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: June 30, 2012
FOR THE QUARTERLY PERIOD ENDED: September 30, 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
48 Wall Street, Suite 703, New York, New York		10005
(Address of principal executive offices)		(Zip Code)

~~561~~212-~~266~~682-~~3059~~6607

(Registrant’s telephone number, including area code)

~~Not~~not ~~Applicable~~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 [ X] 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 [ X ] 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: 7375,~~179~~063,125 shares of common stock are issued and outstanding as of ~~August~~January 177, ~~2012~~2013.

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.	1716
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	2022
Item 4.	Controls and Procedures.	2022
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings.	2023
Item 1A.	Risk Factors.	2123
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	2123
Item 3.	Defaults Upon Senior Securities.	2123
Item 4.	Mine Safety Disclosures	2123
Item 5.	Other Information.	2124
Item 6.	Exhibits.	2125

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~~10-K for the year ended December 31, 2011 and in Part II – Item 1A. of this report:

• ~~Our~~We ~~operations~~have ~~which~~been ~~are~~forced ~~based~~to oncurtail ~~the~~various ~~School~~initiatives ~~Control~~as ~~Arrangements~~a ~~which~~result ~~have~~of athe ~~term~~inability ofto ~~only~~raise 20working ~~years~~capital as necessary. • ~~Our~~In ~~reliance~~February on2013, ~~contractual~~due ~~arrangements~~to ~~with~~lack ~~the~~of ~~Schools,~~working capital and ~~their~~lack ~~shareholder~~of ~~for~~effective ~~all~~control of ~~our~~the ~~China~~Schools ~~operations~~we manage, ~~which~~we ~~may~~determined ~~not~~that bewe ascould ~~effective~~no inlonger ~~providing~~support ~~operational~~or ~~control~~enforce asour ~~direct~~contractual ~~ownership.~~arrangements •with ~~Our~~the ~~historical~~Schools ~~growth~~and ~~rates~~its ~~may~~shareholders ~~not~~and bewe ~~indicative~~have discontinued the Schools’ operations. The impact of the discontinuing our ~~future~~School operations has had a negative impact on our financial position and results of operations. • ~~Potential~~We ~~conflicts~~were ofreliant ~~interest~~on contractual arrangements with the Schools’, ~~shareholders~~and ~~may~~their ~~have~~shareholder ~~with~~for usall of our China operations and we were unable to effectively provide operational control. • 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 11A.A. - Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2011, and Part II - Item 1A. of this report. 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~~US China 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 and, effective on July 1, 2012, Shaoxing High School is presented in the accompanying consolidated financial statements as a discontinued operation.

- "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~~effective on July 1, 2012, Pingtan Lanhua School is presented in ~~our~~the accompanying consolidated financial statements as a discontinued operation.

- "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~~effective on July 1, 2012, Pingtan Lanhua School is presented in ~~our~~the accompanying consolidated financial statements as a discontinued operation.

- "Peng Tuo” refers to Peng Tuo Education Technology Co. Ltd., a Hangzhou based Chinese education services company which iswas 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

CHINA EDUCATION INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

	September 30, 2012			December 31, 2011
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	6,813		$	1,700,821
Prepaid expense and other current assets		5,032			1,689
Assets for discontinued operation		-			1,265,108
Total current assets		11,845			2,967,618

Goodwill		479			479
Intangible asset, net		-			2,410,725
Property and equipment, net		27,904			-
Assets for discontinued operation - long-term		-			13,563,443
Total assets	$	40,228		$	18,942,265

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses	$	326,819		$	262,418
Loan payable-related parties		180,538			157,718
Due to related parties		134,432			16,359
Liabililites for discontinued operation		-			2,705,655
Total current liabilities		641,789			3,142,150

Liabililites for discontinued operation - long-term		-			1,002,049
Total liabilities		641,789			4,144,199

SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value; 187,500,000 shares authorized; 75,063,125 and 70,196,625 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively		75,063			70,197
Additional paid-in capital		35,527,924			34,398,341
Accumulated deficit		(36,207,682	)		(20,005,236	)
Accumulated other comprehensive income		3,134			181,322
Total China Education International Inc.'s shareholders' equity (deficit)		(601,561	)		14,644,624
Non-controlling interest		-			153,442
Total shareholders' equity (deficit)		(601,561	)		14,798,066
Total liabilities and shareholders' equity (deficit)	$	40,228		$	18,942,265

