Summary of CHINACAST EDUCATION CORP

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward Looking Statements
Portions of the discussion and analysis below contain certain statements that are not descriptions of historical facts, but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements may include statements about our plans and objectives for future expansion, including into post-secondary brick and mortar education market; expectations for E-learning and training services the PRC; anticipated margins for our solutions; general and cyclical economic and business conditions, and, in particular, those in the PRC's education market; our ability to enter into and renew key corporate and strategic relationships with our customers and suppliers; changes in the favorable tax incentives enjoyed by our PRC operating companies; and other statements containing forward looking terminology such as "may", "expects", "believes", "anticipates", "intends", "projects", "looking forward" or similar terms, variations of such terms or the negative of such terms. Such information is based upon various assumptions made by, and expectations of, our management that were reasonable when made but may prove to be incorrect. All of such assumptions are inherently subject to uncertainties and contingencies beyond our control and upon assumptions with respect to future business decisions which are subject to change. Accordingly, there can be no assurance that actual results will meet expectations and actual results may vary (perhaps materially) from certain of the results anticipated herein. For a further description of these and other risks and uncertainties, see our most recent Annual Report filed with the Securities and Exchange Commission (SEC) on Form 10-K, and our subsequent SEC filings. The following discussion of our financial condition and results of operations should also be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those financial statements appearing elsewhere in this Form 10-Q. Overview
We were formed on August 20, 2003 to serve as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with a company having its primary operations in the PRC.
On December 22, 2006, we consummated the acquisition of ChinaCast Communication Holdings Limited ("CCH"). As of December 22, 2006, shareholders of CCH that had previously executed Letters of Undertaking with us with respect to the sale of their shares of CCH and that collectively held 239,648,953 shares of CCH or 51.22% of CCH's outstanding shares accepted the voluntary conditional offer (the "Offer") made in Singapore by DBS Bank, for and on our behalf, to acquire all of the outstanding ordinary shares of CCH. On January 18, 2007, at the end of the Offer period, acceptance of the Offer totaled 80.27% which is the basis we accounted for the acquisition. As a result of this acceptance of the Offer by CCH shareholders, CCH became our subsidiary and such acquisition qualified as a "business combination" under our amended and restated certificate of incorporation. During 2007, CEC acquired additional shares by issuing shares of CEC to certain original ChinaCast shareholders and increased its holdings to 100% of the outstanding ordinary shares of ChinaCast. The 19.73% of the additional shares acquired were accounted for on the same basis as the acquisition of the 80.27% shares.
We are subject to risks common to companies operating in China, including risks inherent in our distribution and commercialization efforts, uncertainty of foreign regulatory approvals and laws, the need for future capital and retention of key employees. We cannot provide assurance that we will generate revenues or achieve and sustain profitability in the future. Critical Accounting Policies
For summary of the critical accounting policies and the significant judgments and estimates made on the part of the management, see item 7 of Form 10-K for the year ended December 31, 2008 filed by the Company on March 16, 2009. The following are accounting policies that were either new or were adopted during the nine months ended September 30, 2009.
(1) Adoption of authoritative pronouncement issued by Financial Accounting Standards Board (the "FASB") regarding the noncontrolling interest. Effective January 1, 2009, we adopted authoritative pronouncement issued by FASB regarding the noncontrolling interest. The adoption did not impact the condensed consolidated financial statements for the quarter ended March 31, 2009, except for the presentation and disclosure requirements affecting all periods presented including (a) the noncontrolling interest has been reclassified to equity,
(b) consolidated net income or loss has been adjusted to include the net income or loss attributable to the noncontrolling interest, (c) consolidated comprehensive income or loss has been adjusted to include the comprehensive income or loss attributable to the noncontrolling interest and (d) for each reporting period the Company must present a reconciliation at the beginning and end of the period of the carrying amount of total equity and equity attributable to the Company and the noncontrolling interest.
(2) Adoption of authoritative pronouncement issued by the FASB regarding business combinations. Effective January 1, 2009, the Company adopted authoritative pronouncement issued by the FASB regarding business combinations. The adoption did not have a significant effect on our consolidated financial statements for the nine months ended September 30, 2009.

