                                                         |       |                                        |       |   |   |   |   |   |   |
| General and administrative  (including share-based compensation of RMB1,965,RMB1,942 and RMB2,960 for 2005, 2006 and  2007, respectively)   |       | 44,089                                      |       | 48,846 |   | 76,893 |   | 10,541 |   |
| Selling and marketing  (including share-based compensationof RMB nil, RMB205 and RMB222 for 2005, 2006  and 2007, respectively)             |       | 6,116                                       |       | 12,893 |   | 14,277 |   | 1,957 |   |
| Research and development  (including share-based compensationof RMB44, RMB96 and RMB115 for 2005, 2006  and 2007, respectively)             |       | 11,842                                      |       | 14,263 |   | 21,021 |   | 2,882 |   |
| Goodwill impairment                                                                                                                         |       | —                                      |       | — |   | 16,192 |   | 2,220 |   |
| Total operating expenses                                                                                                                    |       | 62,047                                      |       | 76,002 |   | 128,383 |   | 17,600 |   |
| Income from operations                                                                                                                      |       | 11,177                                      |       | 57,221 |   | 40,256 |   | 5,518 |   |
| Other income                                                                                                                                |       | —                                      |       | — |   | 394 |   | 54 |   |
| Interest income                                                                                                                             |       | 1,078                                       |       | 1,172 |   | 4,118 |   | 565 |   |
| Interest expense                                                                                                                            |       | (1,242                                      | )          | (2,279 | ) | (2,130 | ) | (292 | ) |
| Income before income tax  (benefits) provisions and minority interest                                                                       |       | 11,013                                      |       | 56,114 |   | 42,638 |   | 5,845 |   |
| Income tax (benefits)  provisions:                                                                                                          |       |                                        |       |   |   |   |   |   |   |
| -Current                                                                                                                                    |       | 4,849                                       |       | 9,475 |   | 16,286 |   | 2,233 |   |
| -Deferred                                                                                                                                   |       | (855                                        | )          | (2,481 | ) | (1,283 | ) | (176 | ) |
| Total income tax provisions                                                                                                                 |       | 3,994                                       |       | 6,994 |   | 15,003 |   | 2,057 |   |
| Income before minority  interest                                                                                                            |       | 7,019                                       |       | 49,120 |   | 27,635 |   | 3,788 |   |
| Minority interest, net of  taxes                                                                                                            |       | 9,869                                       |       | 23,581 |   | 25,148 |   | 3,447 |   |
| Net (loss) income                                                                                                                           |       | (2,850                                      | )          | 25,539 |   | 2,487 |   | 341 |   |
| Net (loss) income attributable  to ordinary shareholders                                                                                    |       | (2,850                                      | )          | 25,539 |   | 2,487 |   | 341 |   |
| Net (loss) income per ordinary  share-basic                                                                                                 |       | (0.18                                       | )          | 0.65 |   | 0.06 |   | 0.01 |   |
| Net (loss) income per  preferred A share-basic                                                                                              |       | —                                      |       | 0.65 |   | 0.06 |   | 0.01 |   |
| Net (loss) income per  preferred B share-basic                                                                                              |       | —                                      |       | 0.65 |   | 0.06 |   | 0.01 |   |
| Net (loss) income per  preferred C share-basic                                                                                              |       | —                                      |       | 0.65 |   | 0.06 |   | 0.01 |   |
| Net (loss) income per  preferred D share-basic                                                                                              |       | —                                      |       | — |   | 0.06 |   | 0.01 |   |
| Net (loss) income per ordinary  share-diluted                                                                                               |       | (0.18                                       | )          | 0.60 |   | 0.05 |   | 0.01 |   |
| Weighted average shares used  in calculating ordinary basic net (loss)income per share                                                      |       | 16,243,736                                  |       | 18,540,732 |   | 20,585,074 |   | 20,585,074 |   |
| Weighted average shares used  in calculating preferred A basic net (loss)income per share                                                   |       | —                                      |       | 5,150,000 |   | 4,991,507 |   | 4,991,507 |   |
| Weighted average shares used  in calculating preferred B basic net (loss) income per share                                                  |       | —                                      |       | 12,140,495 |   | 11,561,814 |   | 11,561,814 |   |
| Weighted average shares used in calculating  preferred C basic net (loss) income per share                                                  |       | —                                      |       | 3,378,379 |   | 3,221,030 |   | 3,221,030 |   |
| Weighted average shares used in calculating  preferred D basic net (loss) income per share                                                  |       | —                                      |       | — |   | 1,787,745 |   | 1,787,745 |   |
| Weighted average shares used in calculating  ordinary diluted net (loss) income per share                                                   |       | 16,243,736                                  |       | 42,708,213 |   | 47,322,184 |   | 47,322,184 |   |

 

See notes to consolidated financialstatements.

 

F-4

----

 

**CHINAEDU CORPORATION**

 

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)**

**(Inthousands, 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** | ** ** | ** ** | ** ** | **Statutory** | ** ** | **Accumulated** | ** ** | **comprehensive** | ** ** | ** **     | ** ** | **Comprehensive** | ** ** |
| ** **                                                                 | ** ** | **Shares**                     | ** ** | **Amount**                     | ** ** | **Shares**                     | ** ** | **Amount**                     | ** ** | **Shares**           | ** ** | **Amount**     | ** ** | **Shares**       | ** ** | **Amount** | ** ** | **Shares**    | ** ** | **Amount**      | ** ** | **capital**       | ** ** | **receivable** | ** ** | **Warrants**      | ** ** | **reserve** | ** ** | **deficits** | ** ** | **income  (loss)** | ** ** | **Total**  | ** ** | **income** | ** ** |
| ** **                                                                 | ** ** | ** **                     | ** ** | **RMB**                        | ** ** | ** **                     | ** ** | **RMB**                        | ** ** | ** **           | ** ** | **RMB**        | ** ** | ** **       | ** ** | **RMB**    | ** ** | ** **    | ** ** | **RMB**         | ** ** | **RMB**           | ** ** | **RMB**        | ** ** | **RMB**           | ** ** | **RMB**     | ** ** | **RMB**      | ** ** | **RMB**            | ** ** | **RMB**    | ** ** | **RMB**    | ** ** |
|                                                                       |       |                           |       |                           |       |                           |       |                           |       |                 |       |           |       |             |       |       |       |          |       |            |       |              |       |           |       |              |       |        |       |         |       |               |       |       |       |       |       |
| Balance at  January 1, 2005                                           |       | 5,150,000                      |       | 426                            |       | 12,140,495                     |       | 1,005                          |       | —               |       | —         |       | —           |       | —     |       | 14,137,347    |       | 1,315           |       | 254,524           |       | (4,470         | )          | 5,723             |       | 1,845       |       | (114,370     | )          | (300               | )          | 145,698    |       |       |       |
| Issuance of  ordinary shares for purchase of a subsidiary                  |       | —                         |       | —                         |       | —                         |       | —                         |       | —               |       | —         |       | —           |       | —     |       | 550,000       |       | 44              |       | 3,870             |       | —         |       | —            |       | —      |       | —       |       | —             |       | 3,914      |       |       |       |
| Issuance of  ordinary shares                                               |       | —                         |       | —                         |       | —                         |       | —                         |       | —               |       | —         |       | —           |       | —     |       | 1,745,000     |       | 144             |       | (144              | )          | —         |       | —            |       | —      |       | —       |       | —             |       | —     |       |       |       |
| Amortization of  share-based compensation                                  |       | —                         |       | —                         |       | —                         |       | —                         |       | —               |       | —         |       | —           |       | —     |       | —        |       | —          |       | 2,378             |       | —         |       | —            |       | —      |       | —       |       | —             |       | 2,378      |       |       |       |
| Collection of  subscriptions receivable                                    |       | —                         |       | —                         |       | —                         |       | —                         |       | —               |       | —         |       | —           |       | —     |       | —        |       | —          |       | —            |       | 4,470          |       | —            |       | —      |       | —       |       | —             |       | 4,470      |       |       |       |
| Issuance of Series C  convertible preferred shares and warrants       |       | —                         |       | —                         |       | —                         |       | —                         |       | 3,378,379            |       | 272            |       | —           |       | —     |       | —        |       | —          |       | 48,760            |       | —         |       | 2,353             |       | —      |       | —       |       | —             |       | 51,385     |       |       |       |
| Provision for  statutory reserves                                          |       | —                         |       | —                         |       | —                         |       | —                         |       | —               |       | —         |       | —           |       | —     |       | —        |       | —          |       | —            |       | —         |       | —            |       | 2,776       |       | (2,776       | )          | —             |       | —     |       |       |       |
| Foreign currency  translation adjustments                                  |       | —                         |       | —                         |       | —                         |       | —                         |       | —               |       | —         |       | —           |       | —     |       | —        |       | —          |       | —            |       | —         |       | —            |       | —      |       | —       |       | (760               | )          | (760       | )          | (760       | )          |
| Net loss                                                                   |       | —                         |       | —                         |       | —                         |       | —                         |       | —               |       | —         |       | —           |       | —     |       | —        |       | —          |       | —            |       | —         |       | —            |       | —      |       | (2,850       | )          | —             |       | (2,850     | )          | (2,850     | )          |
|                                                                       |       |                           |       |                           |       |                           |       |                           |       |                 |       |           |       |             |       |       |       |          |       |            |       |              |       |           |       |              |       |        |       |         |       |               |       |       |       |       |       |
| Balance at  December 31, 2005                                         |       | 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 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 of  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       | )          |
|                                                                       |       |                           |       |                           |       |                           |       |                           |       |                 |       |           |       |             |       |       |       |          |       | US$             | 658        |              | US$        | 104,304        |       |              |       | US$         | 873        |         | US$        | 1,667              |       | US$        | (14,154    | )          | US$        | (302 | ) | US$ | 93,046 |   |   |   |
|                                                                            |            |                                |            |                                |            |                                |            |                                |            |                      |            |                |            |                  |            |            |            |               |            |                 |            |                   |            |                |            |                   |            |             |            |              |            |                    |            |            |            |            |            |  |  |  |  |  |  |  |

 

See notes to consolidated financialstatements.

 

F-5

----

 

**CHINAEDU CORPORATION**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Inthousands, except share-related data)**

 
| ** **                                                                                                           | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                           | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2007** | ** ** | **2007** | ** ** |
| ** **                                                                                                           | ** ** | **RMB**                                     | ** ** | **RMB** | ** ** | **RMB** | ** ** | **US$** | ** ** |
| Cash flows from operating  activities:                                                                               |       |                                        |       |   |   |   |   |   |   |
| Net (loss) income                                                                                                    |       | (2,850                                      | )          | 25,539 |   | 2,487 |   | 341 |   |
| Adjustments to reconcile net  (loss) income to net cash (used in) provided by operating activities:                  |       |                                        |       |   |   |   |   |   |   |
| Minority interest                                                                                                    |       | 9,869                                       |       | 23,581 |   | 25,148 |   | 3,447 |   |
| Share-based compensation                                                                                             |       | 2,378                                       |       | 2,711 |   | 3,643 |   | 499 |   |
| Depreciation and amortization  of property and equipment                                                             |       | 5,023                                       |       | 8,157 |   | 8,206 |   | 1,125 |   |
| Amortization of land use  rights                                                                                     |       | 137                                         |       | 518 |   | 533 |   | 73 |   |
| Amortization of intangible  assets                                                                                   |       | 3,251                                       |       | 8,294 |   | 8,548 |   | 1,172 |   |
| Goodwill impairment                                                                                                  |       | —                                      |       | — |   | 16,192 |   | 2,220 |   |
| Amounts due from related  parties write off                                                                          |       | —                                      |       | — |   | 7,049 |   | 966 |   |
| Fixed assets write down                                                                                              |       | —                                      |       | — |   | 688 |   | 94 |   |
| Gain on conversion of warrants of series D  convertible preferred shares                                             |       | —                                      |       | — |   | (394 | ) | (54 | ) |
| Interest expenses                                                                                                    |       | 1,242                                       |       | 2,279 |   | 2,130 |   | 292 |   |
| Loss (gain) from disposal of  property and equipment                                                                 |       | 463                                         |       | (51 | ) | 89 |   | 12 |   |
| Deferred income taxes                                                                                                |       | (855                                        | )          | (2,481 | ) | (1,283 | ) | (176 | ) |
| Changes in assets and  liabilities:                                                                                  |       |                                        |       |   |   |   |   |   |   |
| Accounts receivable                                                                                                  |       | (2,435                                      | )          | (7,679 | ) | 11,340 |   | 1,555 |   |
| Prepaid expenses and other  current assets                                                                           |       | 2,332                                       |       | 2,729 |   | (8,737 | ) | (1,198 | ) |
| Amounts due from related  parties                                                                                    |       | (21,029                                     | )          | (2,609 | ) | (52,492 | ) | (7,196 | ) |
| Accounts payable                                                                                                     |       | (7,350                                      | )          | 3,685 |   | (5,640 | ) | (773 | ) |
| Deferred revenue                                                                                                     |       | 10,037                                      |       | 9,705 |   | 7,905 |   | 1,084 |   |
| Accrued expenses and other  current liabilities                                                                      |       | 5,500                                       |       | 1,128 |   | 20,860 |   | 2,860 |   |
| Amounts due to related parties                                                                                       |       | (30,308                                     | )          | 763 |   | 25,045 |   | 3,433 |   |
| Unrecognized tax benefit                                                                                             |       | —                                      |       | — |   | 588 |   | 81 |   |
| Income taxes payable                                                                                                 |       | 3,180                                       |       | 6,144 |   | 9,495 |   | 1,302 |   |
| Rental deposits                                                                                                      |       | 569                                         |       | 458 |   | (1,187 | ) | (163 | ) |
| Other taxes payable                                                                                                  |       | (1,472                                      | )          | (73 | ) | 2,914 |   | 399 |   |
|                                                                                                                 |       |                                        |       |   |   |   |   |   |   |
| Net cash (used in) provided by  operating activities                                                                 |       | (22,318                                     | )          | 82,798 |   | 83,127 |   | 11,395 |   |
|                                                                                                                 |       |                                        |       |   |   |   |   |   |   |
| Cash flows from investing  activities:                                                                               |       |                                        |       |   |   |   |   |   |   |
| Purchase of businesses, net of  cash acquired of RMB84,089,RMB1,330 and RMB625 in  2005, 2006 and 2007, respectively |       | 9,649                                       |       | (30,795 | ) | (22,520 | ) | (3,087 | ) |
| Purchase of land use rights                                                                                          |       | —                                      |       | (19,092 | ) | (2,195 | ) | (301 | ) |
| Purchase of property and  equipment                                                                                  |       | (10,749                                     | )          | (18,470 | ) | (69,687 | ) | (9,553 | ) |
| Deposits paid for acquisition  of property and equipment                                                             |       | —                                      |       | — |   | (2,025 | ) | (278 | ) |
| Purchase of term deposits                                                                                            |       | —                                      |       | (10,000 | ) | 3,958 |   | 543 |   |
| Purchase of contractual  exclusive rights                                                                            |       | (6,850                                      | )          | (3,450 | ) | (3,430 | ) | (470 | ) |
| Purchase of cost method  investment                                                                                  |       | —                                      |       | (1,110 | ) | — |   | — |   |
| Proceeds from disposal of  property and equipment                                                                    |       | —                                      |       | 141 |   | — |   | — |   |
|                                                                                                                 |       |                                        |       |   |   |   |   |   |   |
| Net cash used in investing  activities                                                                               |       | (7,950                                      | )          | (82,776 | ) | (95,899 | ) | (13,146 | ) |
|                                                                                                                 |       |                                        |       |   |   |   |   |   |   |
| Cash flows from financing  activities:                                                                               |       |                                        |       |   |   |   |   |   |   |
| Proceeds from IPO (net of  issuance cost of RMB25,665)                                                               |       | —                                      |       | — |   | 348,827 |   | 47,820 |   |
| Cash dividends paid to  minority shareholders                                                                        |       | (3,152                                      | )          | (12,898 | ) | (19,028 | ) | (2,609 | ) |
| Capital contribution by  minority shareholders                                                                       |       | 200                                         |       | 6,090 |   | 2,030 |   | 278 |   |
| Proceeds from issuance of  Series D convertible preferred shares (net of issuance costs of RMB2,598)            |       | —                                      |       | — |   | 72,033 |   | 9,875 |   |
| Proceeds from issuance of  Series C convertible preferred shares (net of issuance costs of RMB928)              |       | 51,385                                      |       | — |   | — |   | — |   |
| Proceeds from exercise of  warrants                                                                                  |       | —                                      |       | — |   | 3,838 |   | 526 |   |
| Repurchase of Series B  convertible preferred shares                                                            |       | —                                      |       | — |   | (640 | ) | (88 | ) |
| Repurchase and cancellation of ordinary  shares                                                                      |       | —                                      |       | — |   | (12,813 | ) | (1,757 | ) |
| Issuance of convertible notes                                                                                        |       | 28,187                                      |       | — |   | — |   | — |   |
| Repayment of convertible notes                                                                                       |       | —                                      |       | — |   | (27,783 | ) | (3,809 | ) |
| Repayment of long-term loan  interest and principal                                                                  |       | —                                      |       | — |   | (1,080 | ) | (148 | ) |
| Collection of subscription  receivable                                                                               |       | 4,470                                       |       | — |   | 1,117 |   | 153 |   |
|                                                                                                                 |       |                                        |       |   |   |   |   |   |   |
| Net cash provided by (used in)  financing activities                                                                 |       | 81,090                                      |       | (6,808 | ) | 366,501 |   | 50,241 |   |
|                                                                                                                 |       |                                        |       |   |   |   |   |   |   |
| Effect of exchange rate  changes                                                                                     |       | (1,846                                      | )          | (811 | ) | (4,930 | ) | (674 | ) |
| Net increase in cash and cash  equivalents                                                                           |       | 48,976                                      |       | (7,597 | ) | 348,799 |   | 47,816 |   |
| Cash and cash equivalents,  beginning of year                                                                        |       | 106,936                                     |       | 155,912 |   | 148,315 |   | 20,332 |   |
|                                                                                                                 |       |                                        |       |   |   |   |   |   |   |
| Cash and cash equivalents, end  of year                                                                              |       | 155,912                                     |       | 148,315 |   | 497,114 |   | 68,148 |   |
|                                                                                                                 |       |                                        |       |   |   |   |   |   |   |
| Supplemental disclosure of  cash flow information                                                                    |       |                                        |       |   |   |   |   |   |   |
| Income taxes paid                                                                                                    |       | 1,669                                       |       | 3,331 |   | 6,791 |   | 931 |   |
| Interest paid                                                                                                        |       | 104                                         |       | — |   | 4,743 |   | 650 |   |
|                                                                                                                 |       |                                        |       |   |   |   |   |   |   |
| Supplemental disclosure of  non-cash financing activities:                                                           |       |                                        |       |   |   |   |   |   |   |
| Conversion of convertible note  into Series B preferred shares                                                  |       | 32,909                                      |       | — |   | — |   | — |   |
|                                                                                                                 |       |                                        |       |   |   |   |   |   |   |
| Receivable for the issuance of  ordinary shares upon exercise of share options by employees                          |       | —                                      |       | 1,117 |   | — |   | — |   |
|                                                                                                                 |       |                                        |       |   |   |   |   |   |   |
| Issuance of ordinary shares  for purchases of subsidiaries                                                           |       | 3,914                                       |       | 30,158 |   | — |   | — |   |
|                                                                                                                 |       |                                        |       |   |   |   |   |   |   |
| Conversion of convertible note  into Series D preferred shares                                                  |       | —                                      |       | — |   | 2,489 |   | 341 |   |
| Building purchased by mortgage loan                                                                                  |       | —                                      |       | — |   | 26,430 |   | 3,623 |   |
| Conversion of Series A, B, C, D  preferred shares into ordinary shares                                          |       | —                                      |       | — |   | 1,924 |   | 264 |   |

 

Seenotes to consolidated financial statements.