CONSOLIDATED BALANCE SHEETS

	June 30, 2012			December 31, 2011
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	452,899		$	1,700,821
Due from related parties		1,215,743			390,263
Deferred tax assets		212,710			-
Prepaid expense - related parties, short term		634,025			629,693
Prepaid expense and other current assets		378,709			246,841
Total current assets		2,894,086			2,967,618
Restricted cash		97,773			205,348
Prepaid expense - related parties, long term		4,755,187			5,037,545
Goodwill		5,087,202			5,087,202
Intangible asset, net		3,831,181			4,010,310
Property and equipment, net		1,527,964			1,634,242
Total assets	$	18,193,393		$	18,942,265
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses	$	1,113,556		$	1,133,469
Loan payable-related parties		162,206			157,718
Taxes payables		192,596			147,279
Due to related parties		274,626			153,317
Deferred revenue		596,987			1,550,367
Total current liabilities		2,339,971			3,142,150
Deferred revenue - long term		1,036,614			1,002,049
Total liabilities		3,376,585			4,144,199
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; 187,500,000 shares authorized; 73,179,125 and 70,196,625 shares issued and outstanding at June 30, 2012 and December 31, 2011		73,179			70,197
Additional paid-in capital		34,674,608			34,398,341
Accumulated deficit		(20,349,880	)		(20,005,236	)
Accumulated other comprehensive income		219,661			181,322
Total China Education International Inc.'s shareholders' equity		14,617,568			14,644,624
Noncontrolling interest		199,240			153,442
Total shareholders' equity		14,816,808			14,798,066
Total liabilities and shareholders' equity	$	18,193,393		$	18,942,265

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

- 1 -

CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

CHINA EDUCATION INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)

	For the Three Month Ended September 30,						For the Nine Month Ended September 30,
	2012			2011			2012			2011

Net revenues	$	-		$	-		$	-		$	-

Operating expenses:
Selling expenses		-			(373	)		-			46,207
Consulting expense-related party		-			-			-			1,800,000
General and administrative		966,061			62,985			1,355,539			152,448
Impairment loss		2,350,634			-			2,350,634			-

Total operating expenses		3,316,695			62,612			3,706,173			1,998,655

Loss from operations		(3,316,695	)		(62,612	)		(3,706,173	)		(1,998,655	)

Other expense:
Interest expense		(2,458	)		(2,226	)		(6,946	)		(5,390	)

Total other expense		(2,458	)		(2,226	)		(6,946	)		(5,390	)

Loss from continuing operations before income taxes		(3,319,153	)		(64,838	)		(3,713,119	)		(2,004,045	)

Income taxes		-			-			-			-

Loss from continuing operations		(3,319,153	)		(64,838	)		(3,713,119	)		(2,004,045	)

Discontinued operations:
Income (loss) from discontinued operations		(815,889	)		(441,524	)		(720,641	)		105,941
Loss from abandonment of discontinued operations		(11,768,686	)		-			(11,768,686	)		-
Total (loss) income from discontinued operations		(12,584,575	)		(441,524	)		(12,489,327	)		105,941

Net loss		(15,903,728	)		(506,362	)		(16,202,446	)		(1,898,104	)

Net loss (income) attributable to noncontrolling interest		45,798			6,280			-			(56,769	)

Net loss attributable to China Education International, Inc.	$	(15,857,930	)	$	(500,082	)	$	(16,202,446	)	$	(1,954,873	)

Comprehensive loss:
Net loss	$	(15,903,728	)	$	(506,362	)	$	(16,202,446	)	$	(1,898,104	)
Unrealized foreign currency translation adjustment		99			(19,445	)		(178,188	)		10,497
Comprehensive loss	$	(15,903,629	)	$	(525,807	)	$	(16,380,634	)	$	(1,887,607	)

NET LOSS PER COMMON SHARE:
Net loss per share - basic and diluted	$	(0.22	)	$	(0.01	)	$	(0.22	)	$	(0.03	)
Weighted average common shares outstanding - basic and diluted		73,211,082			61,906,680			72,381,803			55,916,475