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Results of Operations
For the purpose of the discussion and analysis of the results of ChinaCast Education Corporation ("CEC"), its subsidiaries, and variable interest entities in this section, the consolidated group is referred to as the "Company". The satellite operating entity, ChinaCast Company Limited, is referred to as "CCL". CCL was not accounted for as a consolidated variable interest entity, because the Company was not considered to be the primary beneficiary of CCL. CCL's registered branch in Beijing is referred to as "CCLBJ." The US dollar figures presented below were based on the historical exchange rate of 1USD = 6.8RMB at September 30, 2009 for the three months and nine months ended September 30, 2009.
Since our acquisition of Hai Lai, we have been organized as two business segments, the E-learning and training service Group (the "ELG"), encompassing all the Company's businesses before the acquisition, and the Traditional University Group (the "TUG"), offering bachelor and diploma programs to students in China.
The revenue of the Company for the three months and nine months ended September 30, 2009 amounted to RMB82.9 million (US$12.2 million) and RMB236.0 million (US$34.7 million), respectively representing an increase of 14.0% and 14.4% over the revenue of the corresponding period in 2008. The increase in revenue for the nine months ended September 30, 2009 was mainly due to the acquisition of Hai Lai, which forms the TUG, in the second quarter of 2008.
Revenue of the ELG amounted to RMB51.5 million (US$7.6 million) and RMB146.1 million (US$21.5 million) for the three months and nine months ended September 30, 2009, respectively, as compared to revenue of RMB46.3 million and RMB154.1 million of the ELG for the three months and nine ended September 30, 2008. Service income, mainly of a recurring nature amounted to RMB49.6 million (US$7.3 million) and RMB140.1 million (US$20.6 million) for the three months and nine months ended September 30, 2009, respectively, compared to RMB44.4 million and RMB129.8 million for the same periods in 2008. Equipment sales, mainly project based, amounted to RMB1.9 million (US$0.3 million) and RMB6.1 million (US$0.9 million) for the three months and nine months ended September 30, 2009, respectively, against RMB1.9 million and RMB24.3 million for the same periods last year. The following table provides a summary of the ELG's revenue by business lines:

                                                                          Three Months ended
                                                             September 30, 2009             September 30, 2008
(millions)                                                   US$             RMB                  RMB
Post secondary education distance learning                    4.2            28.9                     24.3
K-12 and content delivery                                     2.4            16.0                     16.2
Vocational training, enterprise / government
training and networking and English training
services                                                      1.0             6.6                      5.8
Total ELG revenue                                             7.6            51.5                     46.3



                                                                            Nine Months ended
                                                              September 30, 2009               September 30, 2008
(millions)                                                   US$               RMB                   RMB
Post secondary education distance learning                    12.0             81.3                      71.1
K-12 and content delivery                                      7.1             48.3                      49.5
Vocational training, enterprise / government
training and networking and English training
services                                                       2.4             16.5                      33.5
Total ELG revenue                                             21.5            146.1                     154.1

Net revenue from post secondary education distance learning services increased from RMB71.1 million in the nine months ended September 30, 2008 to RMB81.3 million (US$12.0 million) in the nine months ended September 30, 2009. Net revenue from post secondary education distance learning services increased from RMB24.3 million in the three months ended September 30, 2008 to RMB28.9 million (US$4.2 million) in three months ended September 30, 2009. The total number of post-secondary students enrolled in courses using the Company's distance learning platforms including contracts with CCLBJ, increased to 141,000 at September 30, 2009 from 131,000 at September 30, 2008. The increase was due to the continuous growth of students enrolled in distance learning degree courses with the universities.