 

F-6

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**1.****                                      ORGANIZATION AND PRINCIPAL ACTIVITIES**

 

ChinaEduCorporation (the “Company”) was incorporated in the Cayman Islands on September 6,1999.  The Company, its subsidiaries, andits variable 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”).

 

A summary ofthe Company’s subsidiaries and variable interest entities as of December 31,2007 are as follows:

 
| ** **                                                                                         | ** ** | **Date of  incorporation** | ** ** | **Percentage  of** | ** ** | ** **                       |
|----------------------------------------------------------------------------------------------------|------------|----------------------------|------------|--------------------|------------|----------------------------------|
| **Name of subsidiaries**                                                                           | ** ** | **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      |       | 80                 | %          | Online tutoring                  |
|                                                                                               |       |                       |       |               |       |                             |
| Beijing Gotop Education Co., Ltd. (“Gotop Hongcheng”)                                    |       | December 26, 2005     |       | 80                 | %          | 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    |

 

F-7

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**1.****                                      ORGANIZATIONAND PRINCIPAL ACTIVITIES - continued**

 
| ** **                                                                          | ** ** | **Date of  incorporation** | ** ** | **Percentage  of** | ** ** | ** **                            |
|-------------------------------------------------------------------------------------|------------|----------------------------|------------|--------------------|------------|---------------------------------------|
| **Name of subsidiaries**                                                            | ** ** | **or establishment**       | ** ** | **ownership**      | ** ** | **Principal activities**              |
|                                                                                |       |                       |       |               |       |                                  |
| Beijing Gotop Electronic Science Co., Ltd. (“Gotop  Electronic”)          |       | November 29, 1995     |       | 80                 | %          | Provision of internet content         |
|                                                                                |       |                       |       |               |       |                                  |
| Tianjin Gotop Electric Science Co., Ltd. (“Tianjin  101”)                 |       | January 27, 2001      |       | 80                 | %          | Online tutoring                       |
|                                                                                |       |                       |       |               |       |                                  |
| 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                 |

 

PRCregulations currently limit foreign ownership of entities providing Internetcontent and engaging 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, Hongcheng Education and their subsidiaries.

 

XiandaiTechnology was established by two of the Company’s former directors on November 7,2000, and it holds certain Internet content provider licenses and operates thewebsite www.chinaedu.net on behalf of the Group.  The initial capital contributions from thetwo former directors were obtained from Hongcheng Technology in the form ofnon-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 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-8

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**1.****                                      ORGANIZATIONAND PRINCIPAL ACTIVITIES - continued**

 

HongchengEducation was established on March 7, 2005 by one of the Company’smanagement personnel and a former director of the Company, and it holds certaineducation licenses on behalf of the Group. The initial capital contributions from the two equity owners wereobtained from the Company in the form of non-interest bearing loans totalingRMB54,200.  The loans were eliminatedupon consolidation.  A summary of the keyterms in the loan agreements and the related pledge agreements 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 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 Group hadelected to adopt Financial Accounting Standard Board (“FASB”) Interpretation No. 46(revised) “Consolidation of Variable Interest Entities-an Interpretation of ARBNo. 51” (“FIN 46R”) from its inception. Through the contractual agreements described above, both XiandaiTechnology and Hongcheng Education are considered to be variable interestentities in accordance with FIN 46R because the equity owners lack the abilityto make decisions about Xiandai Technology and Hongcheng Education’s activitiesthat have a significant effect on their success and substantially all ofXiandai Technology and Hongcheng Education’s businesses are conducted on behalfof 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 and operations of XiandaiTechnology and Hongcheng Education are included in the accompanyingconsolidated financial statements effective as of the date of the aboveagreements.

 

F-9

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**1.****                                      ORGANIZATIONAND PRINCIPAL ACTIVITIES - continued**

 

The followingfinancial information of Xiandai Technology and Hongcheng Education wasincluded in the accompanying consolidated financial statements:

 
| ** **        | ** ** | **December 31,** | ** ** |
|-------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2006**              | ** ** | **2007** | ** ** |
| ** **        | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
|              |       |                  |       |   |   |
| Total assets      |       | 94,185                |       | 154,070 |   |
| Total liabilities |       | 30,925                |       | 92,627 |   |

 
| ** **        | ** ** | **Years ended December 31,** | ** ** |
|-------------------|------------|---------------------------------------------|------------|
| ** **        | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **        | ** ** | **RMB**                                     | ** ** | **RMB** | ** ** | **RMB** | ** ** |
|              |       |                                        |       |   |   |   |   |
| Net revenue       |       | 8,538                                       |       | 13,798 |   | 31,608 |   |
| Net (loss) income |       | (1,615                                      | )          | 2,436 |   | 3,592 |   |

 

**2.****                                      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis ofpresentation**

 

Theconsolidated financial statements of the Group have been prepared in accordancewith accounting principles generally accepted in the United States of America (“USGAAP”).  The accompanying consolidatedfinancial statements 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 readers andwere converted at a rate of RMB7.2946 to US$1, the approximate rate of exchangeat December 31, 2007.  Suchtranslation should not be construed to be the amounts that would have beenreported under US GAAP.

 

**Basis ofconsolidation**

 

Theconsolidated financial statements include the financial statements of theCompany, its subsidiaries, and its variable interest entities.  All inter-company transactions and balanceshave been eliminated upon consolidation.

 

**Cash andcash equivalents**

 

Cash and cashequivalents consist of cash on hand and demand deposits which are unrestrictedas to withdrawal or use, and have remaining maturities of three months or lesswhen purchased.

 

F-10

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**2.****                                      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Termdeposits**

 

Term depositsconsist of deposits placed with financial institutions with original maturityterms of greater than three months but less than one year.

 

**Use ofestimates**

 

Thepreparation of financial statements in conformity with US GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and revenue and expenses in the financial statementsand the accompanying notes.  Significantaccounting estimates reflected in the Group’s financial statements include theallowance of doubtful debts, the useful lives and impairment of property andequipment, land use rights, and intangible assets with definite lives;valuation allowance for deferred tax assets; impairment of goodwill andindefinite life intangible assets; purchase price allocation relating to thebusinesses acquired; share-based compensation; valuation of convertible notes;and the related detachable warrants.  Actualresults could differ materially from those estimates.

 

**Land userights, net**

 

Land userights are recorded at cost less accumulated amortization.  Amortization is provided on a straight-linebasis over the estimated useful lives, which is generally 50 years andrepresents the shorter of the estimated usage periods or the terms of theagreements.

 

**Propertyand equipment, net**

 

Property andequipment are carried at cost less accumulated depreciation andamortization.  Assets under constructionare not depreciated until they are ready for their intended use.  Depreciation and amortization is calculatedon a straight-line basis over the following estimated 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           |

 

F-11

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**2.****                                      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Intangibleassets, net**

 

Intangibleassets consist of copyrights, customer base, software platform, contractual rightsand prepaid operating contracts, and are carried at cost, less accumulatedamortization.  Amortization is calculatedon a straight-line basis over the shorter of the contractual terms or theexpected useful lives of the acquired assets. The weighted average amortization periods by major intangible assetsclass is as follows:

 
| Service agreements with universities and high schools |   | 35 years |
|-------------------------------------------------------|--------|----------|
| Operating platform                                    |   | 6 years  |
| Customer base                                         |   | 4 years  |
| Online courseware                                     |   | 2 years  |
| Agency agreements                                     |   | 5 years  |
| Contractual rights                                    |   | 10 years |
| Prepaid operating contracts                           |   | 22 years |

 

Management has determined that the Group’s trade names do not havedeterminable useful lives.  Consequently,the carrying amounts of trade names are not amortized but are tested for impairmentannually or more frequently if events or circumstances indicate that the asset maybe impaired.  Such impairment testconsists of a comparison of the fair values of the trade names with theircarrying amounts 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.  No impairment of indefinite life intangibleassets was recorded during the years ended December 31, 2005, 2006 and2007.

 

**Impairmentof long-lived assets**

 

The Groupreviews its long-lived assets for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may no longer berecoverable.  When these events occur,the Group measures impairment by comparing the carrying value of the long-livedassets to the estimated undiscounted future cash flows expected to result fromthe use of the assets and their eventual disposition.  If the sum of the expected undiscounted cashflow is less than the carrying amount of the assets, the Group would recognizean impairment loss based on the fair value of the assets.  The Company did not record any impairmentloss during the years ended December 31, 2005, 2006 and 2007.

 

F-12

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**2.****                                      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Goodwill**

 

Goodwill isnot amortized but is evaluated at least annually for impairment following atwo-step process.  The first stepcompares the fair values of each reporting unit to its carrying amount,including goodwill.  If the fair value ofeach reporting unit exceeds its carrying amount, goodwill is not considered tobe impaired and the second step will not be required.  If the carrying amount of a reporting unitexceeds its fair value, the second step compares the implied fair value ofgoodwill to the carrying value of a reporting unit’s goodwill.  The implied fair value of goodwill isdetermined in a manner similar to accounting for a business combination withthe allocation of the assessed fair value determined in the first step to theassets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amountsassigned to the assets and liabilities is the implied fair value of goodwill.  An impairment loss is recognized for anyexcess in the carrying value of goodwill over the implied fair value ofgoodwill.

 

Managementperformed the annual goodwill test as of December 31, 2005, 2006, and 2007and no impairment losses were recorded in 2005 and 2006.  In 2007, based on the impairment assessmentperformed by management, the Company incurred a goodwill impairment charge ofRMB16,192.  This impairment chargerelates to the Friendly Experimental Class program (the “FEC program”), asmanagement has significantly adjusted downward the profitability forecast forthis portion of the Company’s business. The Company expects future net revenue from the FEC program to be lowerthan the Company had previously forecast as a result of lower student numbersand lower per student amounts payable to the Company under its contractualarrangements with participating schools. These developments are the result of increased competition, increasedbargaining power of the schools participating in the program and the Company’sexpansion of the program into less affluent areas of China, where tuition feestend to be lower.  In addition to thesecharges, the Company expects that these developments will adversely affect thefuture financial results for the FEC program. The fair values of the reporting units were established using acombination of expected present value of future cash flow and income approachvaluation methodology.

 

The changes inthe carrying amount of goodwill by reportable segments for the years ended December 31,2006 and 2007 were as follows:

 
| ** **                           | ** ** | **Online**  | ** ** | **Primary private** | ** ** | **Online**   | ** ** | **International** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|-------------|------------|--------------------------|------------|--------------|------------|-------------------|------------|------------|------------|
| ** **                           | ** ** | **degree**  | ** ** | **and secondary**   | ** ** | **tutoring** | ** ** | **curriculum**    | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **program** | ** ** | **schools**              | ** ** | **program**  | ** ** | **program**       | ** ** | **Total**  | ** ** |
| ** **                           | ** ** | **RMB**     | ** ** | **RMB**                  | ** ** | **RMB**      | ** ** | **RMB**           | ** ** | **RMB**    | ** ** |
|                                 |       |        |       |                     |       |         |       |              |       |       |       |
| Balance as of January 1, 2006   |       | 12,860      |       | 1,250                    |       | 14,926       |       | 32,171            |       | 61,207     |       |
| Goodwill acquired during the year    |       | —      |       | —                   |       | —       |       | 15,302            |       | 15,302     |       |
| Balance as of December 31, 2006 |       | 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     |       |

 

F-13

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**2.****                                      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Revenuerecognition**

 

The Group’srevenue is principally derived from four primary sources: (i) theprovision of bundled 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 is recognized when earned and isreported net of business taxes, which totaled RMB4,350, RMB6,247 and RMB7,354for the years ended December 31, 2005, 2006, and 2007, respectively.

 

*(i)**                                  Online education technical and consultingservices*

 

The Group’sprimary business is to provide online education technical and consultingservices to the online degree programs of leading Chinese universities.  These services include academic programdevelopment, technology services, enrollment marketing, student supportservices, and finance operations.  Sinceeach of the services does not have a stand-alone value to the universities,these services are accounted for as one unit of accounting and the relatedrevenue is recognized ratably over the service period.  The Group primarily hosts the onlineeducation technology on its system and provides access to the universities towhom 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 note (iv) below).

 

The Groupreceives service fees from the universities each semester covering services tobe provided to the universities during that semester.  The amount of service fees to be received bythe Group is derived from tuition fees collected by the universities from theirstudents at the beginning of each semester, as adjusted for the universities’costs and expenses, such as refunds to students, fees to other serviceproviders, and other operating costs and expenses.

 

Fees receivedare initially recorded as deferred revenue and are recognized as revenueratably over the six-month school semester during which the Group provides theservices.  The semesters generally beginin April and October of each calendar year.  The Group does not provide services directlyto the students and does not have obligations to the students.

 

F-14

----

 

**CHINAEDU CORPORATION**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THEYEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**2.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Revenue recognition** - continued

 

*(ii)**                             **Traditionalclassroom education services*

 

The Group operates a numberof private primary and secondary schools, and markets and supportsinternational post-secondary and English language curriculum programs toestablished learning institutions.  Feesfrom private and secondary schools operations are initially recorded asdeferred revenue at the time the students register for their classes and theGroup receives payments.  Students mustregister and pay for their classes at the beginning of each semester.  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 internationalpost-secondary and English language curriculum programs, students must registerand pay for their classes at the beginning of each semester.  Fees collected from the provision of teachingand other support services to the learning institutions are recognized eitherwhen such services are provided, or on a straight-line basis over the serviceperiod, which is typically the six-month school semester.

 

*(iii)**                         **Onlinetutoring services*

 

The Group offers onlineinteractive tutoring services to primary and secondary students.  These services allow the customers access tothe online education services over a fixed period of time, generally rangingfrom one month to three years, through the use of prepaid cards.  The prepaid cards are sold to distributors,from whom the Group collects payments when the prepaid cards are delivered tothe distributors.  The distributors thenresell the cards to end users.  Allprepaid fees received from distributors are initially recognized as deferredrevenue and revenue is recognized ratably over the applicable period that theGroup provides services.

 

F-15

----

 

**CHINAEDU CORPORATION**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THEYEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**2.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Revenue recognition** - continued

 

*(iv)**                           **Licensingof online education technology platform and courseware*

 

The Group licenses itsonline education technology platform and courseware to universities and othereducation companies and also provides post contract customer support (“PCS”),which includes telephone support and unspecified upgrades on a when-and-ifavailable basis.  The Group recognizesrevenue from licensing of online education technology platform and coursewarewhen persuasive evidence of an agreement exists, delivery of the services hasoccurred, the fee is fixed or determinable, and collectibility isprobable.  As the Group does not havevendor-specific objective evidence to establish the fair values of theundelivered elements, the Group recognizes revenue from the licensing of onlineeducation technology platform and courseware over the PCS period, which istypically 12 months.

 

Revenue from the licensingof the online education technology network platform and courseware alsoincludes the rebate of value-added taxes. The value-added taxes rebate program is part of the PRC government’sstrategy to encourage high technology development in the PRC.  Since the Group cannot estimate when or if arebate will be provided by the PRC taxing authorities, rebates are recorded asa component of revenue when received and are not subject to future return orreimbursement.  Rebates received by theGroup during 2005, 2006, and 2007 were RMB1,094, RMB1,669, and RMB2,405, respectively.

 

**Accounts receivable**

 

Accounts receivable relateto the online education technical and consulting services provided to certainuniversity customers.  Accountsreceivable are recorded at amounts that are presently due based on the serviceagreement, which are net of allowance for doubtful accounts.

 

The Company writes offaccounts receivable when it becomes apparent based upon age or customercircumstances that such amounts will not be collected.

 

**Cost method investment**

 

For investment in aninvestee over which the Group does not have significant influence, the Groupcarries the investment at cost and recognizes income as any dividends receivedfrom the distribution of the investee’s earnings.  The Group reviews the cost investment forimpairment whenever events or changes in circumstances indicate that thecarrying value may no longer be recoverable. An impairment loss is recognized in earnings equal to the differencebetween the investment’s cost and its fair value at the balance sheet date ofthe reporting period for which the assessment is made.  The fair value of the investment would thenbecome the new cost basis of the investment. No impairment charges were recorded during the years ended December 31,2005, 2006 and 2007.

 

F-16

----

 

**CHINAEDU CORPORATION**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THEYEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**2.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Concentration of creditrisk**

 

Financial instruments thatpotentially expose the Group to concentrations of credit risk consist primarilyof cash and cash equivalents, term deposits, and accounts receivable.  The Group places its cash and cashequivalents and term deposits with financial institutions with high-creditratings and quality.

 

The Group conducts creditevaluations of its customers and generally does not require collateral or othersecurity from them.  To date, the Groupprimarily collects fees for its services up front and has not experiencedsignificant losses from uncollectible accounts. Therefore, no allowance for doubtful accounts was established as of December 31,2006 and 2007.  Management of the Groupwill continue to evaluate the Group’s collection experience and will providefor an allowance for doubtful accounts as appropriate.

 

A summary of the customerswho accounted for 10% or more of the Group’s consolidated net revenues was asfollows:

 
| ** **    | ** ** | **Years ended December 31,** | ** ** |
|---------------|------------|---------------------------------------------|------------|
| **Customers** | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **    | ** ** | **RMB**                                     | ** ** | **RMB** | ** ** | **RMB** | ** ** |
|          |       |                                        |       |   |   |   |   |
| A             |       | 33,332                                      |       | 39,947 |   | 55,965 |   |
| B             |       | 25,715                                      |       | 32,522 |   | 37,075 |   |
| C             |       | *                                           |       | * |   | * |   |
| D             |       | *                                           |       | 39,643 |   | 45,926 |   |
| E             |       | 14,056                                      |       | * |   | * |   |

 

A summary of the customerswho accounted for 10% or more of the Group’s consolidated accounts receivablewas as follows:

 
| ** **    | ** ** | **December 31,** | ** ** |
|---------------|------------|-----------------------|------------|
| **Customers** | ** ** | **2006**              | ** ** | **2007** | ** ** |
| ** **    | ** ** | **%**                 | ** ** | **%** | ** ** |
| ** **    | ** ** | ** **            | ** ** | ** ** | ** ** |
| A             |       | 17                    |       | 32 |   |
| B             |       | 21                    |       | 21 |   |
| C             |       | 29                    |       | 32 |   |
| D             |       | *                     |       | * |   |
| E             |       | 14                    |       | * |   |
| F             |       | *                     |       | 11 |   |

 

----

*                                         Representedless than 10% of consolidated revenue or accounts receivable balances.

 

F-17

----

 

**CHINAEDU CORPORATION**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THEYEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**2.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Research and development**

 

Researchand development expenses include payroll, employee benefits, and otherheadcount-related costs associated with the development of online educationtechnology platform and courseware.  TheGroup expenses all research and development costs when incurred.

 

**Advertising costs**

 

Advertising costs areexpensed as incurred.  The Group incurredadvertising costs totaling RMB1,552, RMB4,704 and RMB5,575 for the years ended December 31,2005, 2006, and 2007, respectively, which were recorded as a component ofselling and marketing expenses in the accompanying consolidated statements of operations.

 

**Royalty fees**

 

Royalty fees payable to amiddle school increase each year from the 2005 calendar year to the 2024calendar year.  Royalty fees during thisperiod were aggregated and recognized as royalty expense on a straight-linebasis.  The difference between royaltyfees paid and the amount reported as expenses was included as a component ofaccrued expenses and other current liabilities in the accompanying consolidatedbalance sheets.