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	For the Three Month Ended June 30,						For the Six Month Ended June 30,
	2012			2011			2012			2011
Net revenues	$	2,605,806		$	1,527,194		$	4,164,252		$	2,546,860
Cost of sales		2,089,808			885,014			3,295,907			1,554,932
Gross profit		515,998			642,180			868,345			991,928
Operating expenses:
Selling expenses		-			46,580			-			46,580
Loss on disposal of furniture and equipment		53,419			-			53,419			-
Consulting expense-related party		-			-			-			1,800,000
General and administrative		648,954			338,042			1,339,014			549,733
Total operating expenses		702,373			384,622			1,392,433			2,396,313
Total operating (loss) income		(186,375	)		257,558			(524,088	)		(1,404,385	)
Other income (expense):
Interest expense		(2,704	)		(1,804	)		(3,581	)		(2,735	)
Other (expense) income		(24,397	)		920			(23,025	)		861
Subsidy income		77,785			14,517			215,868			14,517
Total other income		50,684			13,633			189,262			12,643
Net (loss) income before income taxes		(135,691	)		271,191			(334,826	)		(1,391,742	)
Income taxes benefit		37,330			-			35,981			-
Net (loss) income		(98,361	)		271,191			(298,845	)		(1,391,742	)
Net income attributable to noncontrolling interest		(29,534	)		(46,085	)		(45,798	)		(63,049	)
Net (loss) income attributable to China Education International, Inc.	$	(127,895	)	$	225,106		$	(344,643	)	$	(1,454,791	)
Comprehensive income (loss):
Net (loss) income		(98,361	)		271,191			(298,845	)		(1,391,742	)
Foreign currency translation		14,086			55,923			38,339			91,207
Comprehensive (loss) income	$	(84,275	)	$	327,114		$	(260,506	)	$	(1,300,535	)
NET (LOSS) INCOME PER COMMON SHARE:
(Loss) Income per share - basic and diluted	$	-		$	0.01		$	-		$	(0.03	)
Weighted average common shares outstanding - basic and diluted		72,734,839			53,663,728			71,961,418			52,844,105

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

- 2 -

CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

CHINA EDUCATION INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	For the Nine Month Ended September 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(16,202,446	)	$	(1,898,104	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		7,346			-
Depreciation-discontinued operation		373,628			206,236
Amortization		60,091			-
Amortization-discontinued operation		188,650			126,434
Loss on disposal of furniture and equipment-discontinued operation		53,370			-
Loss on abandonment of discontinued operation		11,768,686			-
Loss on written off intangible asset		2,350,634
Common stock issued for services		855,200			1,800,000
Changes in assets and liabilities:
Prepaid expense and other current assets		(3,337	)		112,178
Assets of discontinued operation		(1,053,950	)		(956,149	)
Accounts payable and accrued expenses		64,168			(29,665	)
Liabilities of discontinued operation		98,263			2,316,035
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES		(1,439,697	)		1,676,965

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from acquisition-discontinued operation		-			261,467
Decrease in cash from discontinued operation		(441,738	)		-
Purchase of equipment and buildings improvement-discontinued operation		(232,540	)		(317,325	)
NET CASH USED IN INVESTING ACTIVITIES		(674,278	)		(55,858	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock		244,000			-
Proceeds from related party advances		118,311			5,564
Proceeds from related party advances-discontinued operation		23,777			(515,783	)
Proceeds from loan payable-related parties		22,820			150,000
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		408,908			(360,219	)

EFFECT OF EXCHANGE RATE ON CASH		11,059			73,621

NET (DECREASE) INCREASE IN CASH		(1,694,008	)		1,334,509

CASH - BEGINNING OF PERIOD		1,700,821			7,083

CASH - END OF PERIOD	$	6,813		$	1,341,592

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Shares issued for exchanging fixed assets	$	35,250		$	-
Common stock issued for Hefei Meihua School acquisition	$	315,000		$	3,750,000
Common stock issued for Lanhua School acquisition	$	-		$	2,880,000
Fair value of assets acquired-Hefei Meihua school	$	-		$	196,679
Liabilities assumed-Hefei Meihua school	$	-		$	53,547
Fair value of assets acquired-Lanhua school	$	-		$	1,897,869
Liabilities assumed-Lanhua school	$	-		$	304,363

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Six Month Ended June 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(298,845	)	$	(1,391,742	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		282,037			119,330
Amortization		179,129			56,826
Loss on disposal of furniture and equipment		53,419			-
Common stock issued for services		-			1,800,000
Amortization of prepaid expense - related parties		317,324			306,204
Changes in assets and liabilities:
Restricted cash		109,095			54,225
Deferred revenue		(940,744	)		(768,409	)
Due from related parties		(823,605	)		-
Prepaid expense and other current assets		(130,297	)		(169,379	)
Deferred tax assets		(212,920	)		-
Tax payable		44,348			-
Accounts payable and accrued expenses		(26,257	)		(233,113	)
NET CASH USED IN OPERATING ACTIVITIES		(1,447,316	)		(226,058	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from acquisition		-			185,372
Purchase of equipment and buildings improvement		(217,791	)		(41,729	)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES		(217,791	)		143,643
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from raising capital		244,000			-
Proceeds from related party advances		135,497			96,688
Proceeds from loan payable-related parties		4,488			150,000
Repayment of related party payable		(14,999	)		-
NET CASH PROVIDED BY FINANCING ACTIVITIES		368,986			246,688
EFFECT OF EXCHANGE RATE ON CASH		48,199			1,056
NET CHANGE IN CASH		(1,247,922	)		165,329
CASH - BEGINNING OF PERIOD		1,700,821			55,594
CASH - END OF PERIOD	$	452,899		$	220,923
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Shares issued for exchanging fixed assets	$	35,249		$	-
Common stock issued for Hefei Meihua School acquisition	$	315,000		$	-
Common stock issued for Lanhua School acquisition	$	-		$	1,600,000
Fair value of assets acquired-Lanhua school	$	-		$	1,897,869
Liabilities assumed-Lanhua school	$	-		$	304,363