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The revenue from the K-12 and content delivery business decreased slightly by approximately 2.4% from RMB49.5 million for the nine months ended September 30, 2008 to RMB48.3 million (US$7.1 million) for the nine months ended September 30, 2009. The revenue from the K-12 and content delivery business decreased slightly by approximately 1.1% from RMB16.2 million for the three months ended September 30, 2008 to RMB16.0 million (US$2.4 million) for the three months ended September 30, 2009. The number of subscribing schools for K-12 distance learning services has stabilized at 6,500. The decrease in revenue was due to fluctuation in project-based revenues.
Net revenue from vocational and career training services, enterprise government training and networking and English language training services decreased from RMB33.5 million during the nine months ended September 30, 2008 to RMB16.5 million (US$2.4 million) during the nine months ended September 30, 2009. Net revenue from vocational and career training services, enterprise government training and networking and English language training services increased from RMB5.8 million during the three months ended September 30, 2008 to RMB6.6 million (US$1.0 million) during the three months ended September 30, 2009. The decrease for the nine months ended September 30, 2009 was mainly due to fluctuations in equipment sales, the nature of which is not recurring. Equipment sales included in the revenue of this business line amounted to RMB6.1 million (US$0.9 million) for the nine months ended September 30, 2009, against RMB24.3 million during the same period last year. The increase in revenue of this business line for the three months ended September 30, 2009 was mainly due to fluctuation in project-based service revenues.
TUG was newly established in the second quarter of 2008 after the acquisition of Hai Lai, and its revenue amounted to RMB31.4 million (US$4.6 million) and RMB89.8 million (US$13.2 million) in the three months and nine months ended September 30, 2009. TUG generated a revenue of RMB26.5 million for the third quarter of 2008. The increase in revenue in the third quarter of 2009 was a result of the increase in student enrollment. Foreign Trade and Business College of Chongqing Normal University ("FTBC") had approximately 12,200 students as at September 30, 2009 and generated RMB28.2 million (US$4.2 million) tuition revenue in the third quarter of 2009. Other revenue of TUG, which comprises mainly accommodation and catering revenue, amounted to RMB3.2 million (US$0.5 million).
Cost of sales of the Company decreased by 4.5% from RMB95.5 million during the first three quarters of 2008 to RMB91.2 million (US$13.4 million) during the first three quarters of 2009. The decrease was due to the reduction in equipment sales. Cost of sales of the Company increased slightly by 0.5% from RMB30.8 million during the third quarter of 2008 to RMB31.0 million (US$4.6 million) during the third quarter of 2009. The increase was mainly due to the increase in depreciation of fixed assets.
ELG's cost of materials decreased from RMB24.1 million during the first three quarters of 2008 to RMB6.0 million (US$0.9 million) during the first three quarters of 2009. The decrease was mainly due to fluctuations in equipment sales. ELG's cost of materials was RMB1.9 million (US$0.3 million) during the third quarter of 2008 and during the third quarter of 2009. The cost of service for the ELG amounted to RMB28.3 million (US$4.2 million) for the nine months ended September 30, 2009, as compared to RMB35.2 million for the same period in 2008. The cost of service for the ELG amounted to RMB9.8 million (US$1.4 million) for the three months ended September 30, 2009, as compared to RMB11.1 million for the same period in 2008. The decrease in the third quarter of 2009 as compared to the same period of 2008 was mainly due to the scale down of the English language training service and a reduction in transponder bandwidth fee.
TUG's cost of sales amounted to RMB19.2 million (US$2.8 million) and RMB56.9 million (US$8.4 million) for the three and nine months ended September 30, 2009, respectively, which comprises payroll to teaching staff, depreciation and amortization of the intangible asset. TUG's cost of sales amounted to RMB17.8 million for the three months ended September 30, 2008. The increase in the third quarter of 2009 as compared to the same period in 2008 was due to increase in student enrollment.
ELG's gross profit margin increased by 5.4 percentage points, from 71.9% in the third quarter of 2008 to 77.3% in the third quarter of 2009. The increase was due to the increase in economy of scale as well as the scale down of the English training service and the reduction in transponder bandwidth fee. TUG's gross profit margin was 38.8% for the third quarter of 2009 as compared to 32.8% for the same period of 2008. The increase was mainly due to the increase in student enrollment and revenue.
For the nine months ended September 30, 2009, the Company received a management service fee of RMB3.8 million (US$0.6 million), as compared to RMB4.7 million during the nine months ended September 30, 2008. For the three months ended September 30, 2009, the Company received a management service fee of RMB0.5 million (US$0.08 million), as compared to RMB1.9 million during the three months ended September 30, 2008. The management service fee arose from various agreements with CCL that entitled the Company to the economic benefits of its Beijing Branch - CCLBJ. CCLBJ is in the process of transferring all its outstanding businesses, mainly in post secondary education distance learning, to the Company. The decrease in management fee was mainly due to the transfer of business from CCLBJ.
Selling and marketing expenses decreased from RMB6.4 million in the first three quarters of 2008 to RMB3.6 million (US$0.5 million) in the first three quarters of 2009. Selling and marketing expenses decreased from RMB2.0 million in the third quarter of 2008 to RMB0.9 million (US$0.1 million) in the third quarter of 2009. The decrease was due to the scale down of the English language training division as described in MD&A in the Form 10-K for the year ended December 31, 2008.