 

**Foreign currencytranslation**

 

The functional currency ofthe Company, BJ-BCIT and BJ-WITT is the US$. The functional currency of the Group, excluding the Company, BJ-BCIT andBJ-WITT, is the RMB.  Transactions inother currencies are recorded in each relevant entity’s functional currency atthe rates of exchange 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 dominated in other currencies are converted at the applicablerates of exchange prevailing when the transactions occur.  Exchange gains and losses are recorded in theconsolidated statements of operations.

 

The Group’s reportingcurrency is the RMB.  Currencytranslation involves translating from the functional currency of PRC entitiesof RMB into the Company’s functional currency of US$ followed by a translationfrom US$ to the reporting currency of RMB. Assets and liabilities are translated at the exchange rates at thebalance sheet date, equity amounts are translated at historical exchange ratesand revenues, expenses, gains, and losses are translated using the average ratefor the year.  Translation adjustmentsare reported as cumulative translation adjustments and are shown as a separatecomponent of other comprehensive loss in the consolidated statements ofshareholders’ equity.

 

F-18

----

 

**CHINAEDU CORPORATION**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THEYEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**2.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Foreign currency risk**

 

The RMB is not a freelyconvertible currency.  The StateAdministration for Foreign Exchange, under the authority of the People’s Bankof China, controls the conversion of RMB into foreign currencies.  The value of the RMB is subject to changes incentral government policies and to international economic and politicaldevelopments affecting supply and demand in the China Foreign Exchange TradingSystem market.  Cash and cash equivalentsand term deposits of the Group included aggregate amounts of RMB158,315 and RMB171,831at December 31, 2006 and 2007, respectively, which were denominated inRMB.

 

**Income taxes**

 

Deferred income taxes arerecognized for temporary differences between the tax basis of assets andliabilities and their reported amounts in the financial statements, net ofoperating loss carry forwards and credits, by applying enacted statutory taxrates 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 for in accordance with the laws of therelevant taxing authorities.

 

OnJanuary 1, 2007, the Group adopted FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”(“FIN 48”).  As a result of theimplementation of FIN 48, the total amount of unrecognized tax benefits wasRMB4,332 as of December 31, 2007.  TheGroup recognized RMB3,744 accumulated impact 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 RMB499 and RMB89 of accrued interest and penalties,respectively, related to uncertain tax positions as of December 31,2007.  The Company is subject to taxationin China and other foreign jurisdictions.

 

**Comprehensive income (loss)**

 

Comprehensive income (loss)includes net income and foreign currency translation adjustments.  Comprehensive income (loss) is reported as acomponent of the consolidated statements of shareholders’ equity.

 

**Fair value of financialinstruments**

 

Financial instrumentsinclude cash and cash equivalents, term deposits, accounts receivable, accountspayable, long term debt, convertible notes, and amounts due from and due torelated parties.  The carrying values ofcash and cash equivalents, term deposits, accounts receivable, and amounts duefrom and to related parties approximate their fair values due to theirshort-term maturities.

 

The fair values of theconvertible notes as of December 31, 2006 and 2007 were RMB31,112(US$4,027) and RMB nil, respectively, determined based on the incrementalborrowing rate discounted by using the effective interest method.

 

F-19

----

 

**CHINAEDU CORPORATION**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THEYEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**2.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Net income (loss) pershare**

 

The Group had determinedthat its convertible preferred shares were participating securities as thepreferred shares participate in undistributed earnings on an as-if-convertedbasis.  The holders of the preferredshares were entitled to receive dividends on a pro rata basis, as if theirshares had been converted into ordinary shares. Accordingly, the Group used the two-class method of computing net income(loss) per share, for ordinary and preferred shares according to participationrights in undistributed earnings.  Underthis method, net income applicable to holders of ordinary shares was allocatedon a pro rata basis to the ordinary and preferred shares to the extent thateach class may share income for the period; whereas undistributed net loss wasallocated to ordinary shares because preferred shares were not contractuallyobligated to share the loss.

 

To calculate the number ofshares for diluted net income (loss) per share, convertible preferred shareswere computed using the if-converted method. The convertible preferred shares, convertible notes, options and warrants,which could potentially dilute basic net income per share in the future, wereexcluded from the computation of diluted net income (loss) per share for theyear ended December 31, 2005****as theireffects would have been antidilutive.

 

**Share-based compensation**

 

The Group grants stockoptions to its employees and directors. Prior to January 1, 2006, the Group accounted for employeeshare-based compensation in accordance with Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” (“APB Opinion 25”), andits related interpretations, which required the Group to record a compensationcharge for the excess of the fair value for the ordinary shares at the grantdate over the amount an employee must pay to acquire the ordinary shares.  The compensation expense is recognized on astraight-line basis over the applicable service period, which is usually thevesting period.

 

In December 2004, theFASB issued Statements of Financial Accounting Standard (“SFAS”) No. 123R,which is a revision of SFAS No. 123, “Accounting for Stock-BasedCompensation” 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 grant-date fair value.

 

F-20

----

 

**CHINAEDU CORPORATION**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THEYEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**2.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Share-based compensation** - continued

 

For share-based compensationawards that were granted to employees prior to January 1, 2006 that arenot yet vested and continue to be reported under APB Opinion 25, the followingis the Group’s pro forma net (loss) income that would have been reported ifsuch awards were accounted for under SFAS No. 123R:

 
| ** **                                                            | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                            | ** ** | **RMB**  | ** ** | **RMB**  | ** ** | **RMB**  | ** ** |
|                                                                  |       |     |       |     |       |     |       |
| Net (loss) income, as reported                                        |       | (2,850   | )          | 25,539   |       | 2,487    |       |
| Add: Share-based compensation as reported                             |       | 2,378    |       | 2,711    |       | 3,643    |       |
| Less: Share-based compensation determined using the fair value method |       | 7,596    |       | 7,355    |       | 7,108    |       |
| Pro forma net (loss) income attributable to ordinary shareholders     |       | (8,068   | )          | 20,895   |       | (978     | )          |
|                                                                  |       |     |       |     |       |     |       |
| Basic (loss) income per share:                                        |       |     |       |     |       |     |       |
| As reported                                                           |       | (0.18    | )          | 0.65     |       | 0.06     |       |
| Pro forma                                                             |       | (0.50    | )          | 0.53     |       | (0.02    | )          |
| Diluted (loss) income per share:                                      |       |     |       |     |       |     |       |
| As reported                                                           |       | (0.18    | )          | 0.60     |       | 0.05     |       |
| Pro forma                                                             |       | (0.50    | )          | 0.49     |       | (0.02    | )          |

 

The fair value of eachoption granted to employees is estimated on the date of grant using thefollowing assumptions for grants during the years ended December 31, 2005,2006 and 2007.** **Theminimum value method was used for grants in 2005 as permitted for non-publiccompanies.

 
| ** **                                    | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                          |       |     |       |     |       |     |       |
| Option granted to employees:                  |       |     |       |     |       |     |       |
| Weighted average risk-free rate of return     |       | 4.11     | %          | 4.68     | %          | 4.45     | %          |
| Weighted average expected option life (years) |       | 6.5      |       | 4.8      |       | 5.0      |       |
| Weighted average volatility rate              |       | —   |       | 47.6     | %          | 44.1     | %          |
| Weighted average dividend yield               |       | —   |       | —   |       | —   |       |

 

F-21

----

 

**CHINAEDU CORPORATION**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THEYEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**2.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Recently issued accountingstandards**

 

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements,” which providesenhanced guidance for using fair value to measure assets and liabilities.  SFAS No. 157 also responds to investors’requests for expanded information about the extent to which companies measureassets and liabilities at fair value, the information used to measure fairvalue, and the effect of fair value measurements on earnings.  SFAS No. 157 applies whenever otherstandards require (or permit) assets or liabilities to be measured at fairvalue.  SFAS No. 157 does not expandthe use of fair value in any new circumstances. SFAS No. 157 is effective for financial statements issued forfiscal years beginning after November 15, 2007.  FASB Staff Position No. FAS 157-2, “EffectiveDate of FASB Statement No. 157” delays the effective date of Statement 157for all nonrecurring fair value measurements of non-financial assets andnon-financial liabilities until fiscal years beginning after November 15,2008.  The Group is currently evaluatingwhether the adoption of SFAS No. 157 will have a significant effect on itsconsolidated financial position, results of operations, or cash flows.

 

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities, Including an amendment of FASB Statement No. 115”.  SFAS No. 159 provides companies with anoption to report selected financial assets and liabilities at fair value.  The standard requires companies to provideadditional information that will help investors and other users of financialstatements to more easily understand the effect of a company’s choice to usefair value on its earnings.  It alsorequires entities to display the fair value of those assets and liabilities forwhich a company has chosen to use fair value on the face of the balancesheet.  SFAS No. 159 is effective asof the beginning of an entity’s first fiscal year beginning after November 15,2007.  The Group is currently evaluatingwhether the adoption of SFAS No. 159 will have a significant effect on itsconsolidated results of operations and financial position.

 

In December 2007, theFASB issued SFAS No.160, “Noncontrolling Interests in Consolidated FinancialStatements—an amendment of ARB No. 51” to improve the relevance,comparability, and transparency of financial information provided to investorsby requiring all entities to report noncontrolling (minority) interests insubsidiaries in the same way as required in the consolidated financial statements.  Moreover, SFAS No. 160 eliminates thediversity that currently exists in accounting for transactions between anentity and noncontrolling interests by requiring they be treated as equitytransactions.  SFAS No. 160 iseffective for fiscal years beginning on or after December 15, 2008, andinterim periods within those fiscal years. Earlier adoption is prohibited. The Group has not yet begun the process of assessing the potentialimpact the adoption of SFAS No. 160 may have on its consolidated financialposition or results of operations.

 

F-22

----

 

**CHINAEDU CORPORATION**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS - continued**

**FOR THEYEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**2.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued**

 

**Recently issued accountingstandards** - continued

 

In December 2007, theFASB issued SFAS No.141(R), “Business Combinations,” to improve reporting bycreating greater consistency in the accounting and financial reporting ofbusiness combinations.  The standardrequires the acquiring entity in a business combination to recognize all (andonly) the assets acquired and liabilities assumed in the transaction;establishes the acquisition-date fair value as the measurement objective forall assets acquired and liabilities assumed; and requires the acquirer todisclose to investors and other users all of the information they need toevaluate and understand the nature and financial effect of the businesscombination.  SFAS No. 141R appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008, except for certain tax adjustments for prior business combinations.  Early adoption is prohibited.  The Group has not yet begun the process ofassessing the potential impact the adoption of SFAS No. 141R may have onits consolidated financial position or results of operations.

 

In March 2008, the FASBissued SFAS No. 161, “Disclosures about Derivative Instruments and HedgingActivities” to improve financial reporting about derivative instruments andhedging activities by requiring enhanced disclosures to enable investors tobetter understand their effects on an entity’s financial position, financialperformance, and cash flows.  Thestandard requires disclosure of fair values of derivative instruments and theirgains and losses in a tabular format as well as cross-referencing withinfootnotes to enable financial statement users to locate important informationabout derivative instruments.  SFAS No. 161also provides more information about an entity’s liquidity by requiringdisclosure of derivative features that are credit risk-related.  SFAS No.161 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008, with early application encouraged. The Group does not expect the adoption of SFAS No. 161 to have amaterial impact on its financial statements.

 

**3.****                                     ****ACQUISITIONS**

 

During the periods from 2005to 2007, in order to enhance its leading online degree education serviceofferings, and to diversify its service offerings under the private primary andsecondary schools, online tutoring, and international curriculum programs, theGroup consummated the acquisitions set forth below.  These transactions were recorded using thepurchase method of accounting, and accordingly, the acquired assets andliabilities were recorded at their estimated fair values on the acquisitiondate.

 

F-23

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**3.****                                      ACQUISITIONS- continued**

 

(a)                                  InJanuary 2005, Hongcheng Liye acquired an 80% equity interest in GotopElectronic and Beijing Xuezhi from Tianjin Tianxingjian Education Co., Ltd. (“Tianxingjian”),which were engaged in providing online tutoring services, for an aggregatepurchase price of RMB12,914, consisting of cash consideration of RMB9,000 andthe issuance of 550,000 ordinary shares with an aggregate fair value of US$473(an equivalent of RMB3,914) on the acquisition date.  The minority interest was a debit balance andtherefore recorded as zero.

 

The purchaseprice was allocated based on the fair values of the acquired assets andliabilities as follows:

 
| ** **                                                      | ** ** | ** ** | ** ** | **Weighted average** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|---------------------------|------------|
| ** **                                                      | ** ** | **RMB**    | ** ** | **amortization period**   | ** ** |
| ** **                                                      | ** ** | ** ** | ** ** | ** **                | ** ** |
| Cash and cash equivalents                                       |       | 17,486     |       |                      |       |
| Prepaid expenses and other current assets                       |       | 962        |       |                      |       |
| Amount due from related parties                                 |       | 1,211      |       |                      |       |
| Deferred tax assets                                             |       | 1,800      |       |                      |       |
| Property and equipment                                          |       | 1,286      |       |                      |       |
| Accounts payable                                                |       | (2,241     | )          |                      |       |
| Amount due to related parties                                   |       | (10,941    | )          |                      |       |
| Accrued expenses                                                |       | (6,866     | )          |                      |       |
| Income taxes payable                                            |       | (500       | )          |                      |       |
| Deferred revenue                                                |       | (8,588     | )          |                      |       |
| Net liabilities assumed                                         |       | (6,391     | )          |                      |       |
| Intangible assets:                                              |       |       |       |                      |       |
| Trade name                                                      |       | 3,462      |       | Indefinite life           |       |
| Online courseware                                               |       | 1,429      |       | 2 years                   |       |
| Agency agreements                                               |       | 295        |       | 5 years                   |       |
| Operating platform                                              |       | 393        |       | 5 years                   |       |
| Total intangible assets                                         |       | 5,579      |       | 3.5 years                 |       |
| Deferred tax liabilities related to intangible  assets acquired |       | (1,200     | )          |                      |       |
| Goodwill (allocated to the online tutoring  program segment)    |       | 14,926     |       |                      |       |
| Total                                                           |       | 12,914     |       |                      |       |

 

F-24

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**3.****                                      ACQUISITIONS- continued**

 

(b)                                 InSeptember 2005, the Company acquired a 100% equity interest in BJ-WITT, aBVI company engaged in providing foreign language education and other overseaseducation services, with cash consideration of RMB34,300, of which RMB28,300was paid as of December 31, 2005 and the remaining RMB6,000 was paid in2006.

 

Under the sametransaction, the Company, through its wholly owned subsidiary Hongcheng Liye,also acquired an 80% equity interest in WITT Education, an entity that wasowned by the original shareholder of BJ-WITT, for cash consideration ofRMB3,627.  WITT Education, a companyestablished in the PRC, is mainly engaged in educational management consultingand provides traditional classroom education services through its languageprogram-the FEC program.

 

Total purchaseprice for the acquisition of BJ-WITT and WITT Education was allocated asfollows:

 
| ** **                                                            | ** ** | ** ** | ** ** | **Weighted average** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|---------------------------|------------|
| ** **                                                            | ** ** | **RMB**    | ** ** | **amortization period**   | ** ** |
|                                                                  |       |       |       |                      |       |
| Cash and cash equivalents                                             |       | 11,126     |       |                      |       |
| Prepaid expenses and other current assets                             |       | 1,399      |       |                      |       |
| Amount due from related parties                                       |       | 6,276      |       |                      |       |
| Property and equipment                                                |       | 1,082      |       |                      |       |
| Accounts payable                                                      |       | (9,503     | )          |                      |       |
| Amount due to related parties                                         |       | (8,833     | )          |                      |       |
| Accrued expenses                                                      |       | (455       | )          |                      |       |
| Deferred income tax                                                   |       | (204       | )          |                      |       |
| Deferred revenue                                                      |       | (11,425    | )          |                      |       |
| Net liabilities assumed                                               |       | (10,537    | )          |                      |       |
| Intangible assets:                                                    |       |       |       |                      |       |
| Service agreement with a high school                                  |       | 18,722     |       | 20 years                  |       |
| Service agreements with other high schools                            |       | 5,436      |       | 15 years                  |       |
| Total intangible assets                                               |       | 24,158     |       | 18.9 years                |       |
| Deferred tax liabilities relating to  intangible assets acquired      |       | (7,865     | )          |                      |       |
| Goodwill (allocated to the international curriculum  program segment) |       | 32,171     |       |                      |       |
| Total                                                                 |       | 37,927     |       |                      |       |

 

F-25

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**3.****                                      ACQUISITIONS- continued**

 

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.

 

The purchaseprice for this 20% minority interest was allocated based on the fair values ofthe acquired assets and liabilities on the date of the acquisition.  The fair values were determined by AmericanAppraisal China Limited, an independent third party valuation firm.

 

The purchaseprice was allocated based on the fair value of the acquired assets andliabilities as follows:

 
| ** **                                                            | ** ** | ** ** | ** ** | **Weighted average** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|---------------------------|------------|
| ** **                                                            | ** ** | **RMB**    | ** ** | **amortization period**   | ** ** |
|                                                                  |       |       |       |                      |       |
| Intangible assets:                                                    |       |       |       |                      |       |
| Service agreement with a high school                                  |       | 3,154      |       | 19 years                  |       |
| Service agreements with other high schools                            |       | 4,980      |       | 14 years                  |       |
| Total intangible assets                                               |       | 8,134      |       | 16 years                  |       |
| Deferred tax liabilities relating to  intangible assets acquired      |       | (1,907     | )          |                      |       |
| Goodwill (allocated to the international curriculum  program segment) |       | 6,573      |       |                      |       |
| Total                                                                 |       | 12,800     |       |                      |       |

 

(c)                                  Inan effort to continue expanding its online education services business, on November 30,2005, Hongcheng Liye acquired a 55% equity interest in Zhong Nongda Networks,with a cash consideration of RMB39,638, of which RMB13,513 was paid as of December 31,2005 and the remaining RMB26,125 was paid in 2006.  Zhong Nongda Networks, incorporated in October 30,2001, provides online educational technical and consulting services to ChinaAgricultural University.

 

F-26

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**3.****                                      ACQUISITIONS- continued**

 

The purchase pricewas allocated based on the fair values of the acquired assets and liabilitiesas follows:

 
| ** **                                                       | ** ** | ** ** | ** ** | **Weighted average**    | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------------------------|------------|
| ** **                                                       | ** ** | **RMB**    | ** ** | **amortization period** | ** ** |
|                                                             |       |       |       |                         |       |
| Cash and cash equivalents                                        |       | 25,477     |       |                         |       |
| Amount due from related parties                                  |       | 3,301      |       |                         |       |
| Prepaid expenses and other current assets                        |       | 2,155      |       |                         |       |
| Deferred tax assets                                              |       | 2,051      |       |                         |       |
| Property and equipment                                           |       | 13,229     |       |                         |       |
| Intangible assets                                                |       | 2,129      |       |                         |       |
| Amount due to related parties                                    |       | (10,770    | )          |                         |       |
| Accrued expenses                                                 |       | (5,364     | )          |                         |       |
| Income taxes payable                                             |       | (1,892     | )          |                         |       |
| Deferred revenue                                                 |       | (11,706    | )          |                         |       |
| Net tangible assets acquired                                     |       | 18,610     |       |                         |       |
| Minority interest                                                |       | (8,374     | )          |                         |       |
| Intangible assets:                                               |       |       |       |                         |       |
| Service agreement with university                                |       | 19,195     |       | 50 years                     |       |
| Customer base                                                    |       | 7,992      |       | 3.4 years                    |       |
| Operation platform                                               |       | 241        |       | 7 years                      |       |
| Online courseware                                                |       | 347        |       | 3 years                      |       |
| Total intangible assets                                          |       | 27,775     |       | 35.6 years                   |       |
| Deferred tax liabilities relating to intangible  assets acquired |       | (3,716     | )          |                         |       |
| Goodwill (allocated to the online degree  program segment)       |       | 5,343      |       |                         |       |
| Total                                                            |       | 39,638     |       |                         |       |

 

F-27

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**3.****                                      ACQUISITIONS- continued**

 

(d)                                 OnDecember 30, 2005, Hongcheng Education acquired a 62.5% equity interest inTianchang, an entity that invests in education institutions, for cashconsideration of RMB20,000.  The primaryasset being acquired was Tianchang’s assembled workforce, which is anintangible asset not recognized apart from goodwill.