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

- 3 -

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, Inc. to Mr. Chien in exchange for his assumption of all of the liabilities and obligations of China Bull Holding, Inc. 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 Invictus Advisory Associates, Inc. (“Invictus”), a Florida corporation (69.4%) and Shaoxing Red Green Blue Trading Co., Ltd. (“RGB Trading”), a PRC limited liability company ~~and Invictus Advisory Associates, Inc.~~ (~~“Invictus”~~30.6%), ~~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 1436,~~740~~851,~~694~~735 shares of our common stock in connection with our acquisition of China Education. Of the 1436,~~740~~851,~~694~~735 shares we issued, 1025,000,000 shares were issued to Invictus and were charged to expense as a transaction fee, and 411,~~740~~851,~~694~~735 shares were issued to China Direct Investments, Inc. (“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 $10.0542, 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~~conducted our business in the PRC through contractual arrangements among China Education, Hangzhou Education, the ~~Schools~~schools that we controlled, and ~~their~~the respective school’s owners. We refer to these contracts as the “School Control Agreements” which are summarized below. The Schools ~~are~~were treated as variable interest entities, or 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 (the “Schools”) that permitted the Company to manage and operate, ~~which~~and ~~enable~~enabled 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 412,~~800~~000,000 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~~The ~~Lanhua~~Company ~~School. On~~and ~~May~~RGB 31Trading, ~~2011,~~the weshareholders ~~entered~~and ~~into~~management anof ~~Exclusive~~Shaoxing ~~Cooperation~~High ~~Agreement~~School, ~~Share~~have ~~Pledge~~had ~~Agreement,~~on-going ~~Power~~disagreements with respect to the operations of ~~Attorney~~Shaoxing High School. The disagreements commenced during the quarter and ~~Option~~nine ~~Agreement~~months ended September 30, 2012. In November 2012 the Company’s management reached a decision that their disagreements with ~~Pingtan~~shareholders ~~Lanhua~~and management of Shaoxing High School ~~and~~were ~~its~~such ~~shareholders~~that ~~which~~any ~~permit~~future usoperating cooperation between them was not possible. Accordingly the Company reached the decision to ~~operate~~deconsolidate the ~~Pingtan~~operations ~~Lanhua~~of Shaoxing High School from the Company effective July 1, ~~receive~~2012. ~~economic~~The ~~benefits~~decision to deconsolidate is being accounted for as a forfeiture of ~~its~~the ~~operations~~Company’s investment in Shaoxing High School and will be presented as if it were a discontinued operation (See Note 3). The Company maintains that the ~~right~~aforementioned toagreements ~~purchase~~with ~~all~~the shareholders of ~~its~~Shaoxing ~~equity~~High ~~interests~~School ~~from~~give ~~its~~them ~~shareholders~~operational and financial control of the Shaoxing High School. However ~~These~~due ~~agreements~~to ~~are~~the ~~collectively~~financial, ~~referred~~time and effort, resources required to asdefend these agreements, the ~~Pingtan~~Company ~~Lanhua~~has ~~School~~determined ~~Agreements~~that pursuit of operational and ~~are~~financial ~~discussed~~control inof ~~more~~Shaoxing ~~detail~~High inSchool ~~Item~~is 1not possible. ~~Business~~The –Company’s ~~“Agreements~~management ~~that~~decision ~~provide~~to ~~effective~~deconsolidate Shaoxing High School is not a relinquishment of their claim of operational and financial control ~~over~~of the ~~Schools”~~School ~~and~~based ~~“Agreements~~on the School Control Agreement. Concurrent with the Company’s deconsolidation of Shaoxing High School, management has determined that ~~transfer~~any ~~economic~~obligation ~~benefits~~that tomay usarise from Shaoxing High School, that existed prior, or subsequent, to their decision to deconsolidate, is not an obligation of the ~~Schools~~Company.” With respect to the 12,000,000 shares of the Company’s common stock issued to RGB Trading upon having entered into the aforementioned agreements, the Company is currently analyzing procedures to recover such shares.

