UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: March 31, 2012
or
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM: _____________ TO _____________

COMMISSION FILE NUMBER: 000-53247

CHINA EDUCATION INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Nevada		20-4854568
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

100 E. Linton Blvd, Suite 401A, Delray Beach, Florida		33483
(Address of principal executive offices)		(Zip Code)

561-266-3059

(Registrant’s telephone number, including area code)

Not Applicable

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

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

[X] Yes [ ] No

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

[ X ] Yes [ ] No

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

Large accelerated filer	[ ]	Accelerated filer	[ ]
Non-accelerated filer	[ ]	Smaller reporting company	[X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[ ] Yes [X] No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 29,019,650 shares of common stock are issued and outstanding as of May 16, 2012.

CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page No.
PART I. - FINANCIAL INFORMATION

Item 1.	Financial Statements.	1

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	19

Item 4.	Controls and Procedures.	19

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings.	20

Item 1A.	Risk Factors.	20

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	20

Item 3.	Defaults Upon Senior Securities.	20

Item 4.	Mine Safety Disclosures	20

Item 5.	Other Information.	20

Item 6.	Exhibits.	20

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION

This report includes forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,??“targets,” “likely,” “aim,” “will,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs. A list of factors that could cause our actual results of operations and financial condition to differ materially is set forth below, and these factors are discussed in greater detail under Item 1A – “Risk Factors” included in our Annual Report on Form 10K for the year ended December 31, 2011:

	•		Our operations which are based on the School Control Arrangements which have a term of only 20 years.
	•		Our reliance on contractual arrangements with the Schools, and their shareholder for all of our China operations, which may not be as effective in providing operational control as direct ownership.
	•		Our historical growth rates may not be indicative of our future financial results.
	•		Potential conflicts of interest the Schools’ shareholders may have with us.
	•		Possible investigations of the Schools by regulatory agencies.
	•		Adverse tax consequences of our contractual arrangements with the Schools and their shareholders.
	•		Our ability to obtain sufficient capital to fund our current operations and planned expansion strategy.
	•		Our ability to continue to attract students to enroll in our programs.
	•		Our ability to effectively manage our business expansion and increasingly complicated operations.
	•		Our ability to implement our growth strategy and make strategic acquisitions and investments and to establish and maintain strategic relationships.
	•		Our ability to successfully integrate businesses that we acquire.
	•		Our ability to attract and retain senior management and other key personnel.
	•		Our ability to adequately and promptly respond to changes in curriculum, testing materials and standards.
	•		Our legal right to lease certain properties could be challenged by property owners or other third parties.
	•		Our ability to comply with PRC laws and regulations which currently prohibit foreign ownership of elementary and middle schools for students in grades one to nine in the PRC.
	•		Our ability to increase rates for tuition, accommodation and other fees due to regulation by the Chinese government.
	•		It may be difficult for you to enforce any judgment obtained in the United States against our company, which may limit the remedies otherwise available to our shareholders.
	•		Economic, legal restrictions and business conditions in China.
	•		New labor laws in the PRC.

Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, including the risks described in Item 1.A. Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2011. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

INDEX OF CERTAIN DEFINED TERMS USED IN THIS REPORT

When used in this report the terms:

“CEII” the “Company,” “we”, “us”, “ours,” and similar terms refers to China Education International, Inc., a Nevada corporation formerly known as USChina Channel, Inc., a Nevada corporation, and our subsidiaries.

“China Education” refers to China Education Services, Ltd., a British Virgin Islands company and a wholly owned subsidiary of ours.

“Hangzhou Education” refers to Hangzhou Kunjiang Education and Technology Co., Ltd., a limited liability company established under the laws of the People’s Republic of China (the “PRC”) and a wholly owned subsidiary of ours.

“Shaoxing High School” refers to Shaoxing China Textile City High School, a Chinese company established under the laws of the PRC and a company affiliated with us and consolidated in our financial statements.

“Pingtan Lanhua School” refers to Pingtan Lanhua School, a Chinese company established under the laws of the PRC and a company affiliated with us and consolidated in our financial statements.

“Hefei Meihua School” refers to HeFei Meihua Vocational Training School, a Chinese company established under the laws of the PRC and a company affiliated with us and consolidated in our financial statements.

“Peng Tuo” refers to Peng Tuo Education Technology Co. Ltd., a Hangzhou based Chinese education services company which is affiliated with us

“Crown Union” refers to Crown Union Resources Limited, a British Virgin Islands company.

RMB” refers to the Chinese Renminbi, the national currency of the PRC.

PRC” refers to the Peoples Republic of China.

iii

PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	March 31, 2012			December 31, 2011

ASSETS	(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	2,173,283		$	1,700,751
Due from related parties		506,955			-
Prepaid expense - related parties, short term		633,693			629,693
Prepaid expense and other current assets		92,528			20,637
Subsidiary held for sale		4,223,675			4,223,675
Total current assets		7,630,134			6,574,486
Restricted cash		376,837			205,348
Prepaid expense - related parties, long term		4,911,124			5,037,545
Goodwill		1,480,334			1,480,334
Intangible asset, net		3,920,745			4,010,310
Property and equipment, net		1,612,375			1,634,242
Total assets	$	19,931,549		$	18,942,265
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses	$	855,485		$	1,102,512
Loan payable-related parties		159,000			157,718
Taxes payables		81,255			80,021
Due to related parties		139,187			153,317
Deferred revenue		1,713,256			1,227,996
Subsidiary held for sale		420,586			420,586
Total current liabilities		3,368,768			3,142,150
Deferred revenue - long term		1,695,972			1,002,049
Total liabilities		5,064,741			4,144,199
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value, 29,019,650 and 28,078,650 shares issued and outstanding at March 31, 2012 and December 31, 2011		29,020			28,079
Additional paid-in capital		34,674,768			34,440,459
Accumulated deficit		(20,221,985	)		(20,005,236	)
Accumulated other comprehensive income		215,299			181,322
Total China Education International Inc.'s shareholders' equity		14,697,102			14,644,624
Noncontrolling interest		169,706			153,442
Total shareholders' equity		14,866,808			14,798,066
Total liabilities and shareholders' equity	$	19,931,549		$	18,942,265

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

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CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

	For the Three Month Ended March 31,
	2012			2011
Net revenues	$	1,558,446		$	1,019,666
Cost of sales		1,206,099			669,918
Gross profit		352,347			349,748
Operating expenses:
Consulting expense-related party		-			1,800,000
General and administrative		690,060			211,691
Total operating expenses		690,060			2,011,691
Total operating loss		(337,713	)		(1,661,943	)
Other income (expense):
Interest expense		(877	)		(931	)
Other income		1,372			-
Subsidy income		138,083			-
Total other income (expense)		138,578			(931	)
Net loss before income taxes		(199,135	)		(1,662,874	)
Income taxes		(1,349	)		-
Net loss		(200,484	)		(1,662,874	)
Net income attributable to noncontrolling interest		(16,264	)		(16,964	)
Net loss attributable to China Education International, Inc.	$	(216,748	)		(1,679,838	)
Other comprehensive income:
Foreign currency translation		24,253			35,284
Comprehensive loss	$	(192,495	)	$	(1,644,554	)
NET LOSS PER COMMON SHARE:
Loss per share - basic and diluted	$	(0.01	)	$	(0.08	)
Weighted average common shares outstanding - basic and diluted		28,475,200			20,806,150