 

The purchaseprice was allocated based on the fair values of the acquired assets andliabilities as follows:

 
| ** **                                                           | ** ** | **RMB** | ** ** |
|----------------------------------------------------------------------|------------|---------|------------|
|                                                                 |       |    |       |
| Cash and cash equivalents                                            |       | 30,000  |       |
| Minority interest                                                    |       | (11,250 | )          |
| Net tangible asset                                                   |       | 18,750  |       |
| Goodwill (related to private primary and secondary  schools segment) |       | 1,250   |       |
| Total                                                                |       | 20,000  |       |

 

On February 13, 2007, HongchengEducation acquired an additional 10% equity interest in Tianchang, for cashconsideration of RMB3,520.

 

The purchase price was allocated based on thefair values of the acquired assets and liabilities on the date of theacquisition.

 
| 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-28

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**3.****                                      ACQUISITIONS- continued**

 

(e)                                  OnFebruary 23, 2006, Hongcheng Liye acquired an 80% equity interest inBeijing BCIT by issuing 2,025,061 ordinary shares with a fair value of US$3,746(an equivalent of RMB30,158) on the acquisition date.  Beijing BCIT provides internationalpolytechnic education services (“BCIT program”).

 

The purchaseprice was allocated based on the fair values of the acquired assets andliabilities 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 intangible  assets acquired      |       | (6,148     | )          |                      |       |
| Goodwill (allocated to the international curriculum  program segment) |       | 15,302     |       |                      |       |
| Total                                                                 |       | 30,158     |       |                      |       |

 

The fairvalues of the ordinary shares issued in connection with these acquisitions weredetermined by a retrospective valuation performed by American Appraisal ChinaLimited.  The valuation analysis utilizesand considers generally accepted valuation methodologies such as the income,market, cost and actual transaction of the Group.  The Group has incorporated certainassumptions, which include projected cash flows and replacement costs.

 

F-29

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**3.****                                      ACQUISITIONS- continued**

 

As part of thepurchase agreement, the Group exercised its option to assume the remaining   20% of the minority interest in Beijing BCITfor no additional consideration because Beijing BCIT did not meet the operatingperformance targets as stated in the original purchase agreement.  This transaction was completed in May 2007and Beijing BCIT became wholly owned by the Group thereafter.  The Group incurred RMB200 transaction costsin connection with the acquisition of Beijing BCIT.

 

The followingsummary of unaudited pro forma results of operations for the years ended December 31,2005, 2006 and 2007 were presented with the assumption that all significantacquisitions during these periods occurred as of January 1, 2005.  These 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, 2005, nor are they indicative of future operatingresults.

 
| ** **                                                      | ** ** | **Years ended December 31** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                                      | ** ** | **(Unaudited)**                            | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
|                                                            |       |                                       |       |   |   |   |   |
| Pro forma net revenues                                          |       | 169,896                                    |       | 213,862 |   | 264,988 |   |
| Pro forma net income (loss)                                     |       | (3,117                                     | )          | 25,145 |   | 2,353 |   |
| Pro forma net Income (loss) per ordinary  shares-basic          |       | (0.19                                      | )          | 0.64 |   | 0.06 |   |
| Pro forma net Income (loss) per preferred A  share shares-basic |       | —                                     |       | 0.64 |   | 0.06 |   |
| Pro forma net Income (loss) per preferred B  share shares-basic |       | —                                     |       | 0.64 |   | 0.06 |   |
| Pro forma net Income (loss) per preferred C  share shares-basic |       | —                                     |       | 0.64 |   | 0.06 |   |
| Pro forma net Income (loss) per preferred D  share shares-basic |       | —                                     |       | — |   | 0.06 |   |
| Income (loss) per share diluted                                 |       | (0.19                                      | )          | 0.59 |   | 0.05 |   |

 

F-30

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**4.****                                      PREPAIDEXPENSES AND OTHER CURRENT ASSETS**

 

Prepaidexpenses and other current assets consisted of:

 
| ** **                  | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2006**              | ** ** | **2007** | ** ** |
| ** **                  | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
|                        |       |                  |       |   |   |
| Staff advances              |       | 5,180                 |       | 1,911 |   |
| Advance to an online school |       | 1,832                 |       | 5,009 |   |
| Prepaid expenses            |       | 1,777                 |       | 4,360 |   |
| Advances to suppliers       |       | 210                   |       | 6,212 |   |
|                        |       | 8,999                 |       | 17,492 |   |

 

Staff advancesrepresented travel and the related expenses to be charged to expenses whenexpense reports are submitted.  Advanceto an online school represented amount loaned to an online education allianceprogram to fund its operations.  Advanceto an online school is non-interest bearing and is payable on demand.  Prepaid expenses represented operationalexpenses prepaid and amortized within one year. Advances to suppliers represented the advances the Group paid to thecourse material suppliers for online degree programs.

 

**5.****                                      COSTMETHOD INVESTMENT**

 

In June 2004,the Group obtained a 10% equity interest in Hongcheng Xueyuan TechnologyDevelopment Co., Ltd. (“Hongcheng Xueyuan”), a company established in the PRCthat is engaged in the provision of education services in the PRC, forconsideration of RMB100.  The Groupsettled this consideration by providing education consulting services toHongcheng Xueyuan.  In December 2006,the Group increased its equity interest in Hongcheng Xueyuan to 19% byacquiring an additional 9% equity interest for cash consideration of RMB1,110.

 

**6.****                                      LANDUSE RIGHTS, NET**

 

Land userights, net consisted of the following:

 
| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2006**              | ** ** | **2007** | ** ** |
| ** **                     | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
|                           |       |                  |       |   |   |
| Land use rights                |       | 25,942                |       | 28,137 |   |
| Less: accumulated amortization |       | (655                  | )          | (1,188 | ) |
| Land use rights, net           |       | 25,287                |       | 26,949 |   |

 

Amortizationexpenses for land use rights totaled RMB137, RMB518 and RMB533 for the yearsended December 31, 2005, 2006, and 2007, respectively.  Future amortization expenses are RMB564 peryear for each of the next five years through December 31, 2012.

 

F-31

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**7.****                                      PROPERTYAND EQUIPMENT, NET**

 

Property andequipment, net consisted of the following:

 
| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2006**              | ** ** | **2007** | ** ** |
| ** **                                       | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
| ** **                                       | ** ** | ** **            | ** ** | ** ** | ** ** |
| Buildings                                        |       | 16,380                |       | 72,248 |   |
| Furniture, fixtures and equipment                |       | 31,604                |       | 34,983 |   |
| Motor vehicles                                   |       | 7,490                 |       | 8,983 |   |
| Leasehold improvements                           |       | 8,471                 |       | 9,458 |   |
|                                             |       | 63,945                |       | 125,672 |   |
| Less: accumulated depreciation and  amortization |       | (24,154               | )          | (29,624 | ) |
|                                             |       | 39,791                |       | 96,048 |   |
| Construction in progress                         |       | 3,866                 |       | 34,697 |   |
|                                             |       | 43,657                |       | 130,745 |   |

 

Depreciationexpenses for the years ended December 31, 2005, 2006 and 2007 wereRMB5,023, RMB8,157, and RMB8,206, respectively.

 

**8.****                                      INTANGIBLEASSETS, NET**

 

Intangibleassets, net including those acquired as part of business combination consistedof the following:

 
| ** **                                             | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **2006**              | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
| Intangible assets with definite lives:                 |       |                  |       |   |   |
| Service agreements with universities and  high schools |       | 81,101                |       | 89,235 |   |
| Operating platform                                     |       | 690                   |       | 690 |   |
| Customer base                                          |       | 11,708                |       | 11,708 |   |
| Online courseware                                      |       | 3,504                 |       | 3,504 |   |
| Agency agreements                                      |       | 295                   |       | 295 |   |
| Contractual rights                                     |       | 11,800                |       | 15,230 |   |
| Prepaid operating contracts                            |       | 4,464                 |       | 4,464 |   |
|                                                   |       | 113,562               |       | 125,126 |   |
| Less: accumulated amortization                         |       | (14,188               | )          | (22,736 | ) |
|                                                   |       | 99,374                |       | 102,390 |   |
| Intangible assets with indefinite lives-trade  name    |       | 3,462                 |       | 3,462 |   |
|                                                   |       | 102,836               |       | 105,852 |   |

 

F-32

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

** **

**8.****                                      INTANGIBLEASSETS, NET - continued**

 

The carryingamount of intangible assets by reportable segment was as follows:

 
| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2006**              | ** ** | **2007** | ** ** |
| ** **                            | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
|                                  |       |                  |       |   |   |
| Online degree programs                |       | 53,001                |       | 50,636 |   |
| Private primary and secondary schools |       | 4,048                 |       | 3,840 |   |
| Online tutoring program               |       | 3,875                 |       | 3,737 |   |
| International curriculum program      |       | 41,912                |       | 47,639 |   |
|                                  |       | 102,836               |       | 105,852 |   |

 

Amortizationexpenses of intangible assets with definite lives were RMB3,251, RMB8,294 andRMB8,548 for the years ended December 31, 2005, 2006 and 2007,respectively.  Amortization expenses forintangible assets with definite lives for the next five years are follows:

 
| **Years ending December 31** | ** ** | **RMB** | ** ** |
|---------------------------------------------|------------|---------|------------|
|                                        |       |    |       |
| 2008                                        |       | 8,582   |       |
| 2009                                        |       | 5,553   |       |
| 2010                                        |       | 4,671   |       |
| 2011                                        |       | 4,642   |       |
| 2012                                        |       | 4,318   |       |

** **

**9.****                                      ACCRUEDEXPENSES AND OTHER CURRENT LIABILITIES**

 

Accruedexpenses and other current liabilities consisted of the following:

 
| ** **                                                     | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                     | ** ** | **2006**              | ** ** | **2007** | ** ** |
| ** **                                                     | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
|                                                           |       |                  |       |   |   |
| Advances from students                                         |       | 7,247                 |       | 8,541 |   |
| Accrued expenses                                               |       | 334                   |       | 1,913 |   |
| Accrued professional fees                                      |       | 6,067                 |       | 13,247 |   |
| Dividend payable to a subsidiary’s minority  shareholders |       | 3,850                 |       | — |   |
| Accrued employee bonus and welfare benefits                    |       | 3,027                 |       | 14,375 |   |
| Other payables                                                 |       | 1,229                 |       | 4,020 |   |
|                                                           |       | 21,754                |       | 42,096 |   |

 

Advances from students represented amountsreceived for books and materials, which the Group collected from students onbehalf of third party vendors.

 

F-33

 

----

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued**

**FOR THE YEARS ENDED DECEMBER 31, 2005, 2006AND 2007**

**(In thousands, except share-related data)**

 

**10.****                              OTHERTAXES PAYABLE**

 

Other taxes payable consisted of thefollowing:

 
| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2006**              | ** ** | **2007** | ** ** |
| ** **                       | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
|                             |       |                  |       |   |   |
| Value-added taxes payable        |       | 2,246                 |       | 3,057 |   |
| Business taxes payable           |       | 1,324                 |       | 3,064 |   |
| Individual income taxes  payable |       | 182                   |       | 465 |   |
| Real estate tax                  |       | —                |       | 80 |   |
|                             |       | 3,752                 |       | 6,666 |   |

 

The Group is subject to business taxes at arate of 5% to 5.5%, which are applied to service revenue generated from onlineeducation programs. The Group is also required to withhold PRC individualincome taxes on employees’ payroll for remittance to the tax authorities.

 

**11.****                              SHAREOPTION PLAN**

 

The Group’s original employee share optionplan (the “Original Plan”) was effective on August 10, 2000 and allowedthe Group to offer a variety of incentive awards to employees and non-employeedirectors of the Group and any consultant who performs services for the Group. Pursuantto the Original Plan, an incentive option could only be granted to employeesand a non-qualified option could be granted to employees, non-employeedirectors 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 Original Plan, the exercise price for anincentive option shall not be less than 100% of the fair market value of theordinary 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 Amendedand Restated Stock Option Plan (the “Amended Plan”) was effective, options topurchase were revised and up to 12,846,621 ordinary shares were authorized forissuance under the Amended Plan.

 

In March 2007, the Company adopted theSecond Amended and Restated Stock Option Plan (“Second Amended Plan”), whichreplaced the Amended Plan provided for the grant of options as well asrestricted shares. Under the Second Amended Plan, the Company was permitted togrant options to purchase up to 12,846,621 ordinary shares of the Company, tothe Group’s employees, directors and consultants. The minimum option vestingperiod for any option grant is three years and acceleration of option vestingis not permitted, unless approved by the Board of Directors. Under the terms ofthe Second Amended Plan, no incentive stock option was permitted to be grantedto any greater than 10% shareholder unless the exercise price equal at least110% of the fair market value.

 

F-34

----

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued**

**FOR THE YEARS ENDED DECEMBER 31, 2005, 2006AND 2007**

**(In thousands, except share-related data)**

 

**11.****                              SHARE OPTION PLAN** - continued

 

The Group’s equity incentive plan (the “EquityIncentive Plan”) was adopted in November 2007. This Equity Incentive Planreplaced the amended and restated stock option plans adopted by the Group in March 2007and December 2004, which had amended and restated the Original Planadopted in August 2000. 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 tothe Equity Incentive, an incentive option (“ISO”) may only be granted toemployees and a non-qualified option may be granted to employees, non-employeedirectors and consultants. Not more than 12,846,621 shares may be issued underthis Equity Incentive Plan; provided however, that there shall be an annual increaseto be added on January 1st each year in an amount equal to two percent(2%) of the total number of shares of the Company outstanding on December 31stof the preceding calendar year. Under the terms of this 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 incentive optiongranted to a grantee who at the time of grant owned shares possessing more than10% of the combined voting power of all classes of the Company’s share capital(including any equity of any of the Company’s Chinese subsidiaries), the optionprice may not be less than 110% of the fair market value of the ordinary shareson the date of grant of such ISO and the option period may not be greater thanfive years from the date of grant. The minimum option vesting period for anyoption grant is three years and acceleration of option vesting is notpermitted, unless approved by the Board of Directors.

 

All options granted will vest over periodsranging from immediately to four years and any unexercised options will expireten years from the date of grant. As of December 31, 2006 and 2007,options to purchase 8,682,600 and 9,435,000 ordinary shares were outstanding,and options to purchase 914,021 and 161,621 ordinary shares were available forfuture grants.

 

Options to employees

 

Through December 31, 2007, the Group hadgranted an accumulated total of 13,058,400 share options to purchase ordinaryshares to employees, officers, and directors and were exercisable in US$.

 

For the shares granted after January 1,2006, the Group recorded the compensation expenses under the fair value methodaccording to SFAS No. 123R. The Group recorded a total compensationexpense of RMB2,677 and RMB3,643 for the year ended December 31, 2006 and2007.

 

F-35

----

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued**

**FOR THE YEARS ENDED DECEMBER 31, 2005, 2006AND 2007**

**(In thousands, except share-related data)**

 

**11.****                              SHARE OPTION PLAN** - continued

 

Options to non-employees

 

On May 20, 2004, the Group granted 5,000share options with an exercise price of US$1.09 (RMB9.02) per share to a legaladvisor for the settlement of prior services provided to the Group, whichoptions were fully vested in 2006. The Group recorded compensation expenses ofRMB51, RMB34 and zero for the years ended December 31, 2005, 2006 and 2007,respectively, estimated using the Black-Scholes option pricing model as suchmethod provides a more accurate estimate of the fair value of services receivedby the Group.

 

The following assumptions were used in thenon-employee option pricing model:

 
| ** **                                | ** ** | **2005** | ** ** | **2006** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
|                                      |       |     |       |     |       |
| Weighted average risk-free rate of return |       | 4.34     | %          | 4.66     | %          |
| Weighted average expected option life     |       | 7.5      |       | 6.5      |       |
| Weighted average volatility rate          |       | 57       | %          | 53       | %          |
| Weighted average dividend yield           |       | —   |       | —   |       |

 

Summary of share options to employees andnon-employee

 

A summary of the share option activitiesincluding both employee and non-employee grants was as follows. All of the fairvalue of ordinary shares, intrinsic value and exercise price are denominated inUS$ because the shares are exercisable in US$.

 
| ** **                            | ** ** | **Outstanding options** | ** ** |
|---------------------------------------|------------|------------------------------|------------|
| ** **                            | ** ** | ** **                   | ** ** | **Weighted** | ** ** |
| ** **                            | ** ** | **Number of**           | ** ** | **average exercise** | ** ** |
| ** **                            | ** ** | **options**                  | ** ** | **price per share** | ** ** |
| ** **                            | ** ** | ** **                   | ** ** | **US$** | ** ** |
|                                  |       |                         |       |   |   |
| Outstanding at January 1, 2005   |       | 5,177,000                    |       | 0.89 |   |
| Granted                               |       | 3,849,050                    |       | 1.35 |   |
| Outstanding at December 31, 2005 |       | 9,026,050                    |       | 1.08 |   |
| Granted                               |       | 1,056,350                    |       | 1.85 |   |
| Exercised                             |       | (550,000                     | )          | 0.26 |   |
| Cancelled                             |       | (849,800                     | )          | 1.20 |   |
| Outstanding at December 31, 2006 |       | 8,682,600                    |       | 1.22 |   |
| Granted                               |       | 925,000                      |       | 2.85 |   |
| Exercised                             |       | —                       |       | — |   |
| Cancelled                             |       | (172,600                     | )          | 1.43 |   |
| Outstanding at December 31, 2007 |       | 9,435,000                    |       | 1.38 |   |

 

F-36

----

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued**

**FOR THE YEARS ENDED DECEMBER 31, 2005, 2006AND 2007**

**(In thousands, except share-related data)**

 

**11.****                              SHARE OPTION PLAN** - continued

 

Summary of share options to employees andnon-employee -continued

 

The weighted average per share fair values ofoptions as of their respective grant dates were as follows:

 
| ** ** | ** ** | **December 31,** | ** ** |
|------------|------------|-----------------------|------------|
| ** ** | ** ** | **2005**              | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** ** | ** ** | **US$**               | ** ** | **US$** | ** ** | **US$** | ** ** |
|       |       |                  |       |   |   |   |   |
| Options    |       | 0.316                 |       | 0.86 |   | 1.28 |   |

 

The following table summarizes informationregarding options issued within the 12-month period prior to December 31,2007:

 
| ** **              | ** ** | ** **                  | ** ** | ** **              | ** ** | **Fair Value of** | ** ** | **Intrinsic value**    | ** ** |
|-------------------------|------------|-----------------------------|------------|-------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Grant date**     | ** ** | **No. of shares** | ** ** | **Exercise price** | ** ** | **ordinary shares**    | ** ** | **at grant date** | ** ** |
| ** **              | ** ** | ** **                  | ** ** | ** **              | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| April 23,  2007    |       | 885,000                     |       | US$                     | 2.86       |                        | US$        | 2.86                        | (1)        | — |   |
| December 14,  2007 | ** ** | 40,000                      | ** ** | 3.05                    | ** ** | 3.05                        | (2)        | **—**                  | ** ** |
|                         |            |                             |            |                         |            |                             |            |                             |            |  |  |

 

----

| (1)    | Determined based on a retrospective  valuation by American Appraisal China Limited, an independent third party  valuation firm. |
|--------|---------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                            |
| (2)    | Determined by the closing market price of  an ADS as quoted on the Nasdaq Global Market on the date of grant divided by  three. |

 

The following table summarizes informationwith respect to employee and non-employee share options outstanding at December 31,2007:

 
| ** **              | ** ** | **Options outstanding** | ** ** | **Options exercisable** | ** ** |
|-------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **              | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **              | ** ** | ** **                   | ** ** | **average**                  | ** ** | **Weighted** | ** ** | **average** | ** ** | ** ** | ** ** | **Weighted** | ** ** | **average** | ** ** |
| ** **              | ** ** | **Number**                   | ** ** | **remaining**                | ** ** | **average** | ** ** | **intrinsic** | ** ** | **Number** | ** ** | **average** | ** ** | **intrinsic** | ** ** |
| ** **              | ** ** | **outstanding**              | ** ** | **contractual life**    | ** ** | **exercise price** | ** ** | **value** | ** ** | **exercisable** | ** ** | **exercise price** | ** ** | **value** | ** ** |
| ** **              | ** ** | ** **                   | ** ** | ** **                   | ** ** | **US$** | ** ** | **US$** | ** ** | ** ** | ** ** | **US$** | ** ** | **US$** | ** ** |
|                    |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Average exercise price: |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| US$                     |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| 0.50                    |       | 1,026,000                    |       | 4.65 years                   |       | 0.50 |   | 2.33 |   | 1,026,000 |   | 0.50 |   | 2.33 |   |
| 0.86                    |       | 534,400                      |       | 6.82 years                   |       | 0.86 |   | 1.97 |   | 534,400 |   | 0.86 |   | 1.97 |   |
| 1.00                    |       | 645,000                      |       | 3.32 years                   |       | 1.00 |   | 1.83 |   | 645,000 |   | 1.00 |   | 1.83 |   |
| 1.09-1.85               |       | 6,304,600                    |       | 7.25 years                   |       | 1.39 |   | 1.45 |   | 4,588,855 |   | 1.32 |   | 1.51 |   |
| 2.86-3.05               |       | 925,000                      |       | 9.35 years                   |       | 2.87 |   | — |   | — |   | — |   | — |   |
|                    |       | 9,435,000                    |       | 6.88 years                   |       | 1.38 |   | 1.46 |   | 6,794,255 |   | 1.13 |   | 1.70 |   |

 

The weighted average intrinsic value in thetable above represents the difference between the Company’s estimated fairvalue during 2007 and the weighted average exercise price.