~~As consideration for entering into the~~ Pingtan Lanhua School. On ~~Agreements~~May 31, ~~we issued Crown Union~~2011, awe ~~British~~entered ~~Virgin~~into ~~Island~~an ~~company~~Exclusive ~~(“a~~Cooperation ~~BVI~~Agreement, ~~company”)~~Share aPledge ~~total of 3~~Agreement,~~600,000~~ ~~shares~~Power of ~~our~~Attorney ~~unregistered~~and ~~common~~Option ~~stock~~Agreement ~~(the “Pingtan Lanhua Acquisition Shares”) valued at $2,880,000. Crown Union entered into an option agreement~~ with ~~the~~ Pingtan Lanhua School and its shareholders which ~~permits~~permit ~~them~~us to ~~acquire~~operate ~~shares of~~ the ~~Company’s common stock as follows: (i) 2,000,000 shares upon entering into the~~ Pingtan Lanhua School ~~Agreements~~, ~~which~~receive ~~condition~~economic ~~was~~benefits ~~met~~of onits ~~May~~operations 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~~right ~~from~~to ~~July~~purchase 1,all ~~2011 through June 30, 2013. The number~~ of ~~Pingtan~~its ~~Lanhua~~equity ~~Acquisition~~interests ~~Shares~~from ~~the~~its ~~Pingtan Lanhua~~ shareholders. ~~may~~These ~~purchase~~agreements ~~from~~are ~~Crown~~collectively ~~Union~~referred ~~shall be reduced and returned~~ to usas ~~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~~Agreements. 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~~As ~~Meihua~~consideration ~~School. On~~for ~~August~~entering 2,into ~~2011~~the Pingtan Lanhua School Agreements, we ~~entered~~issued ~~into~~Crown anUnion, ~~Exclusive~~a ~~Cooperation~~British ~~Agreement,~~Virgin ~~Share~~Island ~~Pledge~~company ~~Agreement~~(“ a total of 9,000,000 ~~Power~~shares of ~~Attorney~~our ~~and~~unregistered ~~Option~~common ~~Agreement~~stock ~~with~~(the ~~Hefei~~“Pingtan ~~Meihua~~Lanhua ~~School~~Acquisition ~~and~~Shares”) ~~its~~valued at $2,880,000. Crown Union entered into an option agreement with the Pingtan Lanhua School shareholders which ~~permit~~permits usthem to ~~operate~~acquire shares of the ~~Heifei~~Company’s ~~Meihua~~common stock as follows: (i) 5,000,000 shares upon entering into the Pingtan Lanhua School Agreements, ~~receive~~which ~~economic~~condition ~~benefits~~was ofmet ~~its~~on ~~operations~~May ~~and~~31, ~~the~~2011; ~~right~~(ii) to2,500,000 ~~purchase~~shares ~~all~~upon ofPingtan ~~its~~Lanhua ~~equity~~achieving ~~interests~~not ~~from~~less ~~its~~than ~~shareholders~~$2,000,000 in gross revenues, as determined under U.S. ~~These~~GAAP ~~agreements~~for ~~are~~any ~~collectively~~consecutive ~~referred~~12 tomonths asduring the ~~Hefei~~period ~~Meihua~~from ~~School~~July ~~Agreements~~1, 2011 through June 30, 2013; and ~~are~~(iii) ~~discussed~~1,500,000 inshares ~~more~~upon ~~detail~~Pingtan inLanhua ~~Item~~achieving not less than $1,000,000 in pre-tax profits, as determined under U.S. ~~Business~~GAAP –for ~~“Agreements~~any ~~that~~consecutive ~~provide~~12 ~~effective~~months ~~control~~during ~~over~~the period from July 1, 2011 through June 30, 2013. The number of Pingtan Lanhua Acquisition Shares the ~~Schools”~~Pingtan ~~and~~Lanhua ~~“Agreements~~shareholders ~~that~~may ~~transfer~~purchase ~~economic~~from ~~benefits~~Crown Union shall be reduced and returned to us ~~from~~for cancellation by 1 share for each $1.00 that the ~~Schools~~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 U.”S. GAAP is less than $1,000,000. .