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General and administrative expenses decreased slightly by 5.3% to RMB44.5 million (US$6.5 million) in the nine months ended September 30, 2009 from RMB47.0 million during the nine months ended September 30, 2008. General and administrative expenses decreased by 19.7% to RMB13.3 million (US$2.0 million) in the three months ended September 30, 2009 from RMB16.6 million during the three months ended September 30, 2008. The decrease was mainly due to the decrease in the professional expenses in general and administrative expenses, which decreased from RMB3.7 million in the third quarter of 2008 to RMB1.1 million (US$0.2 million) in the third quarter of 2009. The Company has foreign exchange gain of RMB0.07 million (US$0.01 million) for the first three quarters of 2009 compared to a loss of RMB1.0 million during the first three quarters of 2008. The Company has foreign exchange loss of RMB0.05 million (US$0.01 million) for the third quarter of 2009 compared to a loss of RMB0.4 million during the third quarter of 2008. The change was a result of stabilization of the change in the RMB/US exchange rate and the reduction of the Company's holding in US dollars.
Interest income decreased from RMB15.8 million in the first three quarters of 2008 to RMB6.9 million (US$1.0 million) in the first three quarters of 2009. Interest income decreased from RMB4.2 million in the third quarter of 2008 to RMB2.1 million (US$0.3 million) in the third quarter of 2009. The decrease in the third quarter of 2009 was due to the reduction in interest rate as well as a lower amount of the Company's term deposits.
Interest expense increased from RMB0.4 million in the first three quarters of 2008 to RMB5.6 million (US$0.8 million) in the first three quarters of 2009. Interest expenses increased from RMB0.3 million in the third quarter of 2008 to RMB2.4 million (US$0.4 million) in the third quarter of 2009. Interest expense was mainly associated with the loan of the TUG to finance the construction of the campus. A large portion of interest payment in the third quarter of 2008 was capitalized and no interest payment was capitalized in the third quarter of 2009.
Overall, profit before income tax and loss in equity investments increased from RMB29.1 million in the three months ended September 30, 2008 to RMB37.8 million (US$5.6 million) in the three months ended September 30, 2009, an increase of 30.1%. The increase was mainly due the increase in revenue.
The Company recorded a loss in equity investments amounted to RMB0.8 million (US$0.1 million) in the third quarter of 2009 compared to a gain of RMB0.2 million in the third quarter of 2008.
Income taxes increased by 13.2% from RMB6.7 million in the third quarter of 2008 to RMB7.6 million (US$1.1 million) in the third quarter of 2009. The increase was due to the increase in business and a higher tax rate for the ELG. Noncontrolling interest amounted to RMB2.0 million (US$0.3 million) for the three months ended September 30, 2009 as compared to RMB2.8 million for the three months ended September 30, 2008. The noncontrolling interest resulted mainly from the acquisition of Hai Lai, in which there was a 20% minority stake. On September 18, 2009, the Company acquired the 20% minority stake, which resulted in a reduction of the noncontrolling interest for the three months ended September 30, 2009 as compared to the same period in 2008. Net income attributable to the Company increased by 38.9% to RMB27.4 million (US$4.0 million) in the three months ended September 30, 2009 from RMB19.7 million in the three months ended September 30, 2008.
On March 16, 2007, the National People's Congress of China enacted a new tax law, under which foreign-invested enterprises and domestic companies will be subject to enterprise income tax at a uniform rate of 25% . The new tax law became effective on January 1, 2008. There is a transition period, during which enterprises may continue to enjoy existing preferential tax treatment or in which their tax rates may be gradually adjusted to 25%. Following the effectiveness of the new tax law, one of the Company's major operating subsidiaries, CCT Shanghai, which was subject to the preferential tax rate of 15%, is now eligible to the phased-in rates, which is 18% in 2008, 20% in 2009, 22% in 2210, 24% in 2011, 25% in 2012 and thereafter.

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Liquidity and Capital Resources
The following is a summary of the key items from the consolidated balance
sheets.