 

Total intrinsic value of options exercisedfor the years ended December 31, 2005, 2006, and 2007 was RMB nil, RMB365and RMB nil, respectively.

 

F-37

----

 

**CHINAEDU CORPORATION**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued**

**FOR THE YEARS ENDED DECEMBER 31, 2005, 2006AND 2007**

**(In thousands, except share-related data)**

 

**11.****                              SHARE OPTION PLAN** - continued

 

Summary of share options to employees andnon-employees- continued

 

As of December 31, 2007, there was RMB9,086unrecognized share-based compensation cost related to share options. Thatdeferred cost is expected to be recognized over a weighted-average vestingperiod of 2.06 years. To the extent the actual forfeiture rate is differentfrom Company’s original estimate, actual share-based compensation related tothese awards may be different from the expectation.

 

**12.****                              INCOMETAXES**

 

The Company is a tax-exempted companyincorporated in the Cayman Islands. As of December 31, 2007, the Company’ssubsidiaries and variable interest entities incorporated in the PRC weregoverned by the Income Tax Law of the PRC Concerning Foreign Investment andForeign Enterprises and various local income tax laws (collectively, the “PRCIncome Tax Laws”). Pursuant to the PRC Income Tax Laws, the PRC enterprises aresubject to income tax at a statutory rate of 33% (30% of state unified incometax plus 3% local income tax) on PRC taxable income. A summary of the taxconcessions available to the PRC entities for the year ended December 31,2007 is as follows:

 
| ** **            | ** ** | **PRC state**      | ** ** | ** **                    | ** ** | **Concession from**         | ** ** | **Concession**                 | ** ** | **Year of**             | ** ** |
|-----------------------|------------|-------------------------|------------|-------------------------------|------------|----------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **            | ** ** | **unified income** | ** ** | **PRC local**            | ** ** | **PRC State Unified**  | ** ** | **from PRC**              | ** ** | **commencement**             | ** ** |
| **PRC Entities** | ** ** | **tax rate**       | ** ** | **income tax rate** | ** ** | **income tax**              | ** ** | **local income tax** | ** ** | **of tax holiday** | ** ** |
| ** **            | ** ** | ** **              | ** ** | **(%)**                       | ** ** | ** **                       | ** ** | **(%)**                        | ** ** | ** **                   | ** ** |
|                  |       |                    |       |                          |       |                             |       |                           |       |                         |       |
| ChinaEdu              |       | N/A                     |       | N/A                           |       | N/A                              |       | N/A                            |       | N/A                          |       |
|                  |       |                    |       |                          |       |                             |       |                           |       |                         |       |
| CMR WEB               |       | 15                      |       | —                        |       | Full exemption for               |       | N/A                            |       | 1999                         |       |
|                  |       |                    |       |                          |       | 3 years starting from the        |       |                           |       |                         |       |
|                  |       |                    |       |                          |       | commencement of tax              |       |                           |       |                         |       |
|                  |       |                    |       |                          |       | holiday followed by a 50%        |       |                           |       |                         |       |
|                  |       |                    |       |                          |       | reduction for the next           |       |                           |       |                         |       |
|                  |       |                    |       |                          |       | 3 years thereafter               |       |                           |       |                         |       |
|                  |       |                    |       |                          |       |                             |       |                           |       |                         |       |
| Hongcheng             |       | 15                      |       | —                        |       | Full exemption for               |       | N/A                            |       | 2001                         |       |
| Technology            |       |                    |       |                          |       | 3 years starting from the        |       |                           |       |                         |       |
|                  |       |                    |       |                          |       | commencement of tax              |       |                           |       |                         |       |
|                  |       |                    |       |                          |       | holiday followed by              |       |                           |       |                         |       |
|                  |       |                    |       |                          |       | a 50% reduction for the  next    |       |                           |       |                         |       |
|                  |       |                    |       |                          |       | 3 years thereafter               |       |                           |       |                         |       |
|                  |       |                    |       |                          |       |                             |       |                           |       |                         |       |
| Hongcheng Liye        |       | 15                      |       | —                        |       | Full exemption for               |       |                           |       |                         |       |
|                  |       |                    |       |                          |       | 3 years starting from the        |       | N/A                            |       | 2003                         |       |
|                  |       |                    |       |                          |       | commencement of tax  holiday     |       |                           |       |                         |       |
|                  |       |                    |       |                          |       | followed by a 50%  reduction     |       |                           |       |                         |       |
|                  |       |                    |       |                          |       | for the next 3 years  thereafter |       |                           |       |                         |       |
|                  |       |                    |       |                          |       |                             |       |                           |       |                         |       |
| Hongcheng             |       | 15                      |       | —                        |       | Full exemption for 3 years       |       | N/A                            |       | 2005                         |       |
| Education             |       |                    |       |                          |       | starting from the  commencement  |       |                           |       |                         |       |
|                  |       |                    |       |                          |       | of tax holiday followed by       |       |                           |       |                         |       |
|                  |       |                    |       |                          |       | a 50% reduction for the  next    |       |                           |       |                         |       |
|                  |       |                    |       |                          |       | 3 years thereafter               |       |                           |       |                         |       |
|                  |       |                    |       |                          |       |                             |       |                           |       |                         |       |
| Xiandai Technology    |       | 30                      |       | 3                             |       | N/A                              |       | N/A                            |       | N/A                          |       |
|                  |       |                    |       |                          |       |                             |       |                           |       |                         |       |
| Dongcai               |       | 15                      |       | —                        |       | Full exemption for 2 years       |       | N/A                            |       | 2003                         |       |
|                  |       |                    |       |                          |       | starting from the  commencement  |       |                           |       |                         |       |
|                  |       |                    |       |                          |       | of tax holiday followed by       |       |                           |       |                         |       |
|                  |       |                    |       |                          |       | a 50% reduction for              |       |                           |       |                         |       |
|                  |       |                    |       |                          |       | the next 3 years  thereafter     |       |                           |       |                         |       |

 

F-38

----

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued**

**FOR THE YEARS ENDED DECEMBER 31, 2005, 2006AND 2007**

**(In thousands, except share-related data)**

 

**12.****                              INCOMETAXES - continued**

 
| ** **              | ** ** | **PRC state**      | ** ** | ** **                    | ** ** | **Concession from**                       | ** ** | **Concession**                                         | ** ** | **Year of**             | ** ** |
|-------------------------|------------|-------------------------|------------|-------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------------|------------|------------------------------|------------|
| ** **              | ** ** | **unified income** | ** ** | **PRC local**            | ** ** | **PRC State Unified**                | ** ** | **from PRC**                                      | ** ** | **commencement**             | ** ** |
| **PRC Entities**   | ** ** | **tax rate**       | ** ** | **income tax rate** | ** ** | **income tax**                            | ** ** | **local income tax**                         | ** ** | **of tax holiday** | ** ** |
| ** **              | ** ** | ** **              | ** ** | **(%)**                       | ** ** | ** **                                     | ** ** | **(%)**                                                | ** ** | ** **                   | ** ** |
|                    |       |                    |       |                          |       |                                           |       |                                                   |       |                         |       |
| Chongda                 |       | 15                      |       | —                        |       | Full exemption for 2 years                     |       | N/A                                                    |       | 2006                         |       |
|                    |       |                    |       |                          |       | starting from the commencement                 |       |                                                   |       |                         |       |
|                    |       |                    |       |                          |       | of tax holiday followed by                     |       |                                                   |       |                         |       |
|                    |       |                    |       |                          |       | a 50% reduction for                            |       |                                                   |       |                         |       |
|                    |       |                    |       |                          |       | the next 3 years  thereafter                   |       |                                                   |       |                         |       |
|                    |       |                    |       |                          |       |                                           |       |                                                   |       |                         |       |
| Gotop Electronic        |       | 30                      |       | 3                             |       | N/A                                            |       | N/A                                                    |       | N/A                          |       |
|                    |       |                    |       |                          |       |                                           |       |                                                   |       |                         |       |
| Beijing Xuezhi          |       | 15                      |       | —                        |       | Full exemption for 3 years                     |       | N/A                                                    |       | 2002                         |       |
|                    |       |                    |       |                          |       | starting from the  commencement                |       |                                                   |       |                         |       |
|                    |       |                    |       |                          |       | of tax holiday followed by                     |       |                                                   |       |                         |       |
|                    |       |                    |       |                          |       | a 50% reduction for the  next                  |       |                                                   |       |                         |       |
|                    |       |                    |       |                          |       | 3 years thereafter                             |       |                                                   |       |                         |       |
|                    |       |                    |       |                          |       |                                           |       |                                                   |       |                         |       |
| Tianjin 101             |       | 30                      |       | 3                             |       | N/A                                            |       | N/A                                                    |       | N/A                          |       |
|                    |       |                    |       |                          |       |                                           |       |                                                   |       |                         |       |
| WITT Education          |       | 15                      |       | —                        |       | Full exemption for 3 years                     |       | Full                                                   |       | 2003                         |       |
|                    |       |                    |       |                          |       | starting from the  commencement                |       | exemption                                              |       |                         |       |
|                    |       |                    |       |                          |       | of tax holiday followed by                     |       | from                                                   |       |                         |       |
|                    |       |                    |       |                          |       | a 50% reduction for the  next                  |       | September 3,                                           |       |                         |       |
|                    |       |                    |       |                          |       | 3 years thereafter                             |       | 2003to December 31,  2005                         |       |                         |       |
|                    |       |                    |       |                          |       |                                           |       |                                                   |       |                         |       |
| WITT Science            |       | 30                      |       | 3                             |       | N/A                                            |       | N/A                                                    |       | N/A                          |       |
|                    |       |                    |       |                          |       |                                           |       |                                                   |       |                         |       |
| ZhongNongda             |       | 15                      |       | —                        |       | Full exemption for 3 years                     |       | N/A                                                    |       | 2002                         |       |
| Network                 |       |                    |       |                          |       | starting from the  commencement                |       |                                                   |       |                         |       |
|                    |       |                    |       |                          |       | of tax holiday followed by                     |       |                                                   |       |                         |       |
|                    |       |                    |       |                          |       | a 50% reduction for the  next                  |       |                                                   |       |                         |       |
|                    |       |                    |       |                          |       | 3 years thereafter                             |       |                                                   |       |                         |       |
|                    |       |                    |       |                          |       |                                           |       |                                                   |       |                         |       |
| Beijing Ming Dao        |       | 15                      |       | —                        |       | Full exemption for 3 years                     |       | N/A                                                    |       | 2007                         |       |
|                    |       |                    |       |                          |       | starting from the  commencement                |       |                                                   |       |                         |       |
|                    |       |                    |       |                          |       | of tax holiday followed by                     |       |                                                   |       |                         |       |
|                    |       |                    |       |                          |       | a 50% reduction for the  next                  |       |                                                   |       |                         |       |
|                    |       |                    |       |                          |       | 3 years thereafter                             |       |                                                   |       |                         |       |
|                    |       |                    |       |                          |       |                                           |       |                                                   |       |                         |       |
| Gotop Hongcheng         |       | 30                      |       | 3                             |       | N/A                                            |       | N/A                                                    |       | N/A                          |       |
|                    |       |                    |       |                          |       |                                           |       |                                                   |       |                         |       |
| Tianjin Gotop Hongcheng |       | 30                      |       | 3                             |       | N/A                                            |       | N/A                                                    |       | N/A                          |       |
|                    |       |                    |       |                          |       |                                           |       |                                                   |       |                         |       |
| Beijing BCIT            |       | 30                      |       | 3                             |       | Full exemption from                            |       | Full                                                   |       | 2005                         |       |
|                    |       |                    |       |                          |       | September 3, 2005 to                      |       | exemption                                              |       |                         |       |
|                    |       |                    |       |                          |       | December 31, 2007                         |       | from September 3,  2005 to December 31, 2007 |       |                         |       |
|                    |       |                    |       |                          |       |                                           |       |                                                   |       |                         |       |
| Yuancheng Edu           |       | 30                      |       | 3                             |       | N/A                                            |       | N/A                                                    |       | N/A                          |       |
|                    |       |                    |       |                          |       |                                           |       |                                                   |       |                         |       |
| Beiyuda                 |       | 15                      |       | —                        |       | Full exemption for 3 years                     |       | N/A                                                    |       | 2006                         |       |
|                    |       |                    |       |                          |       | starting from the commencement                 |       |                                                   |       |                         |       |
|                    |       |                    |       |                          |       | of tax holiday followed by  a                  |       |                                                   |       |                         |       |
|                    |       |                    |       |                          |       | 50% reduction for the next  3 years thereafter |       |                                                   |       |                         |       |
|                    |       |                    |       |                          |       |                                           |       |                                                   |       |                         |       |
| Tianchang               |       | 30                      |       | 3                             |       | N/A                                            |       | N/A                                                    |       | N/A                          |       |
|                    |       |                    |       |                          |       |                                           |       |                                                   |       |                         |       |
| South Campus            |       | —                  |       | —                        |       | N/A                                            |       | N/A                                                    |       | N/A                          |       |
|                    |       |                    |       |                          |       |                                           |       |                                                   |       |                         |       |
| Anqing Foreign Language |       | 30                      |       | 3                             |       | N/A                                            |       | N/A                                                    |       | N/A                          |       |
|                    |       |                    |       |                          |       |                                           |       |                                                   |       |                         |       |
| Pingdingshan            |       | 30                      |       | 3                             |       | N/A                                            |       | N/A                                                    |       | N/A                          |       |
|                    |       |                    |       |                          |       |                                           |       |                                                   |       |                         |       |
| BJ-WITT                 |       | N/A                     |       | N/A                           |       | Incorporated in BVI                            |       | N/A                                                    |       | N/A                          |       |
|                    |       |                    |       |                          |       |                                           |       |                                                   |       |                         |       |
| BJ-BCIT                 |       | N/A                     |       | N/A                           |       | Incorporated in BVI                            |       | N/A                                                    |       | N/A                          |       |

 

F-39

----

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued**

**FOR THE YEARS ENDED DECEMBER 31, 2005, 2006AND 2007**

**(In thousands, except share-related data)**

 

**12.****                              INCOMETAXES - continued**

 

During the years ended December 31, 2005,2006 and 2007, if the Company’s subsidiaries and variable interest entities inthe PRC had not been awarded tax holidays or received special tax concessions,provision for income taxes, net (loss) income, and net (loss) income per sharewould have been as follows:

 
| ** **                                     | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                     | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2007** | ** ** |
|                                           |       |                                        |       |   |   |   |   |
| Increase in provision for income taxes         |       | 5,684                                       |       | 25,251 |   | 18,006 |   |
| Net (loss) income                              |       | (8,534                                      | )          | 288 |   | (15,519 | ) |
| Net (loss) income per ordinary share-basic     |       | (0.53                                       | )          | 0.00 |   | (0.37 | ) |
| Net (loss) income per preferred A  share-basic |       | —                                      |       | 0.00 |   | — |   |
| Net (loss) income per preferred B  share-basic |       | —                                      |       | 0.00 |   | — |   |
| Net (loss) income per preferred C  share-basic |       | —                                      |       | 0.00 |   | — |   |
| Net (loss) income per preferred D  share-basic |       | —                                      |       | 0.00 |   | — |   |
| Net (loss) income per ordinary  share-diluted  |       | (0.53                                       | )          | 0.00 |   | (0.37 | ) |

 

The principal components of the Group’s deferredincome tax assets were as follows:

 
| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2006**              | ** ** | **2007** | ** ** |
| ** **                                        | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
|                                              |       |                  |       |   |   |
| Current deferred tax assets                       |       |                  |       |   |   |
| Deferred revenue                                  |       | 5,347                 |       | 9,521 |   |
| Net current deferred tax assets                   |       | 5,347                 |       | 9,521 |   |
| Non-current deferred tax assets                   |       |                  |       |   |   |
| Intangible assets                                 |       | 1,961                 |       | 1,273 |   |
| Deferred revenue                                  |       | 96                    |       | 143 |   |
| Net operating loss carryforwards                  |       | 672                   |       | 399 |   |
| Total non-current deferred taxes                  |       | 2,729                 |       | 1,815 |   |
| Less: valuation allowance on deferred tax  assets |       | (672                  | )          | (399 | ) |
| Total non-current deferred taxes                  |       | 2,057                 |       | 1,416 |   |
| Non-current deferred tax liabilities              |       |                  |       |   |   |
| Property and equipment                            |       | 1,168                 |       | 774 |   |
| Intangible assets                                 |       | 18,711                |       | 23,262 |   |
| Total deferred tax liabilities                    |       | 19,879                |       | 24,036 |   |

 

F-40

----

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued**

**FOR THE YEARS ENDED DECEMBER 31, 2005, 2006AND 2007**

**(In thousands, except share-related data)**

 

**12.****                              INCOMETAXES - continued**

 

The Group has net operating losscarryforwards of RMB1,596 from the PRC subsidiaries for the year ended December 31,2007, which will expire on various dates from December 31, 2008 to December 31,2012.

 

As of December 31, 2007, a valuationallowance of RMB399 was provided against deferred tax assets arising from netoperating loss carryforwards of certain PRC subsidiaries and variable interestentities due to the uncertainty of realization. Adjustments will be made to thevaluation allowance if events occur in the future that indicate changes in theamount of deferred tax assets that may be realized.