AsIn ~~consideration~~February ~~for~~2013, ~~entering into~~ the ~~Hefei~~Company’s ~~Meihua~~management ~~School~~reached ~~Agreements,~~a wedecision ~~issued~~to ~~Crown~~deconsolidate ~~Union~~the aoperations ~~total~~ of ~~3,000,000~~Pingtan ~~shares~~Lanhua ofSchool ~~our~~from ~~unregistered~~the ~~common~~Company ~~stock~~effective ~~(the~~July ~~“Hefei~~1, ~~Meihua~~2012. The ~~Acquisition~~Company’s ~~Shares”)~~decision ~~valued~~to atdeconsolidate ~~$9,000,000. Crown~~the ~~Union~~Pingtan ~~entered~~Langua ~~into~~School awas ~~five~~due ~~year~~to ~~option~~its ~~agreement~~inability ~~with~~to ~~the~~provide ~~Hefei~~effective ~~Meihua~~operational ~~School~~control ~~shareholders~~over ~~which~~the ~~permits~~school ~~them~~and due to ~~acquire~~lack ~~shares~~ of ~~the~~working ~~Company’s~~capital ~~common~~to ~~stock~~enforce asthe ~~follows:~~School ~~(i)~~Control 2Agreement,~~000~~ and accordingly,~~000~~ ~~shares~~any ~~upon~~future ~~entering~~operating ~~into~~cooperation ~~the~~between ~~Hefei~~them ~~Meihua~~was ~~School~~not ~~Agreements,~~feasible. ~~which~~The ~~condition~~decision ~~was~~to ~~met~~deconsolidate onis ~~May~~being ~~31,~~accounted ~~2011;~~for ~~(ii)~~as ~~600,000~~a ~~shares~~forfeiture ~~upon~~of ~~Hefei~~the ~~Meihua~~Company’s ~~achieving~~investment ~~not~~in ~~less~~Pingtan ~~than~~Lanhua ~~$2,000,000~~School inand ~~Gross~~will ~~Revenues,~~be presented as ~~determined~~if ~~under~~it USwere ~~GAAP~~a ~~for~~discontinued ~~any~~operation ~~consecutive~~(See 12Note ~~months~~3). ~~during~~The Company maintains that the ~~period~~aforementioned ~~from~~agreements ~~July~~with 1,the ~~2011~~shareholders ~~through~~of ~~June~~Pingtan ~~30,~~Lanhua ~~2013;~~School give them operational and ~~(iii)~~financial ~~400,000~~control ~~shares~~of ~~upon~~the ~~Hefei~~Pingtan ~~Meihua~~Lanhua ~~achieving~~School. ~~not~~However ~~less~~due ~~than~~to $1the financial,~~000,000~~ intime ~~pre-tax~~and ~~profits~~effort, asresources ~~determined~~required ~~under~~to USdefend ~~GAAP~~these ~~for~~agreements, ~~any~~the ~~consecutive~~Company 12has ~~months~~determined ~~during~~that ~~the~~pursuit ~~period~~of ~~from~~operational ~~July~~and 1,financial ~~2011~~control ~~through~~of ~~June~~Pingtan ~~30,~~Lanhua ~~2013~~School is not possible. The ~~number~~Company’s ofmanagement ~~Hefei~~decision ~~Meihua~~to ~~Acquisition~~deconsolidate ~~Shares~~Pingtan ~~the~~Lanhua ~~Hefei~~School ~~Meihua~~is ~~shareholders~~not ~~may~~a ~~purchase~~relinquishment ~~from~~of ~~Crown~~their ~~Union~~claim ~~shall~~of beoperational ~~reduced~~ and ~~returned~~financial tocontrol usof ~~for~~the ~~cancellation~~School bybased 1on ~~share~~the ~~for~~School ~~each~~Control $1Agreement.00 ~~that~~Concurrent with the ~~net~~Company’s ~~income~~deconsolidation of ~~the~~Pingtan ~~Heifei~~Lanhua School, ~~during~~management has determined that any 12obligation ~~month~~that ~~consecutive~~may ~~period~~arise from ~~July~~Pingtan 1Lanhua School, ~~2011~~that ~~through~~existed ~~June~~prior, 30or subsequent, ~~2013~~to astheir ~~computed~~decision into ~~accordance~~deconsolidate, ~~with~~is USnot ~~GAAP~~an isobligation ~~less~~of ~~than~~the ~~$1,000,000~~Company. ~~Due~~With respect to ~~PRC~~the ~~restrictions~~5,000,000 shares of ~~foreign~~the ~~investment in China~~Company’s ~~education~~common ~~industry,~~stock weissued ~~operate~~to ~~Heifei~~Crown ~~Meihua~~Union ~~School~~upon ~~through~~having ~~contractual~~entered ~~arrangements~~into ~~among~~the ~~China~~aforementioned ~~Education~~agreements, ~~Hangzhou~~the ~~Education~~Company ~~and~~is ~~the~~currently ~~owners~~analyzing ofprocedures ~~the~~to ~~Schools~~recover such shares.