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

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CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Three Month Ended March 31,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(200,484	)	$	(1,662,874	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		101,690			35,159
Amortization		89,565			20,174
Common stock issued for services		-			1,800,000
Amortization of prepaid expense - related parties		158,791			151,416
Changes in assets and liabilities:
Restricted cash		(170,579	)		-
Deferred revenue		839,355			417,581
Due from related parties		(114,477	)		(358,132	)
Prepaid expense and other current assets		156,246			(305	)
Tax payable		(67,115	)		-
Accounts payable and accrued expenses		(284,591	)		60,958
NET CASH PROVIDED BY OPERATING ACTIVITIES		508,401			463,977
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and buildings improvement		(69,287	)		(7,390	)
NET CASH BY (USED IN) INVESTING ACTIVITIES		(69,287	)		(7,390	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from raising capital		200,000			-
Proceeds from loan payable-related parties		1,282			150,000
Repayment of related party payable		(14,999	)		(507,928	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		186,283			(357,928	)
EFFECT OF EXCHANGE RATE ON CASH		(152,865	)		683
NET INCREASE IN CASH		472,532			99,342
CASH - BEGINNING OF PERIOD		1,700,751			55,594
CASH - END OF PERIOD	$	2,173,283		$	154,936
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Shares issued for exchanging fixed assets	$	35,250		$	-

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

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CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 – ORGANIZATION AND OPERATIONS

China Education International, Inc., formerly known as US China Channel, Inc. (the “Company”, “we”, “us”) was formed on April 26, 2006 under the laws of the State of Nevada. Prior to the completion of the acquisition of China Education Services, Ltd., a British Virgin Islands company (“China Education”) on December 31, 2010, we transferred all of our assets and liabilities to our wholly-owned subsidiary, China Bull Holdings, Inc. and appointed Andrew Chien, our founder and former chief executive officer, as general manager of this company. In addition, China Bull Holdings, Inc. entered into a management agreement with China Bull Management, Inc. to manage all aspects of the operations of China Bull Holdings, Inc. Mr. Chien is a principal shareholder of China Bull Management, Inc. On February 17, 2012 we distributed the assets of China Bull Holding to Mr. Chien in exchange for his assumption of all of the liabilities and obligations of China Bull Holding. There was no gain or loss for this exchange.

On December 31, 2010 we acquired China Education as discussed further below. China Education was formed on November 23, 2010 under the laws of the British Virgin Islands and was 100% owned by Shaoxing Red Green Blue Trading Co., Ltd. (“RGB Trading”), a PRC limited liability company and Invictus Advisory Associates, Inc. (“Invictus”), a Florida corporation and shareholder of the Company prior to our acquisition. On November 25, 2010, China Education acquired 100% of the equity interest in Hangzhou Education, a PRC limited liability company, from its shareholders Jinjin Ye and Ruifeng Chen for RMB 1,000,000 (approximately $151,000). Hangzhou Education was established as a wholly foreign owned enterprise under the laws of the PRC in November 2010 and is our principal operating subsidiary in the Peoples Republic of China (the “PRC”).

On December 31, 2010 we issued 14,740,694 shares of our common stock in connection with our acquisition of China Education. Of the 14,740,694 shares we issued, 10,000,000 shares were issued to Invictus and were charged to expense as a transaction fee, and 4,740,694 shares were issued to China Direct for services provided in connection with our acquisition of China Education. The fair value of our common stock as of December 31, 2010, the date we acquired China Education, was $1.05, resulting in stock-based service expense of $15.5 million.

Due to PRC regulatory restrictions on foreign investments in education for students in grades one to 12, we conduct our business in the PRC through contractual arrangements among China Education, Hangzhou Education, the Schools and their owners. We refer to these contracts as the “School Control Agreements” which are summarized below. The Schools are treated as VIE’s in which we do not have direct or controlling equity interest but whose historical financial results have been consolidated in our financial statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP).

Hangzhou Education and the Schools are the principal operating entities for our business operations within the PRC. Their functional currency is the Chinese Renminbi.

On December 31, 2010, May 31, 2011 and August 2, 2011 China Education and Hangzhou Education entered into a series of contractual arrangements, or School Control Agreements, with three schools and educational organizations that permitted the Company manage and operate, which enable us to:

	•		Exercise effective control over the Schools by having their shareholders pledge 100% of their equity interest in the Schools to China Education and entrust all the rights to exercise its voting power over its ownership to China Education. There is no limitation on China Education’s rights to exercise the voting power over the Schools or to obtain and dispose of the pledged equity interest in the Schools by exercise of its call option or share pledge. China Education’s rights to obtain and dispose of the pledged equity interests in the Schools by exercise of its call option or share pledge are subject to China Education’s designating other PRC persons or entities to acquire the pledged equity interests in order not to violate PRC laws that prohibit or restrict foreign ownership in middle and high schools in China;
	•		Receive 65% of the Schools pre-tax profits (90% if no taxes are paid) in consideration for technical support, marketing and management consulting services provided by Hangzhou Education; and
	•		Have an exclusive option to purchase all or part of the equity interests in the School or educational organization and all or part of the equity interest in its subsidiaries, as well as all or part of its assets of the School, in each case when and to the extent permitted by applicable PRC law.

Shaoxing High School. On December 31, 2010, we entered into an Exclusive Cooperation Agreement, Share Pledge Agreement, Power of Attorney and Option Agreement with Shaoxing High School and its shareholders which permit us to operate the Shaoxing High School, receive economic benefits of its operations and the right to purchase all of its equity interests from its shareholders. We issued 4,800,000 shares of our unregistered common stock valued at $5,040,000 to Shaoxing Red Green Blue Trading Co., Ltd.(“RGB Trading”), the shareholder of Shaoxing High School as consideration for entering into these agreements. These agreements are discussed in more detail in Item 1. Business – “Agreements that provide effective control over the Schools” and “Agreements that transfer economic benefits to us from the Schools.”

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CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Pingtan Lanhua School. On May 31, 2011, we entered into an Exclusive Cooperation Agreement, Share Pledge Agreement, Power of Attorney and Option Agreement with Pingtan Lanhua School and its shareholders which permit us to operate the Pingtan Lanhua School, receive economic benefits of its operations and the right to purchase all of its equity interests from its shareholders. These agreements are collectively referred to as the Pingtan Lanhua School Agreements and are discussed in more detail in Item 1. Business – “Agreements that provide effective control over the Schools” and “Agreements that transfer economic benefits to us from the Schools.”

As consideration for entering into the Pingtan Lanhua School Agreements, we issued Crown Union, a British Virgin Island company (“a BVI company”) a total of 3,600,000 shares of our unregistered common stock (the “Pingtan Lanhua Acquisition Shares”) valued at $2,880,000. Crown Union entered into an option agreement with the Pingtan Lanhua School shareholders which permits them to acquire shares of the Company’s common stock as follows: (i) 2,000,000 shares upon entering into the Pingtan Lanhua School Agreements, which condition was met on May 31, 2011; (ii) 1,000,000 shares upon Pingtan Lanhua achieving not less than $2,000,000 in Gross Revenues, as determined under US GAAP for any consecutive 12 months during the period from July 1, 2011 through June 30, 2013; and (iii) 600,000 shares upon Pingtan Lanhua achieving not less than $1,000,000 in pre-tax profits, as determined under US GAAP for any consecutive 12 months during the period from July 1, 2011 through June 30, 2013. The number of Pingtan Lanhua Acquisition Shares the Pingtan Lanhua shareholders may purchase from Crown Union shall be reduced and returned to us for cancellation by 1 share for each $1.00 that the net income of the Pingtan Lanhua School during any 12 month consecutive period from July 1, 2011 through June 30, 2013 as computed in accordance with US GAAP is less than $1,000,000. Due to PRC restrictions of foreign investment in China’s education industry, we operate Pintan Lanhua School through contractual arrangements among China Education, Hangzhou Education and the owners of the Schools.