 

The Group operates through multiplesubsidiaries and variable interest entities and the valuation allowances areconsidered separately for each subsidiary and variable interest entity. TheGroup does not file consolidated tax returns, therefore, losses and deferredtaxes from one subsidiary or a variable interest entity may not be used tooffset another subsidiary or variable interest entity’s earnings or deferredtaxes.

 

In June 2006, the FASB issued 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. FIN 48 became effective for fiscal years beginning afterDecember 15, 2006, with early adoption permitted. As a result of the Group’sadoption of FIN 48 on January 1, 2007, the total amount of unrecognizedtax benefits was RMB4,332 as of December 31, 2007. The Group recognizedRMB3,744 accumulated impact to accumulated deficits as of January 1, 2007.

 

The Group has adopted the accounting policythat interest recognized in accordance with paragraph 15 of FIN48 and penaltiesrecognized in accordance with paragraph 16 of FIN 48 are classified as part ofits income taxes. RMB499 interest and RMB89 penalties were recognized in thecondensed consolidated financial statements for the year ended December 31,2007.

 

A reconciliation of the beginning and endingamount of unrecognized tax benefits is as follows:

 
| 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 December 31, 2007                             |   | 4,332  |   |

 

F-41

----

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued**

**FOR THE YEARS ENDED DECEMBER 31, 2005, 2006AND 2007**

**(In thousands, except share-related data)**

 

**12.****                              INCOMETAXES - continued**

 

The Company is subject to taxation in Chinaand other foreign jurisdictions. There are no ongoing examinations by taxingauthorities at this time. The Company’s various tax years from 2002 to 2007 areremaining open in various taxing jurisdictions.

 

The Group does not anticipate any significantchange within 12 months of this reporting date of its uncertain tax positions.

 

On March 16, 2007, the National People’sCongress adopted the Enterprise Income Tax Law (the “New Income Tax Law”),which became effective January 1, 2008 and replaced the existing separateincome tax laws for domestic enterprises and foreign-invested enterprises,which are PRC subsidiaries of the Group, by adopting unified income tax rate of25% for most enterprises. In accordance with New Income Tax Law, the existingpreferential tax treatments granted to certain subsidiaries of the Company,because it is qualified as a “high and new technology enterprise” may continueto be entitled as long as they continue to qualify as a “high and newtechnology enterprise strongly supported by the State”. Pursuant to theissuance of “Circular 172,” which was issued on April 14, 2008 (GuoKeFaHuo2008 No. 172), in order for applicant enterprises to be classified as “highand new technology enterprises strongly supported by the State” certainrequirements must be met, such as ownership of the core intellectual property,products or services within “State-Encouraged High Technology Areas”. However,as the procedures for obtaining classification as “high and new technologyenterprises strongly supported by the State” have not yet been finalized, theycannot assure you that any of their subsidiaries or affiliated companiescurrently enjoying preferential tax rates will be approved as “high and newtechnology enterprises strongly supported by the State” entitled topreferential tax treatments. Furthermore, under the New Income Tax Law, a “residententerprise,” which includes an enterprise established outside of the PRC withmanagement located in the PRC, will be subject to the PRC income tax. If thePRC tax authorities subsequently determine that the company and itssubsidiaries registered outside PRC should be deemed a resident enterprise, theCompany and its subsidiaries registered outside the PRC will be subject to thePRC income tax at a rate of 25%.

 

The Company expects that the applicablesubsidiaries will apply for the “New and High Technology Enterprise” statusthat will allow them to apply a 15% tax rate under China’s Unified EnterpriseIncome Tax Law. Under applicable accounting rules, until these subsidiariesreceive official approval for this status, they must use the statutory 25% taxrate in their calculation of their deferred tax balances. If these subsidiariesreceive approval, then their present net deferred tax balances of RMB13,099would change to RMB8,231. The change in the tax rate would have resulted in aRMB4,868 decrease in income tax expense for the year ended December 31,2007. The difference would be an increase to these subsidiaries’ profit andloss accounts in the period in which approval is received.

 

F-42

----

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued**

**FOR THE YEARS ENDED DECEMBER 31, 2005, 2006AND 2007**

**(In thousands, except share-related data)**

 

**12.****                              INCOMETAXES - continued**

 

Reconciliation between total income taxexpense and the amount computed by applying the statutory income tax rate toincome before income taxes is as follows:

 
| ** **                                         | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                         | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                         | ** ** | **%**                                       | ** ** | **%** | ** ** | **%** | ** ** |
|                                               |       |                                        |       |   |   |   |   |
| Statutory rate                                     |       | 33                                          |       | 33 |   | 33 |   |
| Tax holiday                                        |       | (52                                         | )          | (45 | ) | (42 | ) |
| Effect on tax rates in different tax  jurisdiction |       | 36                                          |       | 3 |   | 7 |   |
| Permanent book-tax differences                     |       | 17                                          |       | 20 |   | 27 |   |
| Changes in valuation allowance                     |       | 2                                           |       | 1 |   | — |   |
| Increased in unrecognized tax benefit              |       | —                                      |       | — |   | 1 |   |
| Effect of new tax law                              |       | —                                      |       | — |   | 9 |   |
| Effective tax rates                                |       | 36                                          |       | 12 |   | 35 |   |

 

Under the NewIncome Tax Law that became effective January 1, 2008, the rules fordetermining whether an entity is resident in the PRC for tax purposes havechanged and the determination of residence depends on, among other things, the “placeof actual management”. If the Group, or any of its non-PRC subsidiaries, wereto be determined to be a PRC resident for tax purposes, it, or they, would beliable to tax in the PRC on worldwide income, including the income arising injurisdictions outside the PRC. The Group is still evaluating its residentstatus under the New Income Tax Law and related guidance.

 

If the Groupwere to be non-resident for PRC tax purposes, dividends paid to it out ofprofits earned after January 1, 2008 would be subject to a withholding tax.In the case of dividends paid by PRC subsidiaries to their foreign investors,the withholding tax would be 10%, unless any such foreign investor’sjurisdiction of incorporation has a tax treaty with China that provides for adifferent withholding arrangement.

 

Aggregateundistributed earnings of the Group’s subsidiaries and VIEs located in the PRCthat are available for distribution to the Group of approximately RMB3,334 at December 31,2007 are considered to be indefinitely reinvested under APB opinion No. 23,and accordingly, no provision has been made for the Chinese dividendwithholding taxes that would be payable upon the distribution of those amountsto the Group. The Chinese tax authorities have also clarified thatdistributions made out of pre January 1, 2008 retained earnings will notbe subject to the withholding tax.

 

The Group doesnot have any present plan to declare or pay any cash dividends on its ordinaryshares or ADSs in the foreseeable future. The Group currently intends to retainmost, if not all, of its available funds and any future earnings for use in theoperation and expansion of its business. As of December 31, 2007, theGroup had not declared or paid any dividends on its ordinary shares or ADSs.

 

F-43

----

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued**

**FOR THE YEARS ENDED DECEMBER 31, 2005, 2006AND 2007**

**(In thousands, except share-related data)**

 

**13.****                              NET(LOSS) INCOME PER SHARE**

 

The followingtable sets forth the computation of basic and diluted net (loss) income pershare for the periods indicated:

 
| ** **                                                                                                                                                                 | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2007** | ** ** |
|                                                                                                                                                                       |       |                                        |       |   |   |   |   |
| Net (loss) income-basic (numerator):                                                                                                                                       |       |                                        |       |   |   |   |   |
| Net (loss) income attributable to ordinary  shareholders                                                                                                                   |       | (2,850                                      | )          | 12,077 |   | 1,215 |   |
| 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 (loss) income attributable to ordinary shareholders-diluted  (numerator)                                                                                               |       | (2,850                                      | )          | 25,539 |   | 2,487 |   |
| Shares (denominator):                                                                                                                                                      |       |                                        |       |   |   |   |   |
| Weighted average ordinary shares  outstanding used in computing basic net (loss) income per share                                                                          |       | 16,243,736                                  |       | 18,540,732 |   | 20,585,074 |   |
| Weighted average preferred A shares using if-converted  method                                                                                                             |       | —                                      |       | 5,150,000 |   | 4,991,507 |   |
| Weighted average preferred B shares using if-converted  method                                                                                                             |       | —                                      |       | 12,140,495 |   | 11,561,814 |   |
| Weighted average preferred C shares using if-converted  method                                                                                                             |       | —                                      |       | 3,378,379 |   | 3,221,030 |   |
| Weighted average preferred D shares using if-converted  method                                                                                                             |       | —                                      |       | — |   | 1,787,745 |   |
| Incremental weighted average ordinary  shares from 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  used in computing diluted net (loss) income per share                                                                        |       | 16,243,736                                  |       | 42,708,213 |   | 47,322,184 |   |
| Net (loss) income per ordinary share-basic                                                                                                                                 |       | (0.18                                       | )          | 0.65 |   | 0.06 |   |
| Net (loss) income per preferred A share-basic                                                                                                                              |       | —                                      |       | 0.65 |   | 0.06 |   |
| Net (loss) income per preferred B share-basic                                                                                                                              |       | —                                      |       | 0.65 |   | 0.06 |   |
| Net (loss) income per preferred C share-basic                                                                                                                              |       | —                                      |       | 0.65 |   | 0.06 |   |
| Net (loss) income per preferred D share-basic                                                                                                                              |       | —                                      |       | — |   | 0.06 |   |
| Net (loss) income per ordinary share-diluted                                                                                                                               |       | (0.18                                       | )          | 0.60 |   | 0.05 |   |

 

Ordinary shareequivalents of options and warrants are calculated using the treasury stockmethod. Under the treasury stock method, the proceeds from the assumedconversion of options and warrants are used to repurchase outstanding ordinaryshares using the average fair value for the period. The Group has determinedthat its convertible preferred shares are participating securities as thepreferred shares participate in undistributed earnings on an as-if-convertedbasis. The holders of the preferred shares are entitled to receive dividends ona pro rata basis, as if their shares had been converted into ordinary shares. Accordingly,the Group uses the two-class method of computing net income per share, forordinary and preferred shares according to participation rights inundistributed earnings.

 

F-44

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**13.****                              NET(LOSS) INCOME PER SHARE - continued**

 

For 2005, 2006, and 2007, the Group had thefollowing securities outstanding, which could potentially dilute basic netincome per share in the future, but were excluded from the computation ofdiluted net income (loss) per share in 2005, 2006 and 2007 as their effectswould have been antidilutive:

 
| ** **                                                | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2007** | ** ** |
| Preferred A shares                                        |       | 5,150,000                                   |       | — |   | — |   |
| Preferred B shares                                        |       | 12,140,495                                  |       | — |   | — |   |
| Preferred C shares                                        |       | 3,378,379                                   |       | — |   | — |   |
| Outstanding employee options to purchase  ordinary shares |       | 9,026,050                                   |       | — |   | — |   |
| Outstanding warrants to purchase ordinary  shares         |       | 2,376,408                                   |       | — |   | — |   |

 

**14.****                              LONG-TERMDEBT**

 

During 2007, the Group purchased office spacefor RMB55,773, including RMB26,430 pursuant to a mortgage loan from acommercial bank. In December 2007, the Group committed to pay theremaining RMB25,724 of amounts outstanding under the loan in the next five years.

 

**15.****                              CONVERTIBLENOTES**

 

In July and August 2005, inconjunction with the issuance of Series C convertible preferred shares (“Series Cpreferred shares”), the Company issued two convertible notes (“ConvertibleNotes”) of RMB30,188 (US$3,750) to the Series C preferred shareholders. TheConvertible Notes bear an interest rate of 8% per annum commencing on theanniversary date of issuance payable annually in arrears. The Convertible Notesare due and payable in full in July and August 2008, respectively. Allof the outstanding principal and accrued interests are due and payable immediatelyupon the occurrence of an event of default. Fifty percent of the principalamount and all accrued interest are due and payable automatically upon theclosing of a qualified initial public offering (“IPO”) and the remaining 50%are due and payable automatically on the one year anniversary date of theclosing of an IPO. The unpaid principal and accrued interest are convertibleinto Series C preferred shares only in the event of the Company’s defaultunder the terms of the Convertible Notes. The default events includeinsolvency, bankruptcy, liquidation and other material adverse changes to theCompany. In the event of a conversion, the conversion price would be $1.85 pershare.

 

F-45

----

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued**

**FOR THE YEARS ENDED DECEMBER 31, 2005, 2006AND 2007**

**(In thousands, except share-related data)**

 

**15.****                              CONVERTIBLENOTES - continued**

 

In conjunction with the issuance of the Series Cconvertible preferred shares and the Convertible Notes, the Company also issuedto the Series C preferred shareholders a stock purchase warrant providingfor the rights to purchase 608,108 ordinary shares of the Company at thepurchase price of US$1.85 per share. The stock purchase warrant expires fiveyears from the date of grant. The proceeds received in the Series Cconvertible preferred shares and convertible notes offerings were allocatedbetween the convertible instruments and the warrants on a relative fair value basis.The difference between the allocated value of the Convertible Notes and theface value was recorded as a debt discount, which was amortized over the noteterm using the effective interest rate method. The amount of interest expenserecorded resulting from the amortization of the beneficial conversion featuretotaled RMB667 and RMB693 for the periods ended December 31, 2006 and2007, respectively.

 

In March 2007, the Group repaid part ofthe Convertible Notes of RMB5,808 (US$750) in principal and RMB393 in accruedinterest by the issuance of 83,488 Series D preferred shares and the cashpayment of RMB3,151. A gain of RMB394 arising from the extinguishment of theConvertible Note was recorded as part of other income. In addition, as a resultof the early conversion of this portion of the Convertible Notes, the relatedbeneficial conversion feature associated with the converted portion of theConvertible Notes totaling RMB133 was immediately recognized as an interestexpense during the six months ended June 30, 2007.

 

In December 2007, the Group repaid theremaining part of Convertible Notes of RMB22,650 (US$3,099) in principal andaccrued interest by cash payment.

 

**16.****                              CONVERTIBLEPREFERRED SHARES**

 

In August 2000 and 2001, the Companyissued 6,000,000 shares of Series A convertible preferred shares forRMB49,669 (US$6,000) before issuance costs of RMB547 (US$66). In December 2004,the Company Repurchased 2,000,000 Series A convertible preferred sharesfrom one of the shareholders for a total price of US$2,160 (RMB17,881). TheCompany issued 300,000 Series A preferred shares in September 2007 at$1.00 per share upon the exercise of a warrant.

 

In December 2004, the Company issued12,140,495 Series B convertible preferred shares to certain investors fortotal proceeds of RMB137,310 (US$16,590), before issuance costs of RMB4,467(US$573). In conjunction with the issuance of Series B convertiblepreferred shares, the Company also issued detachable warrants to certaininvestors for no additional consideration. As per the warrant agreement, theseinvestors could purchase an aggregate of 1,768,300 ordinary shares at a pershare exercise price of RMB12.2 (US$1.48). The proceeds received in the Series Bconvertible preferred share offerings were allocated between the convertibleinstrument and the warrants on a relative fair value basis. For certaininvestors, the issuance price was US$1.31 (an equivalent of RMB10.88). When thedetachable warrants are taken into consideration and after a portion of theissuance price was allocated to the warrants, the issuance price of Series Bpreferred shares decreased to US$1.25 (an equivalent of RMB10.51), which waslower than the issuance price for other investors by US$1.48 (an equivalent ofRMB12.25). Such difference was recorded as a deemed dividend in the amount ofRMB15,959. In July 2007, the Company repurchased 30,000 Series Bpreferred shares in July 2007, in each case, at $2.81 per share.

 

F-46

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(In thousands, except share-related data)**

 

**16.****                              CONVERTIBLEPREFERRED SHARES - continued**

 

The Group has determined that there was noembedded beneficial conversion feature attributable to the Series Bconvertible preferred shares because the initial effective conversion price of Series Bpreferred shares equaled to the issuance price and was higher than the fairvalue of the Company’s ordinary shares determined based on an independentvaluation.

 

In July 2005, the Company issued3,378,379 shares of Series C convertible preferred shares to certaininvestors for total proceeds of RMB50,312 (US$6,250), before issuance costs ofRMB928 (US$115). In addition, the Company issued two convertible notes in theamount of RMB30,188 (US$3,750) (Note 15). In conjunction with the issuance ofconvertible notes, the Company also issued detachable warrants to the investorsfor no additional consideration. As per the warrant agreements, these investorscould purchase up to 608,108 ordinary shares at a per share exercise price ofRMB14.89 (US$1.85). The proceeds received in the Series C convertiblepreferred shares and convertible notes offerings were allocated between theconvertible instruments and the warrants on a relative fair value basis.

 

The Company has determined that there was noembedded beneficial conversion feature attributable to the Series Cconvertible preferred shares because the initial effective conversion price of Series Cpreferred shares equaled to the issuance price and was higher than the fairvalue of the Company’s ordinary shares determined based on an independentvaluation.

 

In March 2007, the Company issued1,968,503 Series D preferred shares at a price of US$3.85 per share in aprivate placement to a group of investors. In July 2007, the Companyissued 630,000 Series D preferred shares at a price of US$3.85 per shareto additional investors. Each Series D preferred share is convertible atthe option of the holder at any time after the issuance of such shares, or isautomatically converted at the consummation of a qualified IPO. Each Series Dpreferred share is convertible into one ordinary share of the Company. Each Series Dpreferred share is entitled to the same voting rights as each ordinary share. FromJanuary 1, 2009 to December 31, 2022, the Series D preferredshareholders are entitled to receive cumulative dividends at 12.5% of theoriginal issue price. In the event of liquidation, Series D preferred shareholderswill receive a liquidation distribution in preference to any distribution tothe holders of Series A, B, and C preferred shares and ordinaryshareholders at an amount that equals the original issuance price plus anyaccrued but unpaid dividends.

 

Each Series A, Series B, Series Cand Series D convertible preferred share has been automatically converted intoone ordinary share upon the qualified IPO on December 14, 2007.

 

F-47

----

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued**

**FOR THE YEARS ENDED DECEMBER 31, 2005, 2006AND 2007**

**(In thousands, except share-related data)**

 

**16.****                              CONVERTIBLEPREFERRED SHARES - continued**

 

The significant terms of the above Series A,Series B, Series C and Series D convertible preferred shareswere as follows:

 

*Conversion*

 

Each Series A, Series B, Series Cand D convertible preferred share was convertible into one ordinary share ofthe Company at the option of the holder at any time after the issuance of suchshares, or is automatically converted in a qualified IPO. The conversion ratiowas subject to standard anti-dilutive adjustments such as stock splits, stockdividends and recapitalization.

 

*Voting rights*

 

The Series A, Series B, Series Cand Series D shareholders had the voting rights determined based on theequivalent number of the Company’s ordinary shares into which their preferredshares were convertible.

 

*Dividends*

 

The holders of the preferred shares wereentitled to receive dividends on a pro rata basis, as if their shares had beenconverted into ordinary shares. From January 1, 2008 to December 31,2022, the Series B convertible preferred shareholders would be entitled(if not previously converted) to receive cumulative dividends at a rate of12.5% of the original issuance price per share per annum. From January 1,2009 to December 31, 2022, both the Series C and D convertiblepreferred shareholders would be entitled (if not previously converted) toreceive cumulative dividends at a rate of 12.5% of the original issuance priceper share per annum. No dividend will be paid to the Company’s ordinaryshareholders and Series A preferred shareholders until all Series B,C, and D preferred share dividends have been paid in full. Once the Series B,C and D preferred shareholders have been fully satisfied, all preferredshareholders were entitled to any additional dividends declared and are payableto the ordinary shareholders on an as-if-converted basis.