~~Peng~~Hefei ~~Tuo~~Meihua School. On ~~December~~August 312, 2011, we ~~and Hangzhou Education~~ entered into aan ~~series~~Exclusive ofCooperation ~~agreements~~Agreement, ~~with~~Share ~~Peng~~Pledge ~~Tuo~~Agreement, ~~Information~~Power ~~Technology~~of ~~Co.~~Attorney ~~Ltd.~~and ~~(“PTIT”),~~Option aAgreement ~~private~~with ~~education~~Hefei ~~company~~Meihua ~~organized~~School ~~in China,~~ and its shareholders, which permit us to operate inthe ~~China~~Heifei Meihua School, ~~and~~receive ~~its~~economic ~~shareholders~~benefits toof ~~operate~~its ~~PTIT~~operations 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. The PTIT financial statements will now be received no later than September 30, 2012

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. We have subsequently decided to retain the Meihua Exclusive Cooperation Agreement and associated agreements and on May 25, 2012 engaged PTIT to assist in the management of the operation the Meihua School. Accordingly the financial results for Meihua for the 6 months ended June 30, 2012 are included herein.

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CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~Accordingly~~As consideration for entering into the Hefei Meihua School Agreements, we ~~treat~~issued Crown Union a total of 7,500,000 shares of our unregistered common stock (the ~~Schools~~“Hefei Meihua Acquisition Shares”) valued at $3,750,000. 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 ~~variable~~follows: ~~interest~~(i) ~~entities~~5,000,000 ~~and~~shares ~~consolidate~~upon ~~their~~entering ~~assets~~into the Hefei Meihua School Agreements, ~~liabilities~~which ~~and~~condition ~~financial~~was ~~results~~met on May 31, 2011; (ii) 1,500,000 shares upon Hefei Meihua achieving not less than $2,000,000 in ~~our~~gross ~~financial~~revenues, ~~statements~~as ~~effective~~determined under U.S. GAAP for any consecutive 12 months during the period from July 1, 2011 through June 30, 2013; and (iii) 1,000,000 shares upon Hefei Meihua achieving not less than $1,000,000 in pre-tax profits, as ofdetermined under U.S. GAAP for any consecutive 12 months during the ~~date~~period wefrom ~~entered~~July ~~into~~1, 2011 through June 30, 2013. The number of Hefei Meihua Acquisition Shares the ~~School~~Hefei ~~Control~~Meihua ~~Agreements~~shareholders ~~with~~may purchase from Crown Union shall be reduced and returned to us for cancellation by 1 share for each $1.00 that the ~~respective~~net income of the Heifei School ~~and~~during ~~its~~any ~~owners~~12 month consecutive period from July 1, 2011 through June 30, 2013 as computed in accordance with U.S. GAAP is less than $1,000,000. 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 who we are in discussion to manage.

~~Each~~In February 2013, the Company’s management reached a decision to deconsolidate the operations of Hefei Meihua School ~~holds~~from the ~~requisite~~Company ~~licenses~~effective July 1, 2012. The Company’s decision to deconsolidate the Hefei Meihua School was due to its inability to provide effective operational control over the school and ~~permits~~due ~~necessary~~to lack of working capital to ~~conduct~~enforce ~~their~~the ~~respective~~School ~~education~~Control ~~business~~Agreement, and accordingly, any future operating cooperation between them was not feasible. The decision to deconsolidate is being accounted for as a forfeiture of the Company’s investment in ~~their~~Hefei ~~respective~~Meihua ~~areas~~School and will be presented as if it were a discontinued operation (~~province~~See Note 3). The Company maintains that the aforementioned agreements with the shareholders of Hefei Meihua School give them operational and financial control of the Hefei Meihua School. However due to the financial, ~~city~~time and effort, ~~county~~resources required to defend these agreements, ~~etc~~the Company has determined that pursuit of operational and financial control of Hefei Meihua School is not possible.) The Company’s management decision to deconsolidate Hefei Meihua School is not a relinquishment of their claim of operational and financial control of the ~~PRC~~School based on the School Control Agreement. Concurrent with the Company’s deconsolidation of Hefei Meihua School, management has determined that any obligation that may arise from Hefei Meihua School, that existed prior, or subsequent, to their decision to deconsolidate, is not an obligation of the Company. With respect to the 5,630,000 shares of the Company’s common stock issued to Crown Union upon having entered into the aforementioned agreements, the Company is currently analyzing procedures to recover such shares.

Other Activities

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 U.S. GAAP. 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. The parties agreed that the PTIT financial statements will be provided to China Education no later than September 30, 2012. However, as of the date the date of this report, the PTIT financial statements have not been received by the Company and it is unlikely that the Company will receive them and we will no longer pursue this acquisition.