Hefei Meihua School. On August 2, 2011, we entered into an Exclusive Cooperation Agreement, Share Pledge Agreement, Power of Attorney and Option Agreement with Hefei Meihua School and its shareholders which permit us to operate the Heifei Meihua School, receive economic benefits of its operations and the right to purchase all of its equity interests from its shareholders. These agreements are collectively referred to as the Hefei Meihua School Agreements and are discussed in more detail in Item 1. Business – “Agreements that provide effective control over the Schools” and “Agreements that transfer economic benefits to us from the Schools.”

As consideration for entering into the Hefei Meihua School Agreements, we issued Crown Union a total of 3,000,000 shares of our unregistered common stock (the “Hefei Meihua Acquisition Shares”) valued at $9,000,000. Crown Union entered into a five year option agreement with the Hefei Meihua School shareholders which permits them to acquire shares of the Company’s common stock as follows: (i) 2,000,000 shares upon entering into the Hefei Meihua School Agreements, which condition was met on May 31, 2011; (ii) 600,000 shares upon Hefei Meihua achieving not less than $2,000,000 in Gross Revenues, as determined under US GAAP for any consecutive 12 months during the period from July 1, 2011 through June 30, 2013; and (iii) 400,000 shares upon Hefei Meihua achieving not less than $1,000,000 in pre-tax profits, as determined under US GAAP for any consecutive 12 months during the period from July 1, 2011 through June 30, 2013. The number of Hefei Meihua Acquisition Shares the Hefei Meihua shareholders may purchase from Crown Union shall be reduced and returned to us for cancellation by 1 share for each $1.00 that the net income of the Heifei School during any 12 month consecutive period from July 1, 2011 through June 30, 2013 as computed in accordance with US GAAP is less than $1,000,000. Due to PRC restrictions of foreign investment in China’s education industry, we operate Heifei Meihua School through contractual arrangements among China Education, Hangzhou Education and the owners of the Schools.

Peng Tuo School. On December 31, 2011, we and Hangzhou Education entered into a series of agreements with Peng Tuo Information Technology Co. Ltd. (“PTIT”), a private education company organized in China, and its shareholders, to operate in China, and its shareholders to operate PTIT and the right to purchase all of its equity interests from its shareholders to become effective on the date when PTIT provides China Education with its financial statements prepared in accordance with generally accepted accounting principles (“US GAAP”). The parties agreed that the PTIT financial statements will be provided to China Education no later than June 15, 2012 and that such financial statements shall be reasonably acceptable to China Education.

Established in 2011, PTIT provides educational services for schools and students within China, either directly or indirectly. PTIT projects that it will provide educational services for approximately 4,500 students during 2012.

As of March 31, 2012, we determined to sell the Meihua Exclusive Cooperation and associated agreements to a school we are currently managing, or a school with whom we are in discussion to manage.

Accordingly, we treat the Schools as variable interest entities and consolidate their assets, liabilities and financial results in our financial statements effective as of the date we entered into the School Control Agreements with the respective School and its owners in accordance with U.S. GAAP.

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CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Each School holds the requisite licenses and permits necessary to conduct their respective education business in their respective areas (province, city, county, etc.) and the PRC.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting, and should be read in conjunction with our audited consolidated financial statements, notes thereto and related information contained in our Annual Report on Form 10-K for the year ended December 31, 2011. The consolidated financial statements for the interim periods presented are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the periods presented. Financial results for interim periods are not necessarily indicative of results that should be expected for the full year. The consolidated financial statements include the accounts of the Company and all of its subsidiaries, including those operating outside the United States of America, as of their respective dates of acquisition. In addition, Shaoxing High School, Pingtan Lanhua School and Hefei Meihua School have been consolidated as variable interest entities, effective as of December 31, 2010, May 31, 2011 and August 2, 2011, respectively, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810-10. All intercompany account balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of our common stock issued in exchange for services, the estimated useful lives of property and equipment and estimates used in determining the fair value of assets and liabilities acquired in business combinations. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.

Concentration of Credit Risks

Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and restricted cash. We deposit our cash with high credit quality financial institutions in the United States and the PRC. At March 31, 2012, we had deposits of $2,169,981 in banks in the PRC, as well as restricted cash, described below, in the amount of $376,837. In the PRC, there is no equivalent of federal deposit insurance as in the United States; as such these amounts held in banks in the PRC are not insured. We have not experienced any losses in such bank accounts through March 31, 2012.

Restricted Cash

Restricted cash pertains to cash on deposit in a bank account which is set up under the laws of the PRC, under which the Company’s revenues are required to be deposited into this bank account and directly supervised by the Ministry of Finance of People’s Republic of China (the “Ministry of Finance”). We periodically apply funding and withdraw money from this bank account upon approval of the Ministry of Finance. This bank account requires a minimum balance of RMB 500,000 (approximately $75,000) or not less than either 15% of the Company’s revenues or the aggregate amount of three months’ salaries for all of the Company’s employees. At March 31, 2012 and December 31, 2011, restricted cash amounted to $376,837 and $205,348, respectively.

Impairment of Long-lived Assets

In accordance with US GAAP, the Company periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company did not consider it necessary to record any impairment charges during the three months ended March 31, 2012 and 2011.

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CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Property and Equipment

Property and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation of property and equipment is computed by the straight-line method (after taking into account their respective estimated residual values) over the assets estimated useful lives. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operations. Leasehold improvements, if any, are amortized on a straight-line basis over the lease period or the estimated useful life, whichever is shorter.

Fair Value of Financial Instruments

We have adopted ASC Topic 820, “Fair Value Measurements”, for its financial instruments. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts of the Company’s financial assets and liabilities, such as cash and cash equivalents, prepayments and other current assets, accounts payable, accrued expenses and other current liabilities, approximate their fair values, generally due to the short-term maturity of these instruments.

Revenue Recognition

We follow the guidance of ASC 605, “Revenue Recognition”. In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered, the fee to the student is fixed or determinable, and collectability is reasonably assured. Revenue is reported net of refunds. The primary sources of our revenues are tuition and dormitory fees.

Tuition is generally paid in advance and is initially recorded as deferred revenue. The Company collects tuition twice a year, during the months of September and February. Tuition is only refundable to students if they should withdraw, or be unable to complete their required courses. Tuition and dormitory fees are recognized ratably as the services are rendered, and are reported net of related surcharges and tuition refunds. Deferred revenue on our balance sheet reflects the unearned portion of this revenue.

Stock-based Compensation

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). ASC 718 also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company records compensation expense based on the fair value of the award at the reporting date. The awards to consultants and other third-parties are then revalued, or the total compensation is recalculated based on the then current fair value, at each subsequent reporting date.

Income Taxes

We account for income taxes under ASC Section 740-10-30, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date.

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CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

We have adopted ASC Section 740-10-25, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC Section 740-10-25, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty (50) percent likelihood of being realized upon ultimate settlement. ASC Section 740-10-25 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. We had no material adjustments to our liabilities for unrecognized income tax benefits according to the provisions of ASC Section 740-10-25.