 

*Liquidation preference*

 

In the event of liquidation, Series Dpreferred shareholders would have received a liquidation distribution inpreference to any distribution to the holders of Series A, B, and Cpreferred shares and ordinary shareholders at an amount that equals to theoriginal issuance price plus any accrued but unpaid dividends. Any remainingfunds after satisfying the Series D preferred shareholders were first tobe paid to the Series C preferred shareholders, then the Series Bpreferred shareholders, and finally, the Series A preferred shareholders,in that order. The amounts to be paid would have been equal to the aggregateoriginal purchase price plus any declared but unpaid dividends adjusted for anystock split, stock dividends and recapitalizations.

* *

*Redemption rights*

 

The preferred shares were not redeemable atthe option of the holders.

 

F-48

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**17.****                              WARRANTS**

 

In conjunction with the issuance of the convertible notes in 2002, theCompany also issued to the convertible notes holder a stock purchase warrantproviding for the rights to purchase 300,000 shares of Series A preferredshares of the Company at US$1 per share. The stock purchase warrant will expire 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) at the grant date, respectively. The Company issued 300,000 Series A preferred shares in September 2007at $1.00 per share upon the exercise of a warrant.  Its fair value was estimated using theBlack-Scholes option pricing model with the following assumptions:

 
| Expected volatility              |   | 64     | %      |
|----------------------------------|--------|--------|--------|
| Risk-free interest rate          |   | 5.12   | %      |
| Expected dividend                |   | — |   |
| Contractual life of the  warrant |   | 5      |   |

 

Pursuant to the terms of the Series B preferred share agreementdated December 13, 2004, the Company granted warrants to the Series Bpreferred shareholders to purchase up to 1,768,300 ordinary shares.  The warrants have an exercise price ofUS$1.48 per share and are exercisable commencing on December 13, 2004 andending on December 13, 2009.  Thefair value and the allocated value of the warrants were approximately RMB4,719(US$570) and RMB4,487 (US$542) at the grant date, respectively.  Its fair value was estimated using theBlack-Scholes option pricing model with the following assumptions:

 
| Expected volatility              |   | 57     | %      |
|----------------------------------|--------|--------|--------|
| Risk-free interest rate          |   | 3.65   | %      |
| Expected dividend                |   | — |   |
| Contractual life of the  warrant |   | 5      |   |

 

Pursuant to the terms of the Series C preferred share agreementdated July 14, 2005, the Company granted warrants to the 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) at the grant date, respectively.  By the end of 2007, 121,622 warrants wereexercised at US$1.85 to purchase the same number of ordinary shares, the fairvalue of the exercised warrants was approximately RMB471 (US$65).  The fair value was estimated using theBlack-Scholes option pricing model with the following assumptions:

 
| Expected volatility              |   | 53     | %      |
|----------------------------------|--------|--------|--------|
| Risk-free interest rate          |   | 3.99   | %      |
| Expected dividend                |   | — |   |
| Contractual life of the  warrant |   | 5      |   |

 

As of December 31,2007, the total number of outstanding shares underlying these warrants was2,254,786.

 

F-49

----

 

**CHINAEDU CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**18.****                              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 RMB8,070, RMB8,267 and RMB14,659for the years ended December 31,2005, 2006 and 2007, respectively.

 

**19.****                              COMMITMENTSAND CONTINGENCIES**

 

(a)                                 Pursuantto the contract signed between Hongcheng Technology and another university,Hongcheng Technology has committed to contribute RMB35,000 for the use of theuniversity’s education resources.  As of December 31,2007, the remaining commitment is approximately RMB5,000, which is expected tobe paid within the next two years.

 

(b)                                Pursuantto the 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 RMB1,000 per annum from 2008 to 2010, and RMB1,200 perannum from 2011 to 2024.  The aggregateof the fees committed through 2024 were recognized as expenses on astraight-line basis with the difference between the amount paid and the amountrecognized reported as deferred commitment fees, a component of RMB1,313.  For the years ended December 31, 2006and 2007, the amounts reported as expenses were RMB1,088 during both periods.  The amounts recorded as deferred commitmentfees as of December 31, 2006 and 2007 were RMB874 and RMB1,313,respectively.

 

(c)                                 TheGroup leases certain office premises under non-cancelable operating leasesthrough 2011.  Rent expenses underoperating leases for 2005, 2006, and 2007 were RMB6,406, RMB7,264, and RMB9,088,respectively.

 

Future minimum lease payments under non-cancelable operating leasesagreements are as follows:

 
| **Years ending December 31,** | ** ** | **RMB** | ** ** |
|----------------------------------------------|------------|---------|------------|
| 2008                                         |       | 6,971   |       |
| 2009                                         |       | 3,828   |       |
| 2010                                         |       | 2,965   |       |
| 2011                                         |       | 1,227   |       |
| 2012                                         |       | 723     |       |
|                                         |       | 15,714  |       |

 

(d)                                Asof December 31, 2007, the Group had commitments totaling RMB141,434 forthe expansion of the schools in Anqing and Jingzhou, which included capital commitmentfor the on-going construction in progress was RMB19,827 as of December 31,2007.  All the capital commitments areexpected to be paid within the next two years.

 

(e)                                 InNovember 2007, one of the Group’s former employees threatened to take legal actionagainst the Group in respect of options for the purchase of the ordinary sharesthat he claims to own. This former employee, who sold the FEC and the BCITprograms to the Group in 2005 and 2006, respectively, worked in the businessunit responsible for those programs until his departure from the Group in May of2007. He claims to own options to purchase 140,000 of the Company’s shares,60,000 exercisable at $1.26 per share and 80,000 exercisable at $1.58 pershare. Although 140,000 share options were granted to him under the Company’sshare option plan, at the time of his departure from the Company, only 46,667of these options had vested. Under the agreements governing the share option plan,he was required to exercise those vested options within 30 days of leaving theGroup, which he did not do. Consequently, the Group does not believe that hisclaim in respect of these options has any merit and its impact on the results ofoperations cannot be estimated.

 

F-50

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**20.****                               SEGMENTAND GEOGRAPHIC INFORMATION**

 

Since the acquisitions in 2005 and 2006, the Group has been organizedas four business units:

 

(i)                                   Onlinedegree program, which enables leading higher education institutions in the PRCto operate and grow their online degree-granting programs.  The Group provides online education technicaland consulting services to these institutions. In addition, the Group also licenses online education technologyplatform and courseware to them.

 

(ii)                                Privateprimary and secondary schools, which provide educational services to thestudents through traditional classroom education.

 

(iii)                             Onlinetutoring program, which provides online tutoring services for students toobtain review course help through the online program.

 

(iv)                            Internationalcurriculum program, which includes an integrated English language learningservice for high schools in the PRC and international polytechnic curriculumprograms through traditional classroom education.

 

The Group’s chief operating decision maker is its chief executiveofficer.  Segment information provided tothe chief operating decision maker is prepared using US GAAP.

 

The following sets forth the condensed statements of operations for theGroup’s reportable segments:

 
| ** **                             | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------------|------------|
| ** **                             | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                             | ** ** | **RMB**                                     | ** ** | **RMB** | ** ** | **RMB** | ** ** |
| Revenue                                |       |                                        |       |   |   |   |   |
| Online degree program                  |       | 98,527                                      |       | 156,845 |   | 202,185 |   |
| Private primary and secondary  schools |       | 8,591                                       |       | 10,874 |   | 13,356 |   |
| Online tutoring program                |       | 14,390                                      |       | 17,384 |   | 18,013 |   |
| International curriculum  program      |       | 4,854                                       |       | 28,428 |   | 31,434 |   |
| Total revenue                          |       | 126,362                                     |       | 213,531 |   | 264,988 |   |
| Cost of revenue                        |       |                                        |       |   |   |   |   |
| Online degree program                  |       | 38,748                                      |       | 51,215 |   | 58,027 |   |
| Private primary and secondary  schools |       | 7,861                                       |       | 8,429 |   | 10,944 |   |
| Online tutoring program                |       | 2,902                                       |       | 3,452 |   | 3,875 |   |
| International curriculum  program      |       | 3,627                                       |       | 17,212 |   | 23,503 |   |
| Total cost of revenue                  |       | 53,138                                      |       | 80,308 |   | 96,349 |   |
| Gross profit                           |       |                                        |       |   |   |   |   |
| Online degree program                  |       | 59,779                                      |       | 105,630 |   | 144,158 |   |
| Private primary and secondary  schools |       | 730                                         |       | 2,445 |   | 2,412 |   |
| Online tutoring program                |       | 11,488                                      |       | 13,932 |   | 14,138 |   |
| International curriculum  program      |       | 1,227                                       |       | 11,216 |   | 7,931 |   |
| Total gross profit                     |       | 73,224                                      |       | 133,223 |   | 168,639 |   |

 

F-51

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**20.****                              SEGMENTAND GEOGRAPHIC INFORMATION - continued**

 

The Company does not allocate operating expenses or assets andliabilities to individual segments when making decisions about allocatingresources to the segments and assessing their performance.  The Group primarily operates in the PRC.  All the long-lived assets of the Group arelocated in the PRC and the Group does not allocate such assets to individualsegments.

 

Revenue from each type of services the Group provides was as follows:

 
| ** **                                                       | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                                       | ** ** | **RMB**                                     | ** ** | **RMB** | ** ** | **RMB** | ** ** |
| Customers:                                                       |       |                                        |       |   |   |   |   |
| Online education technical and  consulting services              |       | 20,628                                      |       | 29,549 |   | 40,801 |   |
| Traditional classroom  education services                        |       | 13,445                                      |       | 39,301 |   | 44,790 |   |
| Online tutoring services                                         |       | 14,390                                      |       | 17,384 |   | 18,013 |   |
| Licensing of online education  technology platformand courseware |       | 991                                         |       | 2,052 |   | — |   |
|                                                             |       | 49,454                                      |       | 88,286 |   | 103,604 |   |
| Related parties:                                                 |       |                                        |       |   |   |   |   |
| Online education technical and  consulting services              |       | 75,597                                      |       | 125,245 |   | 161,384 |   |
| Traditional classroom  education services                        |       | —                                      |       | — |   | — |   |
| Online tutoring services                                         |       | —                                      |       | — |   | — |   |
| Licensing of online education  technology platformand courseware |       | 1,311                                       |       | — |   | — |   |
|                                                             |       | 76,908                                      |       | 125,245 |   | 161,384 |   |
|                                                             |       | 126,362                                     |       | 213,531 |   | 264,988 |   |

 

The carrying amounts of goodwill and intangible assets by reportablesegments were as follows:

 
| ** **                             | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2006**              | ** ** | **2007**              | ** ** |
| Intangible assets, net:                |       |                  |       |                  |       |
| Online degree program                  |       | 53,001                |       | 50,636                |       |
| Private primary and secondary  schools |       | 4,048                 |       | 3,840                 |       |
| Online tutoring program                |       | 3,875                 |       | 3,737                 |       |
| International curriculum  program      |       | 41,912                |       | 47,639                |       |
|                                   |       | 102,836               |       | 105,852               |       |
| Goodwill:                              |       |                  |       |                  |       |
| Online degree program                  |       | 12,860                |       | 12,860                |       |
| Private primary and secondary  schools |       | 1,250                 |       | 1,924                 |       |
| Online tutoring program                |       | 14,926                |       | 14,926                |       |
| International curriculum  program      |       | 47,473                |       | 43,609                |       |
|                                   |       | 76,509                |       | 73,319                |       |

 

F-52

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**21.****                              RELATEDPARTY TRANSACTIONS**

 

The minority shareholders of a number of the Group’s majority-ownedsubsidiaries are universities who 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 were as follows:

 
| ** **                                                             | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                             | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                                             | ** ** | **RMB**                                     | ** ** | **RMB** | ** ** | **RMB** | ** ** |
| ** **                                                             | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Online education technical and  consulting services:                   |       |                                        |       |   |   |   |   |
| Online Education School ofDongbei University of Finance  and Economics |       | 25,719                                      |       | 32,529 |   | 34,132 |   |
| Online Education School ofRenmin University of China                   |       | 35,059                                      |       | 38,124 |   | 54,743 |   |
| Online Education School of  Chongqing University                       |       | 12,066                                      |       | 14,887 |   | 19,391 |   |
| Online Education School ofChina Agricultural University                |       | 2,753                                       |       | 39,705 |   | 43,995 |   |
| Online Education School ofBeijing Language and Culture  University     |       | —                                      |       | — |   | 9,123 |   |
|                                                                   |       | 75,597                                      |       | 125,245 |   | 161,384 |   |
| Licensing of online education  technologyplatform  and courseware:     |       |                                        |       |   |   |   |   |
| Online Education School of  Chongqing University                       |       | 1,311                                       |       | — |   | — |   |
|                                                                   |       | 1,311                                       |       | — |   | — |   |
| Total                                                                  |       | 76,908                                      |       | 125,245 |   | 161,384 |   |

 

Deferred revenue associated with services provided to related partieswere as follows:

 
| ** **                                                              | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                              | ** ** | **2006**              | ** ** | **2007** | ** ** |
| ** **                                                              | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
|                                                                    |       |                  |       |   |   |
| Online Education School of Dongbei  University of Finance and Economics |       | 6,505                 |       | 6,345 |   |
| Online Education School of Renmin  University of China                  |       | 11,132                |       | 13,897 |   |
| Online Education School of Chongqing  University                        |       | 2,728                 |       | 7,527 |   |
| Online Education School of China  Agricultural University               |       | 10,453                |       | 13,732 |   |
| Online Education School of Beijing Language  and Culture University     |       | 2,614                 |       | 5,906 |   |
|                                                                    |       | 33,432                |       | 47,407 |   |

 

F-53

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**21.****                              RELATEDPARTY TRANSACTIONS - continued**

 

As of December 31, 2006 and 2007, the following balances were duefrom related parties:

 
| ** **                                                                      | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                      | ** ** | **2006**              | ** ** | **2007** | ** ** |
| ** **                                                                      | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
| Schools owned by the minority shareholders  of the Company’s subsidiaries: |       |                  |       |   |   |
| Online Education School of Renmin  University of China (ii)                     |       | 12,547                |       | 33,782 |   |
| Online Education School of Dongbei  University of Finance and Economics (ii)    |       | 15,097                |       | 22,290 |   |
| Online Education School of Chongqing  University (ii)                           |       | 20,691                |       | 34,340 |   |
| Online Education School of Beijing Language  and Culture University (ii)(iii)   |       | 5,761                 |       | 12,258 |   |
| Online Education School of China  Agriculture University of China (ii)          |       | —                |       | 39 |   |
| Minority shareholders of the Company’s majority-owned  subsidiaries:       |       |                  |       |   |   |
| Tianxingjian (i)                                                                |       | 55                    |       | — |   |
| Beijing Guojiao Investment Co., Ltd. (iv)                                       |       | 4,195                 |       | — |   |
| Shanghai Guangdian Communication Network  Co., Ltd. (i)                         |       | —                |       | 1,100 |   |
| Company owned by shareholder or management:                                     |       |                  |       |   |   |
| Beijing Hongji Xingye Technology  Development Co., Ltd. (i)                     |       | 200                   |       | — |   |
| Wellent Institute of Education  International (Asia) Limited (i)                |       | 1,000                 |       | 1,000 |   |
| Director of the Company:                                                        |       |                  |       |   |   |
| Xie Changqing (i)                                                               |       | 433                   |       | — |   |
| Liu Xin (i)                                                                     |       | —                |       | 713 |   |
|                                                                            |       | 59,979                |       | 105,522 |   |

 

----

(i)                                   Theamounts represent cash advances that are expected to be collected in 2008.

 

(ii)                                Thefees for 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)                             In2007, the Group wrote off RMB2,918 in uncollectible amounts due to a disputewith Online Education School of Beijing Language and Culture University.

 

(iv)                             In2006, the amount represents receivables of unpaid tuition fees by internationalcurriculum program participants and an unpaid loan made by the internationalcurriculum program to its related entity prior to the Company’s acquisition ofthe program. In 2007, the Group wrote off RMB4,131 since the Group did notexpect to collect such unpaid amounts.

 

All of theamounts due from related parties are unsecured and non-interest bearing.  The Group expects the amounts to be receivedwithin the next 12 months.

 

F-54

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**21.****                              RELATEDPARTY TRANSACTIONS - continued**

 

As of December 31, 2006 and 2007, the following balances were dueto related parties:

 
| ** **                                                                      | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                      | ** ** | **2006**              | ** ** | **2007** | ** ** |
| ** **                                                                      | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
|                                                                            |       |                  |       |   |   |
| Former owner of an entity consolidated by  the Company:                         |       |                  |       |   |   |
| Fourth Middle School of Anqing (ii)                                             |       | 1,747                 |       | 2,442 |   |
| Schools owned by the minority shareholders  of the Company’s subsidiaries: |       |                  |       |   |   |
| Online Education School of Chongqing  University (i)                            |       | 48                    |       | 48 |   |
| Online Education School of Dongbei  University of Finance and Economics (i)     |       | 35                    |       | 25,826 |   |
| Online Education School of China  Agricultural University (i)                   |       | 1,155                 |       |   |   |
| Minority shareholders of the Company’s  subsidiaries:                      |       |                  |       |   |   |
| Tianxingjian (i)                                                                |       | —                |       | — |   |
| Beijing Guojiao Investment Co., Ltd. (iii)                                      |       | 4,133                 |       | — |   |
| Company owned by shareholder or management:                                     |       |                  |       |   |   |
| Beijing Hongji Xingye Technology  Development Co., Ltd. (i)                     |       | 3                     |       | — |   |
|                                                                            |       | 7,121                 |       | 28,316 |   |

 

----

(i)                                  Theamounts represented cash collected on behalf of the related parties.

 

(ii)                               Theamount primarily represents service fees to be paid for utilizing the school’steaching resources.

 

(iii)                            Theamount primarily represents dividends payable to a subsidiary’s minorityshareholder, which have been fully paid in 2007

 

All the amounts due to related parties are non-interest bearing andunsecured.  The Group expects the amountsto be repaid within a year.

 

**22.****                               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 a (i) general reserve, and (ii) enterpriseexpansion reserve.

 

F-55

----

 

**CHINAEDU CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS - continued**

**FORTHE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**

**(Inthousands, except share-related data)**

 

**22.****                               STATUTORYRESERVES - continued**

 

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 staff bonus and welfareand are not distributable as cash dividends. For the years ended December 31, 2005, 2006 and 2007, the Company’sPRC subsidiaries and variable interest entities made appropriations to thegeneral reserve of RMB2,776, RMB nil and RMB7,540 respectively.

 

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.

 

**23.****                               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 22) 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 subsidiary and variable interest entities arerestricted in their abilities to transfer a portion of their net assets to theCompany.  As of December 31, 2006and 2007, the amounts of restricted net assets were approximately RMB176,650and RMB227,995, respectively.

 

**24.****                               SUBSEQUENTEVENTS**

 

(a)                                  Acquisition ofMinority Interests in 101 Online School

 

In March 2008, the Company, through Hongcheng Liye, entered intodefinitive agreements to acquire, through the acquisition of threesubsidiaries, the remaining 20% equity interests in 101 Online School for cashconsideration of RMB5,200 (US$713).The acquisitions were completed in May 2008and the 101 Online School became wholly-owned, indirectly through suchsubsidiaries, by the Company.  Thesetransactions will be accounted for under the purchase method accounting.

 

(b)                                 Formation ofSubsidiary with Beijing Forestry University

 

To further expand its online education services, in March 2008,the Company, through Hongcheng Liye, entered into an exclusive 20-year collaborativealliance with Beijing Forestry University (“BFU”) to provide online educationservices to BFU.  Under the agreement,the Company holds a 51% equity interest and will provide the development anddelivery of online education services to BFU’s students.