                                                                               As of
                                                        As of              December 31,
                                                  September 30, 2009           2008
                  (millions)                       RMB           US$            RMB
           Cash and cash equivalents                398.3        58.6             220.1
                 Term deposits                      280.0        41.2             369.0
                   Subtotal                         678.3        99.8             589.1
              Accounts receivable                    55.7         8.2              32.6
                   Inventory                          1.7         0.3               1.4
   Prepaid expenses and other current assets          6.5         1.0               9.0
             Total current assets                   744.2       109.4             634.6
    Non-current advances to a related party          97.6        14.4             110.2
                 Total assets                     1,665.1       244.9           1,499.2

Cash and cash equivalents balances increased from RMB220.1 million as at December 31, 2008, to RMB398.3 million (US$58.6 million) as at September 30, 2009. The increase was mainly because of transfer from fixed deposits prior to the payment of acquisition consideration in the fourth quarter of 2009. There was net cash generated from operating activities of RMB135.3 million (US$19.9 million) for the nine months ended September 30, 2009 as compared to net cash from operating activities of RMB147.6 million for the nine months ended September 30, 2008. In the first three quarters of 2009, there was an increase in accounts receivable in the current period which is mainly due to that several universities settled the payments near the end of year 2008 which is earlier than usual. There was a cash outflow in relation to the payment of accrued expenses and other current liabilities of RMB22.3 million in the nine months ended September, 2009. Revenue is recognized ratably throughout the periods services are provided, but payments may be received ahead of or behind the revenue being recognized. Payments received before recognition of revenue are recorded as deferred revenue while payments not received at the time goods and service have been provided are recorded as accounts receivable. For revenue related to project sales, the timing of payments depended upon the terms of the contracts.
Net cash used in investment activities in the nine months ended September 30, 2009 was RMB23.7 million (US$3.5 million), mainly reflecting the transfer from term deposit of RMB89.0 million (US$13.1 million) and the payment of the first tranche of the consideration in relation to the acquisition of the Lijiang College amounting to RMB100 million (US$14.7 million). For the nine months ended September 30, 2008, transfer from term deposit amounted to RMB187.8 million to finance the acquisition of Hai Lai, which resulted in a cash outflow of RMB465.5 million for the period.
Net cash provided by financing activities in the first nine months of 2009 was RMB66.6 million (US$9.8 million). New loans were obtained to finance the expansion of the capacity of FTBC.
The Company believes that its cash and cash equivalents balances, together with its access to financing sources, will continue to be sufficient to meet the working capital needs associated with its current operations on an ongoing basis, although that cannot be assured. Also, it is possible that the Company's cash flow requirements could increase as a result of a number of factors, including unfavorable timing of cash flow events, the decision to increase investment in marketing and development activities or the use of cash for acquisitions to accelerate its growth.
Total assets at September 30, 2009 amounted to RMB1,665.1 million (US$244.9 million), an increase of 11.1%, when compared to the total assets amounting to RMB1,499.2 million at December 31, 2008. Total current assets increased by 17.3% to RMB744.2 million at September 30, 2009.
Accounts receivable increased from RMB32.6 million as at December 31, 2008 to RMB55.7 million (US$8.2 million) at September 30, 2009. The increase was due to the seasonal factor in the settlement of accounts receivable by the Company's customers. Most of the business partners are long term customers and settle their accounts promptly. All accounts receivable are reviewed regularly and provisions have been made for any balances that are disputed or doubtful. Inventory, mainly made up of satellite transmission and receiving equipment, increased slightly to RMB1.7 million (US$0.3 million) at September 30, 2009.

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Prepaid expenses and other current assets decreased from RMB9.0 million as at December 31, 2008 to RMB6.5 million (US$1.0 million). The decrease was mainly due to the decrease of accrued interest income from fix deposits. The Company also funded the operation of a related party, CCL, which held the satellite license before transferring it to the Company. The related party is still in the process of transferring its satellite related businesses to the Company. Amounts advanced to the related party were RMB97.6 million (US$14.4 million) as at September 30, 2009. As at December 31, 2008, the amount advanced was RMB110.2 million, the decrease is mainly due to repayment made. On September 18, 2009, the Company closed a $19,765,950 private placement of 2,582,947 restricted shares of common stock of the Company (the "Shares"). The purchasers of the Shares were the former minority shareholders of The Foreign Trade and Business College of Chongqing Normal University. The sale of the Shares to each of the investors was exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act") pursuant to Regulation S under the Act due to the fact that the offering of the Shares was not made in the United States and that each of the investors is a non-U.S. Person (as defined in the Act).
As at September 30, 2009, the Company had total long-term bank loans of RMB148.4 million (US$21.8 million). RMB94.4 million of the bank loans are expiring within one year were secured by pledge of certain land use rights and buildings in Hai Lai, the entitlement to accommodation income of the student apartments of FTBC and guarantees given by certain individuals. The rest . . .