In accordance with the current laws and regulations of the PRC, Shaoxing High School is registered as a private school whose shareholders will not receive returns from net incomes from Shaoxing High School. Therefore it is exempt from business income tax. Pingtan Lanhua School and Hefei Meihua School are registered as private schools that require reasonable returns, and is therefore subject to a 25% income tax rate.

Noncontrolling Interest

Noncontrolling interests in our subsidiaries are recorded as a component of our equity, separate from the parent’s equity. Purchase or sale of equity interests that do not result in a change of control are accounted for as equity transactions. Results of operations attributable to the noncontrolling interest are included in our consolidated results of operations and, upon loss of control, the interest sold, as well as interest retained, if any, will be reported at fair value with any gain or loss recognized in earnings.

Basic and Diluted Loss per Share

Pursuant to ASC Subtopic 260-10-45, basic income (loss) per common share is computed by dividing income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the income of the Company, subject to anti-dilution limitations. There were no potentially dilutive securities outstanding for the three months ended March 31, 2012 and 2011.

Foreign Currency Translation

Our functional currency is the Chinese Renminbi (“RMB”). In accordance with Section 830-20-35 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), the financial statements have been translated into United States dollars using period-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in other comprehensive income or loss.

RMB is not a fully convertible currency. All foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the “PBOC”) or other institutions authorized to buy and sell foreign exchange. The exchange rate adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC, which are determined largely by supply and demand.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income and foreign currency translation adjustments and is presented in the Consolidated Statements of Operations and Comprehensive Income.

Recently Issued Accounting Pronouncements

In September, 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-08, Intangibles – Goodwill and Other, which simplifies how an entity is required to test goodwill for impairment. This ASU would allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under the ASU, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The ASU includes a number of factors to consider in conducting the qualitative assessment. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. Our adoption of this guidance did not have a material impact on our consolidated financial statements.

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CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Under the amendments, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The presentation option under current GAAP to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity has been eliminated. The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted because compliance with amendments is already permitted. We already comply with this presentation.

A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, the Company’s management has not determined whether implementation of such proposed standards would be material to its consolidated financial statements.

NOTE 3 – DISCONTINUED OPERATION

As of March 31, 2012, we determined to sell the Meihua Exclusive Cooperation and associated agreements to a school we are currently managing, or a school with whom we are in discussion to manage. Accordingly, the school’s assets and liabilities have been reclassified as related to discontinued operations as of December 31 2011 and March 31, 2012. Also, the results of operations and cash flows were reported as discontinued operations.

NOTE 4 – ACQUISITIONS

As previously discussed in Note 1, on December 31, 2010, we entered into an Exclusive Cooperation Agreement, Share Pledge Agreement, Power of Attorney and Option Agreement with Shaoxing High School and its shareholders which permit us to operate the Shaoxing High School, receive economic benefits of its operations and the right to purchase all of its equity interests from its shareholders. We issued 4,800,000 shares of our unregistered common stock valued at $5,040,000 to Shaoxing Red Green Blue Trading Col, Ltd.(“RGB Trading”), the shareholder of Shaoxing High School as consideration for entering into these agreements.

On May 31, 2011 we acquired effective control of the Pingtan Lanhua School through the School Control Agreements. In connection with this transaction, we issued 2,000,000 shares of our common stock, valued at $1.6 million, to Crown Union, which then entered into an option agreement with the Pingtan Lanhua Founders, in accordance with the terms of the Option Agreement. The Pingtan Lanhua Founders have the opportunity to receive an additional 1,600,000 shares of our common stock, valued at $1.28 million if Pingtan Lanhua School meets certain revenue and earnings targets during the two year period ending June 30, 2013. The additional stock to be earned is accounted for as it is extremely like that these additional shares will be issued.

On August 2, 2011 we acquired effective control of Hefei Meihua School through the School Control Agreements. In connection with this transaction, we issued 2,000,000 shares of our common stock, valued at $2,500,000, to Crown Union, which then entered into an option agreement with the Hefei Meihua Founders, in accordance with the terms of the Option Agreement. The Hefei Meihua Founders have the opportunity to receive an additional 1,000,000 shares of our common stock, valued at $1.25 million if Hefei Meihua School meets certain revenue and earnings targets during the two year period ending August 1, 2013. As of March 31, 2012, we determined to sell the Meihua Exclusive Cooperation and associated agreements to a school we are currently managing, or a school with whom we are in discussion to manage.

On December 31, 2011, we and Hangzhou Education entered into a series of agreements with Peng Tuo Information Technology Co. Ltd. (“PTIT”), a private education company organized in China, and its shareholders, to operate in China, and its shareholders to operate PTIT and the right to purchase all of its equity interests from its shareholders to become effective on the date when PTIT provides China Education with its financial statements prepared in accordance with generally accepted accounting principles (“USGAAP”). The parties agreed that the PTIT financial statements will be provided to China Education no later than June 15, 2012 and that such financial statements shall be reasonably acceptable to China Education.

Based on the terms of the Control Agreements, we determined that the Schools are VIE for which we are the Primary Beneficiary. As a result, the transactions have been accounted for under acquisitions method. The purchase price of each school was allocated to the assets acquired and liabilities assumed at their fair values as of their respective acquisition dates as follows:

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CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The favorable lease intangible of Shaoxing Hig School was determined based on our evaluation of the prepaid rent under the terms of a ten-year lease Shaoxing High School had entered into with RGB Trading in November 2010. This intangible asset will be amortized over the lease term of ten years. The favorable lease intangible of Pingtan Lanhua School was determined based on our evaluation of the arrangement Pingtan Lanhua School has with its Founders whereby Pingtan Lanhua School conducts its operations in facilities owned by its Founders with its Founders forgoing a rental fee. This intangible asset will be amortized over a period of five years.

NOTE 5 – GOODWILL AND INTANGIBLE ASSETS

Goodwill

In connection with the acquisition of Shaoxing High School on December 31, 2010, we recognized goodwill in the amount of $193,840. In connection with the acquisition of Pingtan Lanhua School on May 31, 2011, we recognized goodwill in the amount of $1,286,494.

We account for goodwill and other intangible assets in accordance with the provision of FASB ASC 350 “Intangibles – Goodwill and Other.” We conduct impairment testing on goodwill at least annually, or sooner when indications of impairment exist.

Intangible Assets

In connection with the acquisition of Shaoxing High School on December 31, 2010, we recognized a favorable lease intangible asset related to a lease agreement that RGB Trading (see Note 4), the major shareholder of Shaoxing High School. This favorable lease is being amortized over 10 years. In connection with the acquisition of Pingtan Lanhua School on May 31, 2011, we recognized a favorable lease intangible asset related to the arrangement with the shareholders of Pingtan Lanhua School (see Note 4), which is being amortized over 5 years. The balance related to the Company’s favorable lease is as follows:

On October 14, 2011, we entered into an Assignment Agreement with Frontera Associates, Inc. (“Frontera”) pursuant to which Frontera transferred us a License Agreement dated September 1, 2010 between Frontera and American Education Center, Inc. Under the terms of the License Agreement we will have the use of the name American Education Center, its systems, brochures, literature, manuals, know how, logos, contacts and arrangements with schools and colleges across the U. S., China and elsewhere. In consideration for the assignment, we issued Frontera 1,000,000 shares of our common stock at the valued of $0.74 per share and a three-year warrant exercisable at $1.00 per share for 2,400,000 shares which we valued at $1,688,020 by using Black Scholes model. We recognized the License Agreement as intangible asset with a total value of $2,428,020. The license term is for thirty years. The Company recognized intangible asset related to this License Agreement and will amortize it over 30 years.