 

F-56

----

 

**CHINAEDU CORPORATION**

 

**Additional Information-Financial StatementSchedule I**

**Condensed Financial Information of ParentCompany**

**BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                             | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                             | ** ** | **2006**              | ** ** | **2007** | ** ** | **2007** | ** ** |
| ** **                                                                                                                                                                                                                             | ** ** | **RMB**               | ** ** | **RMB** | ** ** | **US$** | ** ** |
| Assets                                                                                                                                                                                                                                 |       |                  |       |   |   |   |   |
|                                                                                                                                                                                                                                   |       |                  |       |   |   |   |   |
| Current assets:                                                                                                                                                                                                                        |       |                  |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                                                              |       | 11,292                |       | 331,325 |   | 45,421 |   |
| Prepaid expenses and other current assets                                                                                                                                                                                              |       | 5,749                 |       | 435 |   | 60 |   |
| Amounts due from related parties                                                                                                                                                                                                       |       | 54,200                |       | 63,279 |   | 8,675 |   |
| Total current assets                                                                                                                                                                                                                   |       | 71,241                |       | 395,039 |   | 54,156 |   |
| Investments in subsidiaries and variable  interest entities                                                                                                                                                                            |       | 233,568               |       | 302,042 |   | 41,406 |   |
| Total assets                                                                                                                                                                                                                           |       | 304,809               |       | 697,081 |   | 95,562 |   |
| Liabilities and shareholders’ equity                                                                                                                                                                                              |       |                  |       |   |   |   |   |
|                                                                                                                                                                                                                                   |       |                  |       |   |   |   |   |
| Current liabilities:                                                                                                                                                                                                                   |       |                  |       |   |   |   |   |
| Accrued expenses and other current  liabilities                                                                                                                                                                                        |       | 6,086                 |       | 13,118 |   | 1,799 |   |
| Amount due to a related party                                                                                                                                                                                                          |       | 3,750                 |       | 5,229 |   | 717 |   |
| Total current liabilities                                                                                                                                                                                                              |       | 9,836                 |       | 18,347 |   | 2,516 |   |
| Convertible notes                                                                                                                                                                                                                      |       | 30,654                |       | — |   | — |   |
| Total liabilities                                                                                                                                                                                                                      |       | 40,490                |       | 18,347 |   | 2,516 |   |
| Shareholders’ equity:                                                                                                                                                                                                             |       |                  |       |   |   |   |   |
| Series A convertible preferred shares  RMB0.08 (US$0.01) par value; 5,150,000 shares authorized, 5,150,000 and nil shares  issued and outstanding in 2006 and 2007, respectively (liquidation value of  RMB49,669 (US$6,000))     |       | 426                   |       | — |   | — |   |
| Series B convertible preferred shares  RMB0.08 (US$0.01) par value; 12,140,495 shares authorized, 12,140,495 and nil  shares issued and outstanding in 2006 and 2007, respectively (liquidation  value of RMB137,310 (US$16,590)) |       | 1,005                 |       | — |   | — |   |
| Series C convertible preferred shares  RMB0.08 (US$0.01) par value; 8,614,054 shares authorized, 3,378,379 and nil  shares issued and outstanding in 2006 and 2007, respectively (liquidation  value of RMB50,312 (US$6,250))     |       | 272                   |       | — |   | — |   |
| Series D convertible preferred shares  RMB0.074 (US$0.01) par value; 2,598,503 shares authorized and issued; nil  shares outstanding in 2007 (liquidation value of RMB77,120 (US$10,004))                                         |       | —                |       | — |   | — |   |
| Ordinary shares RMB0.08 (US$0.01) par  value; 60,000,000 shares authorized, 19,007,408 and 58,434,407 shares issued  and outstanding in 2006 and 2007, respectively)                                                                   |       | 1,710                 |       | 4,805 |   | 658 |   |
| Additional paid-in capital                                                                                                                                                                                                             |       | 343,167               |       | 760,858 |   | 104,304 |   |
| Subscription receivable                                                                                                                                                                                                                |       | (1,117                | )          | — |   | — |   |
| Warrants                                                                                                                                                                                                                               |       | 8,076                 |       | 6,370 |   | 873 |   |
| Accumulated deficits                                                                                                                                                                                                                   |       | (89,836               | )          | (91,093 | ) | (12,487 | ) |
| Accumulated other comprehensive (loss)  income                                                                                                                                                                                         |       | 616                   |       | (2,206 | ) | (302 | ) |
| Total shareholders’ equity                                                                                                                                                                                                        |       | 264,319               |       | 678,734 |   | 93,046 |   |
| Total liabilities and shareholders’ equity                                                                                                                                                                                        |       | 304,809               |       | 697,081 |   | 95,562 |   |

 

F-57

----

 

**CHINAEDU CORPORATION**

 

**Additional Information-Financial StatementSchedule I**

**Condensed Financial Information of ParentCompany**

**STATEMENTS OF OPERATIONS**

 
| ** **                                                                                                                                                                  | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2007** | ** ** | **2007** | ** ** |
| ** **                                                                                                                                                                  | ** ** | **RMB**                                     | ** ** | **RMB** | ** ** | **RMB** | ** ** | **US$** | ** ** |
| Operating expenses:                                                                                                                                                         |       |                                        |       |   |   |   |   |   |   |
| General and administrative  (including share-based compensation of RMB2,291,RMB2,586, and RMB1,225 for 2005, 2006 and  2007, respectively)                                  |       | (14,441                                     | )          | (6,570 | ) | (8,176 | ) | (1,121 | ) |
| Loss from operations                                                                                                                                                        |       | (14,441                                     | )          | (6,570 | ) | (8,176 | ) | (1,121 | ) |
| Other income                                                                                                                                                                |       | —                                      |       | — |   | 394 |   | 54 |   |
| Interest income                                                                                                                                                             |       | 514                                         |       | 161 |   | 1,179 |   | 162 |   |
| Interest expenses                                                                                                                                                           |       | (1,139                                      | )          | (2,279 | ) | (1,715 | ) | (235 | ) |
| Equity in earnings of  subsidiaries and variable interest entities(including share-based compensation of  RMB87, RMB125 and RMB2,418 for 2005, 2006 and 2007, respectively) |       | 12,216                                      |       | 34,227 |   | 10,805 |   | 1,481 |   |
| Net (loss) income                                                                                                                                                           |       | (2,850                                      | )          | 25,539 |   | 2,487 |   | 341 |   |
| Net (loss) income attributable  to ordinary shareholders                                                                                                                    |       | (2,850                                      | )          | 25,539 |   | 2,487 |   | 341 |   |

 

F-58

----

 

**CHINAEDU CORPORATION**

 

**Additional Information-Financial StatementSchedule I**

**Condensed Financial Information of ParentCompany**

**STATEMENTS OF SHAREHOLDERS’ DEFICIENCY ANDCOMPREHENSIVE INCOME (LOSS)**

 
| ** **                                                                 | ** ** | ** **                         | ** ** | ** **                         | ** ** | ** **                         | ** ** | ** **                         | ** ** | ** **               | ** ** | ** **  | ** ** | ** **       | ** ** | ** ** | ** ** | ** **      | ** ** | ** **        | ** ** | ** **  | ** ** | ** **        | ** ** | ** **   | ** ** | ** **   | ** ** | **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** | ** ** |
| ** **                                                                 | ** ** | ** **                         | ** ** | **RMB**                            | ** ** | ** **                         | ** ** | **RMB**                            | ** ** | ** **               | ** ** | **RMB**     | ** ** | ** **       | ** ** | **RMB**    | ** ** | ** **      | ** ** | **RMB**           | ** ** | **RMB**     | ** ** | **RMB**           | ** ** | **RMB**      | ** ** | **RMB**      | ** ** | **RMB**                | ** ** | **RMB**    | ** ** | **RMB**    | ** ** |
| ** **                                                                 | ** ** | ** **                         | ** ** | ** **                         | ** ** | ** **                         | ** ** | ** **                         | ** ** | ** **               | ** ** | ** **  | ** ** | ** **       | ** ** | ** ** | ** ** | ** **      | ** ** | ** **        | ** ** | ** **  | ** ** | ** **        | ** ** | ** **   | ** ** | ** **   | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at  January 1, 2005                                           |       | 5,150,000                          |       | 426                                |       | 12,140,495                         |       | 1,005                              |       | —                   |       | —      |       | —           |       | —     |       | 14,137,347      |       | 1,315             |       | 254,524     |       | (4,470            | )          | 5,723        |       | (112,525     | )          | (300                   | )          | 145,698    |       |       |       |
| Issuance of  ordinary shares for purchase of a subsidiary                  |       | —                             |       | —                             |       | —                             |       | —                             |       | —                   |       | —      |       | —           |       | —     |       | 550,000         |       | 44                |       | 3,870       |       | —            |       | —       |       | —       |       | —                 |       | 3,914      |       |       |       |
| Issuance of  ordinary shares                                               |       | —                             |       | —                             |       | —                             |       | —                             |       | —                   |       | —      |       | —           |       | —     |       | 1,745,000       |       | 144               |       | (144        | )          | —            |       | —       |       | —       |       | —                 |       | —     |       |       |       |
| Amortization of  share-based compensation                                  |       | —                             |       | —                             |       | —                             |       | —                             |       | —                   |       | —      |       | —           |       | —     |       | —          |       | —            |       | 2,378       |       | —            |       | —       |       | —       |       | —                 |       | 2,378      |       |       |       |
| Collection of  subscriptions receivable                                    |       | —                             |       | —                             |       | —                             |       | —                             |       | —                   |       | —      |       | —           |       | —     |       | —          |       | —            |       | —      |       | 4,470             |       | —       |       | —       |       | —                 |       | 4,470      |       |       |       |
| Issuance of  Series C convertible preferred shares and warrants       |       | —                             |       | —                             |       | —                             |       | —                             |       | 3,378,379                |       | 272         |       | —           |       | —     |       | —          |       | —            |       | 48,760      |       | —            |       | 2,353        |       | —       |       | —                 |       | 51,385     |       |       |       |
| Foreign currency  translation adjustments                                  |       | —                             |       | —                             |       | —                             |       | —                             |       | —                   |       | —      |       | —           |       | —     |       | —          |       | —            |       | —      |       | —            |       | —       |       | —       |       | (760                   | )          | (760       | )          | (760       | )          |
| Net loss                                                                   |       | —                             |       | —                             |       | —                             |       | —                             |       | —                   |       | —      |       | —           |       | —     |       | —          |       | —            |       | —      |       | —            |       | —       |       | (2,850       | )          | —                 |       | (2,850     | )          | (2,850     | )          |
|                                                                       |       |                               |       |                               |       |                               |       |                               |       |                     |       |        |       |             |       |       |       |            |       |              |       |        |       |              |       |         |       |         |       |                   |       |       |       |       |       |
| Balance at  December 31, 2005                                         |       | 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       | )          |
|                                                                       |       |                               |       |                               |       |                               |       |                               |       |                     |       |        |       |             |       |       |       |            |       | US$               | 658        |        | US$        | 104,304           |       |         |       | US$          | 873        |                   | US$        | (12,487    | )          | US$        | (302       | ) | US$ | 93,046 |   |   |   |
|                                                                            |            |                                    |            |                                    |            |                                    |            |                                    |            |                          |            |             |            |                  |            |            |            |                 |            |                   |            |             |            |                   |            |              |            |              |            |                        |            |            |            |            |            |  |  |  |  |  |  |

 

F-59

----

 

**CHINAEDU CORPORATION**

 

**Additional Information-Financial StatementSchedule I**

**Condensed Financial Information of ParentCompany**

**STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                                 | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2007** | ** ** | **2007** | ** ** |
| ** **                                                                                                 | ** ** | **RMB**                                     | ** ** | **RMB** | ** ** | **RMB** | ** ** | **US$** | ** ** |
| Cash flows from operating  activities:                                                                     |       |                                        |       |   |   |   |   |   |   |
| Net income (loss)                                                                                          |       | (2,850                                      | )          | 25,539 |   | 2,487 |   | 341 |   |
| Adjustments to reconcile net  income (loss) to net cash used in operating activities:                      |       | —                                      |       | — |   | — |   | — |   |
| Share based compensation                                                                                   |       | 2,291                                       |       | 2,586 |   | 1,225 |   | 168 |   |
| Other income                                                                                               |       | —                                      |       | — |   | (394 | ) | (54 | ) |
| Interest expenses                                                                                          |       | 1,139                                       |       | 2,279 |   | 1,715 |   | 235 |   |
| Equity in earnings of  subsidiaries and variable interest entities                                         |       | (12,216                                     | )          | (34,227 | ) | (10,805 | ) | (1,481 | ) |
| Changes in assets and  liabilities:                                                                        |       |                                        |       |   |   |   |   |   |   |
| Prepaid expenses and other  current assets                                                                 |       | 4,104                                       |       | (5,301 | ) | 717 |   | 98 |   |
| Amounts due from related  parties                                                                          |       | (54,200                                     | )          | — |   | (1,302 | ) | (178 | ) |
| Accrued expense and other  liabilities                                                                     |       | 8,592                                       |       | (3,796 | ) | 7,767 |   | 1,065 |   |
| Amount due to a related party                                                                              |       | 3,750                                       |       | — |   | 1,479 |   | 203 |   |
|                                                                                                       |       |                                        |       |   |   |   |   |   |   |
| Net cash used in operating  activities                                                                     |       | (49,390                                     | )          | (12,920 | ) | 2,889 |   | 397 |   |
|                                                                                                       |       |                                        |       |   |   |   |   |   |   |
| Cash flows from investing  activities:                                                                     |       |                                        |       |   |   |   |   |   |   |
| Investments in subsidiaries  and variable interest entities                                                |       | (81,870                                     | )          | — |   | (62,505 | ) | (8,569 | ) |
|                                                                                                       |       |                                        |       |   |   |   |   |   |   |
| Net cash used in investing  activities                                                                     |       | (81,870                                     | )          | — |   | (62,505 | ) | (8,569 | ) |
|                                                                                                       |       |                                        |       |   |   |   |   |   |   |
| Cash flows from financing  activities:                                                                     |       |                                        |       |   |   |   |   |   |   |
| Proceeds from IPO (net of  issuance cost of RMB25,665)                                                     |       | —                                      |       | — |   | 348,827 |   | 47,820 |   |
| Proceeds from issuance of  Series D convertible preferred shares (net of issuance costs of  RMB2,598) |       | —                                      |       | — |   | 72,033 |   | 9,875 |   |
| Proceeds from issuance of  Series C convertible preferred shares (net of issuance costs of  RMB1,802) |       | 51,385                                      |       | — |   | — |   | — |   |
| Proceeds from exercise of  warrants                                                                        |       | —                                      |       | — |   | 3,838 |   | 526 |   |
| Repurchase of Series B  convertible preferred shares                                                  |       | —                                      |       | — |   | (640 | ) | (88 | ) |
| Repurchase of ordinary shares                                                                              |       | —                                      |       | — |   | (12,813 | ) | (1,757 | ) |
| Issuance of convertible notes                                                                              |       | 28,187                                      |       | — |   | — |   | — |   |
| Repayment of convertible notes                                                                             |       | —                                      |       | — |   | (27,783 | ) | (3,809 | ) |
| Collection of subscription  receivable                                                                     |       | 4,470                                       |       | — |   | 1,117 |   | 153 |   |
|                                                                                                       |       |                                        |       |   |   |   |   |   |   |
| Net cash used in financing  activities                                                                     |       | 84,042                                      |       | — |   | 384,579 |   | 52,720 |   |
|                                                                                                       |       |                                        |       |   |   |   |   |   |   |
| Effect of exchange rate  changes                                                                           |       | (1,846                                      | )          | (811 | ) | (4,930 | ) | (674 | ) |
|                                                                                                       |       |                                        |       |   |   |   |   |   |   |
| Net (decrease) increase in  cash and cash equivalents                                                      |       | (49,064                                     | )          | (13,731 | ) | 320,033 |   | 43,874 |   |
| Cash and cash equivalents,  beginning of year                                                              |       | 74,087                                      |       | 25,023 |   | 11,292 |   | 1,547 |   |
|                                                                                                       |       |                                        |       |   |   |   |   |   |   |
| Cash and cash equivalents, end  of year                                                                    |       | 25,023                                      |       | 11,292 |   | 331,325 |   | 45,421 |   |
|                                                                                                       |       |                                        |       |   |   |   |   |   |   |
| Supplemental disclosure of  non-cash financing activities:                                                 |       |                                        |       |   |   |   |   |   |   |
| Conversion of convertible notes  into Series B preferred shares                                       |       | 32,909                                      |       | — |   | — |   | — |   |
| Receivable for the issuance of  ordinary shares upon exercise of share options by employees                |       | —                                      |       | 1,117 |   | — |   | — |   |
| Issuance of ordinary shares  for purchases of subsidiaries                                                 |       | 3,914                                       |       | 30,158 |   |   |   |   |   |
| Conversion of convertible notes into  Series D preferred shares                                       |       | —                                      |       | — |   | 2,489 |   | 341 |   |
| Conversion of Series A, B, C, D  preferred shares into ordinary shares                                |       | —                                      |       | — |   | 1,924 |   | 264 |   |

 

F-60

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**CHINAEDU CORPORATION**

 

**NOTES TO CONDENSED FINANCIAL INFORMATION OFPARENT COMPANY**

 

1.                                       BASIS FORPREPARATION

 

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 INSUBSIDIARIES AND VARIABLE INTEREST ENTITIES

 

The Company and its subsidiaries and variable interest entities areincluded in the consolidated financial statements where the inter-companybalances and transactions are eliminated upon consolidation.  For the purpose of the Company’s stand-alonefinancial statements, its investments in subsidiaries and variable interestentities are reported using the equity method of accounting.  The Company’s share of income and losses fromits subsidiaries and variable interest entities is reported as earnings fromsubsidiaries and variable interest entities in the accompanying condensedfinancial information of the parent 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 PARTYTRANSACTIONS

 

The following represents related party balances as of December 31,2006 and 2007:

 
| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2006**              | ** ** | **2007** | ** ** |
| ** **                        | ** ** | **RMB**               | ** ** | **RMB** | ** ** |
|                              |       |                  |       |   |   |
| Amounts due from related parties: |       |                  |       |   |   |
| Former director-Yan Xueshan (i)   |       | 14,840                |       | 14,840 |   |
| Director-Xie Changqing (i)        |       | 39,360                |       | 39,360 |   |
| BCIT (iv)                         |       | —                |       | 3 |   |
| WITT (iv)                         |       | —                |       | 1,289 |   |
| BJ-BCIT (iv)                      |       | —                |       | 5 |   |
| BJ-WITT (iv)                      |       | —                |       | 5 |   |
| CMR (v)                           |       | —                |       | 7,777 |   |
|                              |       | 54,200                |       | 63,279 |   |
|                              |       |                  |       |   |   |
| Amount due to a related party:    |       |                  |       |   |   |
| Hongcheng Technology (ii)         |       | 3,750                 |       | 3,750 |   |
| WOFE (iii)                        |       | —                |       | 1,279 |   |
| CMR (iii)                         |       | —                |       | 200 |   |
|                              |       | 3,750                 |       | 5,229 |   |

 

F-61

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**CHINAEDUCORPORATION**

 

**NOTES TO CONDENSED FINANCIAL INFORMATION OFPARENT COMPANY**

 

4.                                       RELATED PARTYTRANSACTIONS - continued

 

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(i)                                   Theamounts represent loans to the two equity owners of Hongcheng Education.

 

(ii)                                Theamount represents an intercompany****payable toHongcheng Technology for an acquisition consideration payment.

 

(iii)                             Theamounts represent the collection of account receivables on behalf of asubsidiary company.

 

(iv)                            Theamounts represent the payment of insurance for foreign employees on behalf of asubsidiary company.

 

(v)                               Theamount represents the receivable of profit distribution from a subsidiarycompany.

 

F-62

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