	March 31, 2012			December 31, 2011
	(unaudited)			(unaudited)
Favorable Lease-Shaoxing School	$	806,950		$	806,950
Favorable Lease-Lanhua School		988,677			988,677
License Agreement		2,428,020			2,428,020
		4,223,647			4,223,647

Less: Accumulated Amortization		(302,902	)		(213,337	)
	$	3,920,745		$	4,010,310

We expects to recognize amortization expense of approximately $197,735 and $80,695 in each year in connection with the intangibles related to Pingtan Lanhua School and Shaoxing High School, respectively; and $80,934 in each year in connection with the License Agreement. Amortization expense for the three months ended March 31, 2012 and 2011 was $89,565 and $20,174, respectively.

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CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Future amortization expenses for intangible assets were as follows:

Year Ended December 31,	Amortization Expense
2012	$	359,364
2013	$	359,364
2014	$	359,364
2015	$	359,364
2016	$	244,020

NOTE 6 – PROPERTY AND EQUIPMENT

Property and equipment, was follows:

	Estimated Life	March 31, 2012		December 31, 2011
		(unaudited)
Automobiles	5 Years	$	158,290	$	157,291
Buildings	10-20 Years		844,338		977,832
Furniture, fixtures, and equipment	3-10 Years		1,026,387		1,680,459
Other					3,251
			2,029,015		2,818,833
Less: Accumulated Depreciation			(416,640)		(1,184,591)
		$	1,612,375	$	1,634,242

Depreciation expense for the three months ended March 30, 2012 and 2011 was $101,690, and $35,159, respectively.

NOTE 7 – DEFERRED REVENUE

Deferred revenue was as follows:

	March 31, 2012		December 31, 2011
	(unaudited)
Tuition and school selection fees	$	3,171,108	$	2,149,679
Dormitory fees		238,120		80,366
Total		3,409,228		2,230,045
Less: Current portion		(1,713,256)		(1,227,996	)
Long-term portion of deferred revenue	$	1,695,972	$	1,002,049

NOTE 8 - FOREIGN OPERATIONS

Substantially all of the Company’s operations are carried out and all of its assets are located in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC. The Company’s business may be influenced by, among other things, changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency fluctuations and methods of taxation.

NOTE 9- COMMITMENTS

Prior to the establishment of Hefei Meihua School, members of Hefei Meihua School along with a company controlled by these members entered into a building lease agreement with Hengyuan Athletic School, which is owned by Xiaoyun Chen, a principal shareholder of Meihua School.On February 10, 2011, as amended on May 25, 2011 (the “School Facility Lease”). Subsequent to the establishment of Hefei Meihua School, the School Facility Lease was transferred to Hefei Meihua School which it assumed. The School Facility Lease provides for the use and occupancy of a 220,000 square foot educational facility that houses the school’s classrooms, student dormitory, cafeteria and administrative offices which is located in Hefei City, Anhui Province, China (the “School Facility”). The term of the School Facility Lease commenced on March 1, 2011 and terminates on February 28, 2014. Annual rent due over the term of the School Facility Lease is RMB1,560,000 (approximately $240,000).

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CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Prior to the establishment of Hefei Meihua School, and in anticipation of its establishment, members of Hefei Meihua School along with a company controlled by these members entered into an Equipment Lease Agreement with Anhui Luhai Business School, a related party of Hefei Meihua School’s principal shareholder, on February 10, 2011 as amended on June 23, 2011 (the “Equipment Lease”). The Equipment Lease provides for Hefei Meihua School’s use of various computer and electronic equipment, furnishings and other personal property used by Meihua School in its operations. The term of the Equipment Lease commenced on March 1, 2011 and expires on December 31, 2011. Monthly rent due over the term of the Equipment Lease is RMB 16,000 (approximately $2,500). The lease has been extended to February 28, 2017 and monthly rent is RMB 6,667 (approximately $1,050) from January 2012. As of March 31, 2012, we determined to sell the Meihua Exclusive Cooperation and associated agreements to a school we are currently managing, or a school with whom we are in discussion to manage.

Future rent expenses are as follows:

Year Ended December 31,	Rent Expense
2012		252,600
2013		252,600
2014		252,600
2015		252,600
2016		252,600

In November 2010, Shaoxing High School entered into a lease agreement with RGB Trading for a term of 10 years that began on January 1, 2011 and will expire on December 31, 2020. The annual rent is RMB 3,000,000 (approximately $453,700. Shaoxing High School paid the total amount of rent due over the term of the lease in advance in December 2010 and amortizes the expense over the term of the lease.

Pingtan Lanhua School has an agreement with Xingbiao Lin, Qiming Weng, Qiude Chen, the legal owners of Pingtan Lanhua School. The agreement permits Pingtan Lanhua School to use the land and improvements on this property rent for free until August 2016.

NOTE 10 – RELATED PARTY TRANSACTIONS

We have specified the following persons and entities as related parties with balances as of March 31, 2012 and December 31, 2011:

●		"China Direct” refers to China Direct Investments, Inc., a Florida corporation and a substantial stockholder of the Company.
●		RGB Trading, which in addition to being the sole stockholder of Shaoxing High School, is majority owned by Guotong Chen, one of our principal stockholders.
●		"RGB Education” refers to Zhejiang Red Green Blue Education Group, Ltd., a limited liability company established under the laws of the PRC which is majority owned by Guotong Chen.
●		Jinjin Ye, is a former stockholder of Hangzhou Technology. Jinjin Ye currently holds the position of Chief Financial Officer of Hanghzou Technology.
●		"Anhui Luhai” refers to Anhui Luhai Business School, which is majority owned by Xiaoyun Chen, a principal shareholder of Meihua School.
●		"Hengyuan Athletic” refers to Hengyuan Athletic School, which is majority owned by Xiaoyuan Chen.

Prepaid expenses-related parties

Prepaid expenses-related parties were as follows:

	March 31, 2012			December 31, 2011
	(Unaudited)
Prepaid rent	$	4,158,613		$	4,250,428
Prepaid education service fee		1,386,204			1,416,810
Total		5,544,817			5,667,238
Less: current portion		(633,693	)		(629,693	)
Long-term portion of prepaid expense	$	4,911,124		$	5,037,545

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CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In November 2010, Shaoxing High School entered into a lease agreement with RGB Trading for a term of 10 years that began on January 1, 2011 and will expire on December 31, 2020. The November 2010 lease, which covers approximately 102,720 square meters of land and 40,215 square meters of building space, all used by Shaoxing High School for educational facilities, provides for annual rent of RMB 3,000,000 (approximately $453,700) over the 10 year term. Shaoxing High School paid the total amount of rent due over the term of the lease in advance in December 2010 and amortizes the expense over the term of the lease.

In November 2010, Shaoxing High School renewed its education service agreement with RGB Education for 10 years, providing for an annual aggregate service fee of RMB 10,000,000 (approximately $1,512,000). This agreement will expire on December 31, 2020. Shaoxing High School paid the total amount of the education service fee in advance in December 2010 and amortizes the expense over the term of the agreement. Under the terms of the education service agreement, RGB Education is responsible for organizing and arranging the hiring of personnel and additional services related to hiring each semester in consultation with Shaoxing High School. In addition, RGB Education has agreed to provide marketing and business development, teacher training, facilities management, security and transportation services under this agreement.

Prior to the establishment of Meihua School, members of the Company along with a company controlled by these members entered into a Building Lease Agreement with Hengyuan Athletic, on February 10, 2011, as amended on May 25, 2011 (the “School Facility Lease”). Subsequent to the establishment of Meihua School, the school facility lease was transferred in title and responsibility to the Company. The School Facility Lease provides for the use and occupancy of a 220,000 square foot educational facility that houses the Company’s classrooms, student dormitory, cafeteria and administrative offices which is located in Hefei City, Anhui Province, China (the “School Facility”). The term of the School Facility Lease commenced on March 1, 2011 and terminates on February 28, 2014. Annual rent due over the term of the School Facility Lease is RMB1,560,000 (approximately $240,000).

Prior to the establishment of Meihua School, and in anticipation of its establishment, future members of the Company along with a company controlled by these members entered into an Equipment Lease Agreement with Anhui Luhai, a related party of the Company’s principal shareholder, on February 10, 2011 as amended on June 23, 2011 (the “Equipment Lease”). The Equipment Lease provides for the Company’s use of various computer and electronic equipment, furnishings and other personal property used by the Company in its operations. The term of the Equipment Lease commenced on March 1, 2011 and expires on December 31, 2011. Monthly rent due over the term of the Equipment Lease is RMB 16,000 (approximately $2,500). The lease has been extended to February 28, 2017 and monthly rent is RMB 6,667 (approximately $1,050). As of March 31, 2012, we determined to sell the Meihua Exclusive Cooperation and associated agreements to a school we are currently managing, or a school with whom we are in discussion to manage.

Loan payable-related parties

On February 22, 2011, we borrowed $150,000 from China Direct under the terms of an unsecured promissory note. The proceeds will be used for working capital purposes. The promissory note accrues interest at an annual rate of 6%. The principal and accrued interest is due on February 21, 2012. At March 31, 2012, including accrued interest $9,000 we had loan payable-related party of $159,000. This note was extended due on demand.

Due from related parties

At March 31, 2012, we have $506,955 due from RGB Trading, the sole stockholder of Shaoxing High School, is majority owned by Guotong Chen, one of our principal stockholders. This amount bears no interest, was due on demand and was unsecured.

Due to related parties

Due to related parties of $139,187 at March 31, 2012 was follows:

●

$1,245 due to Jinjin Ye and Ruifeng Chen for the outstanding balance of consideration for the 100% equity interests in Hangzhou Technology, which we acquired in November 2010.

●

Pingtan Lanhua School owes its shareholders, Qiude Chen and Guangyu Wei $137,828 for loans they made to us for working capital purposes as of December 31, 2011. These advances are unsecured, non-interest bearing and due upon demand.

●

$114 due to China Direct for expense China Direct paid on our behalf.

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CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Due to related parties of $153,317 at December 31, 2011 was as follows:

●

$16,245 due to Jinjin Ye and Ruifeng Chen for the outstanding balance of consideration for the 100% equity interests in Hangzhou Education, which we acquired in November 2010.

●

Pingtan Lanhua School owes its shareholders, Qiude Chen and Guangyu Wei $136,958 for loans they made to us for working capital purposes as of December 31, 2011. These advances are unsecured, non-interest bearing and due upon demand.

●

$114 due to China Direct for expense China Direct paid on our behalf.

NOTE 11 – SHAREHOLDERS’ EQUITY

Preferred Stock

In October 2009 our Board of Directors approved the creation of a series of 10,000 shares of class A preferred stock and 50,000,000 shares of class B preferred stock. We have not filed an amendment to our Articles of Incorporation to authorize these classes of stock. No rights or preferences related to either class of the preferred stock were established or authorized to be established at the time of authorization and we do not intend to file a charter amendment or otherwise issue any of these shares of preferred stock.

Common Stock

We have 75,000,000 shares of common stock, par value $.001, authorized. At March 31, 2012 and December 31, 2011 there were 29,019,650 and 28,078,650 shares of common stock issued and outstanding, respectively. We issued 2,000,000 shares of common stock, valued at $1.6 million to Crown Union in connection with the Pingtan Lanhua School transaction on May 31, 2011 and 2,000,000 shares of common stock, valued at $2.5 million to Crown Union in connection with the Hefei Meihua School transaction on August 2, 2011.

On February 15, 2012, we issued 141,000 shares valued at $0.25 per share to Invictus in exchange for furniture and equipments.

On February 24, 2012, we completed the sale of 800,000 shares of our common stock to Dolton Consulting Services, Inc. at a price of $0.25 per share. These shares of our common stock were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933. In addition, the recipient of our shares was a sophisticated investor and had access to information normally provided in a prospectus regarding us. In addition, the recipient of the shares had the necessary investment intent as required by Section 4(2) since it agreed to allow us to include a legend on the shares stating that such shares are restricted pursuant to Rule 144 of the 1933 Securities Act. These restrictions ensure that these shares would not be immediately redistributed into the market and therefore not be part of a "public offering." Based on an analysis of the above factors, we have met the requirements to qualify for exemption under Section 4(2) of the Securities Act of 1933 for the above transaction.

On February 15, 2011, Invictus Advisory Associates, Inc. (“Invictus”) transferred to China Direct on our behalf a total of 600,000 shares of our common stock previously issued to Invictus under the Share Exchange Agreement, valued at $1,800,000 as compensation for services under the Consulting and Management Agreement entered into among Invictus, China Direct and us as of December 31, 2010. In November 2011, we reimbursed Invictus for the 600,000 shares of our common stock it delivered to China Direct.

On December 16, 2011, we entered into a six months consulting agreement with Summit Marketing, Inc. (“Summit”). Under the terms of the consulting agreement, Summit will provide advisory services including developing investor presentation, executing online distribution campaign and selecting top financial publishers for the Company. We agreed to issue 200,000 shares of restricted stock which has value of $400,000 to Summit in exchange for the services it provides.

In December 2011, we issued 200,000 shares of our unregistered common stock to China Direct as a bonus for the additional work performed by China Direct on behalf of us during the fiscal 2011. The shares were value at $360,000.

- 14 -

CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In December 2011, we issued 52,000 shares at $1.80 per share to our Chief Executive Officer, Joel Mason, and our Board of Directors, Andrew Chien and Judith Denton for their 2011 performance.

In December 2011, we issued 80,000 shares at $1.80 per share to the shareholders of Pingtan Lanhua School and 100,000 shares to the shareholders of Hefei Meihua School for the school performance in 2011.

In December 2011, we issued a total of 480,000 shares which had total value of $864,000 related to Shaoxing High School and Pingtan Lanhua School finders fee.

During the fourth quarter of 2011, we issued 100,000 shares at $0.51 and 460,500 shares at $1.80 to consultants for their services in 2011.

Additional Paid- in Capital

In connection with Pingtan Lanhua School’s acquisition on May 31, 2011, Pingtan Lanhua Founders have the opportunity to receive an additional 1,600,000 shares of our common stock, valued at $1.28 million if Pingtan Lanhua School meets certain revenue and earnings targets during the two year period ending June 30, 2013. Those shares have not been issued and we recorded it in our book as additional paid in capital. The additional stock to be earned is accounted for as it is extremely like that these additional shares will be issued.

In connection with Hefei Meihua School’s acquisition on August 2, 2011, Hefei Meihua Founders have the opportunity to receive an additional 1,000,000 shares of our common stock, valued at $1.25 million if Hefei Meihua School meets certain revenue and earnings targets during the two year period ending August 1, 2013. Those shares have not been issued and we recorded it in our book as additional paid in capital.

Common Stock Warrant

In connection of the Assignment Agreement with Frontera on October 14, 2011, we granted common stock purchase warrants to purchase 2,400,000 shares of common stock with a par value $0.001 per share, exercisable at $1.00 per share. The warrant includes a cashless exercise provision and standard anti-dilution provisions.

Our assumptions under the Black Scholes Option Pricing Model for the warrants valued at March 31, 2012 were as follows:

Expected life (years)	3.00
Risk free rate interest	0.50	%
Volatility	234	%
Dividend yield	0	%

Stock warrant activity for the three months ended March 31, 2012 was as follows:

	Number of Warrants		Weighted Average Exercise Price
Balance at December 31, 2011		2,400,000	$	1.00
Granted		-		-
Exercised		-		-
Expired		-		-
Balance at March 31, 2012		2,400,000	$	1.00

NOTE 12 - SUBSEQUENT EVENT

On May 8, 2012, the Company filed a Certificate of Change (the “Certificate”) with the State of Nevada to effect a stock split of its outstanding and authorized shares of common stock at a ratio of 2.5 for 1 (the “Stock Split”). The Stock Split was approved by the board of directors of the Company. As a result of the Stock Split, the Company’s authorized shares were increased from 75,000,000 to 187,500,000 shares of common stock. Upon the effectiveness of the Stock Split, our issued and outstanding shares of common stock will be increased from 29,259,194 to 73,147,985 shares of common stock, all with a par value of $0.001. Fractional shares resulting from the Stock Split will be rounded up to the next whole number. The record date of the Stock Split is May 7, 2012 and the effective date of the Stock Split will be May 14, 2012. On May 14, 2012, the Company issued a press release announcing that the Stock Split is expected to become effective at the opening of business on May 14, 2012.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with the preceding unaudited consolidated financial statements and related footnotes, and the Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Overview

Organization and Business Operations

Prior to our acquisition of China Education on December 31, 2010, we did not generate any revenues and had minimal operations during the 2010 transition period and in prior years. On December 31, 2010 we acquired China Education through a Share Exchange Agreement (the “Share Exchange Agreement”) among us, Andrew Chien, China Education and its stockholders who owned 100% of the outstanding shares of China Education (the “China Education Shareholders”). China Education was formed on November 23, 2010 under the laws of the British Virgin Islands. On November 25, 2010, China Education acquired 100% of the equity interest in Hangzhou Education from its shareholders Jinjin Ye and Ruifeng Chen for RMB 1,000,000 (approximately $151,000).

Under the Share Exchange Agreement, we exchanged 14,800,000 shares of our common stock representing 92.1% of our then outstanding common stock for 100% of the issued and outstanding common stock of China Education (the “Share Exchange”). As a result of the consummation of the Share Exchange, China Education became a wholly-owned subsidiary our company. In connection with the acquisition of China Education, we entered into a Consulting Agreement dated December 31, 2010 with China Direct for services provided to us in connection with this acquisition. We issued China Direct 4,740,694 shares of our common stock as compensation for these services. In addition, on December 31, 2010, Invictus entered into a consulting and management agreement on our behalf with China Direct whereby China Direct agreed to perform certain consulting and business advisory services for us, including advising us on financing matters, assistance with acquisitions, and coordination of SEC filings. The term of the agreement is for one year, beginning January 1, 2011. As compensation for China Direct’s services under this agreement, Invictus transferred 200,000 shares of our common stock previously received in the Share Exchange to China Direct. In accordance with the terms of this agreement, Invictus also transferred an additional 400,000 shares of our common stock to China Direct as a bonus for China Direct’s work in connection with our acquisition of China Education. We reimbursed Invictus for this transfer by issuing to them an additional 600,000 shares of our common stock in November 2011. The agreement was terminated on December 31, 2011.

Hangzhou Education, our principal operating subsidiary in the People’s Republic of China (the “PRC”), was established as a private limited liability company under the laws of the PRC in November 2010. Due to PRC regulatory restrictions on foreign investments in education for students in grades one through 12, we conduct our business in the PRC through contractual arrangements between China Education, Hangzhou Education, and the Schools located in the PRC. These agreements provide us with substantial ability to control the Schools. We have obtained an option to purchase all of the equity interests of the Schools from their owners. The contractual agreements we entered into in with the schools (Control Agreements) include:

Shaoxing High School is a private primary education school for grades seven through twelve in Shaoxing County located in the Zhejiang Province in the PRC. Shaoxing High School offers unified national core curriculums such as Chinese, mathematics, physics, English, history, biology, and related primary courses. Established in 2002, Shaoxing High School operates on a 25 acre campus and offers 57 classes across six grades. After eight years of development, Shaoxing High School has more than 2,600 students and over 200 staff members.

Pingtan Lanhua School is located at Lianhua Mountain, Lancheng Village, Pingtan County, Fuzhou City, Fujian Province, China. Lanhua School’s campus is located on 41,572 square meters of land and is comprised of 12 buildings. After 12 years of development, Pingtan Lanhua School has approximately 3,201 students and approximately 226 teachers and support staff encompassing 6 grades and 60 classes under middle school and high school sections. Pingtan Lanhua School offers unified national education curriculum, such as language, mathematics, physics, English, history and biology.

Established in April, 2011 the Hefei Meihua School provides non-academic training programs that include advertising design, ecommerce, secretarial, logistics, marketing and business management courses. The Hefei Meihua School has approximately 700 students enrolled in its programs. In the first quarter of 2012, thess operations were discontinued and Meihua is no longer part of operations and is not included in financial statements

Due to Chinese regulatory restrictions on foreign investments in Chinese companies, we conduct our business in China through contractual arrangements which make up the School Control Agreements among China Education, Hangzhou Education, and the Schools. The Schools will be treated as a variable interest entity in which China Education does have direct or controlling equity interest but whose historical financial results will be consolidated in our 2011 financial statements in accordance with U.S. generally accepted accounting principles ("U.S. GAAP").

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RESULTS OF OPERATIONS

Net revenues for the quarter ended March 31, 2012 were $1.6 million, an increase of 52.8%, which were derived from tuition, school selection fees and dormitory fees, as compared to $1.0 million for the same period in 2011 which was based on only one school, Shaoxing High School. The increase in revenues for the quarter ended March 31, 2012 was due primarily to the operations of two schools namely, Shaoxing High School and Pingtan Lanhua School.

Cost of sales for the quarter ended March 31, 2012 were $1.2 million, resulting in a gross profit of $0.4 million, with a gross margin of 22.6%, as compared to cost of sales of $0.7 million, gross profit of $0.3 million, with a gross margin of 34.3% in the same period in 2011. Cost of revenues was mainly comprised of teachers’ compensation and benefits. The increase in cost of revenues was primarily due to compensation expense for additional education staff resulting from the increase in the number of schools and student enrollment.

Total operating expenses from continuing operating for the quarter ended March 31, 2012 were $0.7 million, a decrease of 65.7%, primarily due to general and administrative expenses associated with the operations of the schools. During the same period in 2011 we paid $1.8 million in share based consulting and management fee to CD International (formerly known as "China Direct").

We recorded a net loss of $0.2 million for the quarter ended March 31, 2012, as compared to a net loss of $1.7 million for the same period in 2011 which included $1.8 million in share based consulting fees paid to CD International in the first quarter of 2011 .

As of March 31, 2012, we determined to sell the Meihua Exclusive Cooperation and associated agreements to a school we are currently managing, or a school with whom we are in discussion to manage. Several of these schools have expressed an interest in an arrangement that would allow us to transfer the management with no negative impact.

Accordingly, the assets and liabilities have been reclassified as related to discontinued operations. Also, the results of operations and cash flow analysis for the quarter ended March 31, 2012 did not include those from Hefei Meihua School.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is the ability of a company to generate enough cash to meet its operational cash requirements. As of March 31, 2012, we had cash of $2.2 million and working capital of $6.0 million, exclusive of $1.7 million of deferred revenue, as compared to working capital of $4.7 million at December 31, 2011, exclusive of $1.2 million of deferred revenue.

Prepaid expense and other current assets represent advance payments for goods and services made by Shaoxing High School in the normal course of business. We have recorded prepaid expense and other current assets, including current portion of the prepaid expenses to related parties, in the amount of approximately $0.7 million as of March 31, 2012.

Due to related parties consist primarily of short term non-interest bearing loans we have received from RGB Trading for working capital purposes. These advances bear no interest, are due on demand, and are unsecured. Due to related parties also includes $1,245 and $16,245 at March 31, 2012 and December 31, 2011, respectively, for the amount that remains outstanding to the former stockholders of Hangzhou Technology in connection with its acquisition by China Education in November 2010.

Our balance sheet also includes restricted cash as a non-current asset in the amount of $0.4 million and $0.2 million as of March 31, 2012 and December 31, 2011, respectively, in the form of cash deposit in a bank account set up under the laws of the PRC. Our revenues are required to be deposited into this bank account and directly managed by the Ministry of Finance People’s Republic of China. We periodically apply funding and withdraw money from this bank account upon approval of the Ministry of Finance People’s Republic of China.

On February 22, 2011, we borrowed $150,000 from China Direct, a related party, under the terms of a promissory note. The proceeds from this loan will be used for working capital purposes. The promissory note accrues interest at an annual rate of 6%, with principal and accrued interest due on February 21, 2012. This note was extended on demand on February 21, 2012.

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We expect that our cash on hand, cash flow we expect to generate from operations in fiscal 2012 will be sufficient to sustain our operations for at least the next twelve months. However, the following events are reasonably likely to require us to raise additional capital.

	•		An increase in working capital requirements to finance the growth of the Schools
	•		Acquisitions of additional schools, with related increases to capital expenditures, marketing and administrative expenses to support the growth of our company;
	•		The costs for recruitment and retention of additional management and personnel to support our operations and expansion plans; and
	•		The additional costs, including legal accounting and consulting fees, of being a public company and the related compliance activities.

Our business plan contemplates the acquisition of additional schools through contractual agreements similar to those of the Schools Control Agreements. We expect that the consideration for gaining control of these schools will be comprised entirely of new issuances of our common stock.

Analysis of Cash Flow

Net cash provided by operating activities for the quarter ended March 31, 2012 was $0.5 million, primarily due to favorable changes of $0.8 million in deferred revenue, partially offset by a decrease of $0.3 million in accounts payable and accrued expenses.

Net cash used in investing activities was $0.1 million for the quarter ended March 31, 2012, primarily due to capital expenditures for school building improvements and purchase of operating equipment.

Net cash provided by financing activities for the quarter ended March 31, 2011 was $0.2 million, due primarily to proceeds from capital raised.

OFF BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements that we are required to disclose. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 2 to our financial statements. Although we believe that our estimates, assumptions and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.

Revenue recognition

Revenues for educational programs and services are recognized when all four of the following criteria are met:

	•		persuasive evidence of an arrangement exists;
	•		delivery of the products and/or services has occurred;
	•		the selling price is both fixed and determinable; and
	•		collectability is reasonably assured. Tuition and dormitory fees are generally paid in advance, and revenue is recognized ratably as the services are rendered.

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Variable Interest Entities

Pursuant to Section 810-10 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), we are required to include in our consolidated financial statements the financial statements of variable interest entities for which we are the primary beneficiary. ASC 810-10 requires a variable interest entity (“VIE”) to be consolidated by a reporting entity if the reporting entity is subject to a majority of the risk of loss for the variable interest entity or is entitled to receive a majority of the variable interest entity’s residual returns. We consolidate variable interest entities for which we are the primary beneficiary of the entity, thereby bearing the risks of, and receiving the rewards normally associated with, ownership of the entity.

The Schools are considered a VIE and we are the primary beneficiary. China Education and Hangzhou Education have entered into the School Control Agreements with the Schools and their owners, which we (i) exercise effective control over the Schools by having their shareholders pledge their respective equity interests in the the Schools to us and entrust all the rights to exercise their voting power over their ownership to us (ii) receive 65% of the Schools’ pre-tax profits (90% if no taxes are paid) in consideration for technical support, marketing and management consulting services provided by Hangzhou Education to the the Schools; and (iii) have an exclusive option to purchase all or part of the equity interests in the Schools and all or part of the equity interest in its subsidiaries, as well as all or part of the assets of the Schools, in each case when and to the extent permitted by applicable PRC law.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for a smaller reporting company.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported as specified in the SEC’s rules and forms and that such information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer (CEO), and our Chief Financial Officer (CFO), to allow timely decisions regarding required disclosure. Management, with the participation of our CEO and CFO, performed an evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2012.

Based on this evaluation we concluded that as of March 31, 2012 our disclosure controls and procedures were not effective such that the information relating to our company, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure as a result of continuing material weaknesses in our internal control over financial reporting previously identified in our Annual Report on Form 10-K for the year ended December 31, 2011.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with our evaluation that occurred during the quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS.

Risk factors describing the major risks to our business can be found under Item 1A, “Risk Factors”, in our Annual Report on Form 10K for the year ended December 31, 2011.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

On February 15, 2012, we issued 141,000 shares valued at $0.25 per share to Invictus for exchanging the furniture and equipments.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

Exhibit No.		Description of Exhibit
	10.39	Consulting Agreement dated as of December 16, 2011 between Brook Capital Investments LLC and China Education International, Inc. *
	31.1	Section 302 Certification of Chief Executive Officer.*
	31.2	Section 302 Certification of Principal Financial and Accounting Officer.*
	32.1	Section 906 Certification of Chief Executive Officer and Principal Financial and Accounting Officer.*
	101.INS	XBRL INSTANCE DOCUMENT**
	101.SCH	XBRL TAXONOMY EXTENSION SCHEMA**
	101.CAL	XBRL TAXONOMY EXTENSION CALCULATION LINKBASE**
	101.DEF	XBRL TAXONOMY EXTENSION DEFINITION LINKBASE**
	101.LAB	XBRL TAXONOMY EXTENSION LABEL LINKBASE**
	101.PRE	XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE**

	*		Filed herewith.
	**		In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 in this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed”.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CHINA EDUCATION INTERNATIONAL, INC.

Date: May 21, 2012	/s/ Joel Mason
	Joel Mason, Chief Executive Officer, Chairman of the Board of Directors and Chief Financial Officer

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CHINA EDUCATION INTERNATIONAL, INC. 10-Q