On August 19, 2012, the Company and Hangzhou Education entered into a series of School Control Agreements with Shanghai Fuye Education Information Consulting Co., Ltd., a Chinese company “Shanghai Fuye”), and its shareholders which permit us to operate Shanghai Fuyi and the right to purchase all of its equity interests from its shareholders. In connection with these agreements, the Company agreed to issue a total of 11,000,000 shares (the “Fuyi Acquisition Shares”) of its unregistered common stock. The number of Fuye Acquisition Shares was determined based on the projected income of Shanghai Fuyi for the 12 month period commencing on April 1, 2012 which amount is $3,000,000 (the “Income Target”). The number of Fuye Acquisition Shares shall be reduced by 2 1/2 shares for each $1.00 that the Income Target exceeds the actual income for Shanghai Fuyi during any 12 month consecutive period from April 1, 2012 through March 31, 2014 as computed in accordance with US GAAP, and the number of Fuye Acquisition Shares so reduced shall be returned to the Company for cancellation. Established in 2009, Shanghai Fuyi provides education and training programs that include art design, adult education, accounting, human resources, and an 18 month Executive MBA program with emphasis on international business. Some of these programs are in conjunction with Fudan University, where Shanghai Fuyi has offices. Shanghai Fuyi has projected more than 2,000 students for enrollment in 2012. In order to close on this acquisition, the company must receive the Shanghai Fuyi financial statements. As of the date of this report, the financial statements have not been received and due to lack of working capital, it is unlikely that the Company will be able to close on this transaction and we will no longer pursue this acquisition..

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CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Going Concern

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~~?癋ASB”) Accounting Standards Codification (“ASC”) Topic 810-10. All intercompany account balances and transactions have been eliminated in consolidation. Effective on July 1, 2012, the Schools are presented in the accompanying consolidated financial statements as a discontinued operation.

As reflected in the accompanying consolidated financial statements, the Company had a net loss and net cash used in operations of $16,202,446 and $1,439,697, respectively, for the nine months ended September 30, 2012 and an accumulated deficit of $601,561 at September 30, 2012 and has no revenues. These matters raise substantial doubt about the company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s ability to implement its business plan, raise additional capital, and generate revenues. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Reclassifications

Certain reclassifications have been made to the Company’s consolidated financial statements for prior periods to conform to the current presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.

Included in such reclassification is the presentation of the Schools as discontinued operations as of December 31, 2011 and September 30, 2012 and for the three and nine months ended September 30, 2012 and 2011.

Use of Estimates

The preparation of consolidated 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~~Fair ~~and~~value ~~Cash~~of ~~Equivalents~~financial instruments

~~The~~We ~~Company~~adopted ~~considers~~the ~~all~~guidance ~~highly~~of ~~liquid~~ASC ~~investments~~Topic ~~with~~820 ~~maturities~~for offair ~~three~~value ~~months~~measurements orwhich ~~less~~clarifies at the ~~time~~definition of ~~purchase~~fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to beclassify ~~cash~~the ~~equivalents.~~inputs used in measuring fair value as follows:

~~Concentration~~Level of1-Inputs ~~Credit~~are ~~Risks~~unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

~~Financial~~Level ~~instruments~~2-Inputs ~~which~~are ~~potentially~~unadjusted ~~subject~~quoted usprices tofor ~~concentrations~~similar ofassets ~~credit risk consist principally of cash~~ and ~~restricted~~liabilities ~~cash. We deposit our cash with high credit quality financial institutions~~ in ~~the~~active ~~United States and the PRC. At June 30~~markets, ~~2012,~~quoted weprices ~~had~~for ~~deposits~~identical ofor ~~$442,514~~similar inassets ~~banks~~and inliabilities ~~the PRC, as well as restricted cash, described below,~~ in ~~the~~markets ~~amount~~that ofare ~~$97,773. In~~not ~~the PRC~~active, ~~there~~inputs isother nothan ~~equivalent~~quoted ofprices ~~federal~~that ~~deposit insurance as in the United States; as such these amounts held in banks in the PRC~~ are ~~not~~observable, ~~insured. We~~and ~~have~~inputs ~~not~~derived ~~experienced~~from ~~any~~or ~~losses~~corroborated inby ~~such~~observable ~~bank~~market ~~accounts through June 30, 2012~~data.

~~Restricted~~Level ~~Cash~~3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

~~Restricted~~The ~~cash~~carrying ~~pertains~~amounts toreported ~~cash on deposit~~ in athe ~~bank~~balance ~~account~~sheets ~~which~~for iscash ~~set~~and upcash ~~under~~equivalents, ~~the~~accounts ~~laws of the PRC~~receivable, ~~under~~due ~~which~~from/ ~~the Company’s revenues are required~~ (to) berelated ~~deposited~~parties, ~~into~~prepaid ~~this~~expenses ~~bank account~~ and ~~directly~~other ~~supervised~~current byassets, ~~the~~prepaid ~~Ministry~~expenses ofand ~~Finance~~other ofcurrent ~~People’s~~assets, ~~Republic~~accounts ofpayable ~~China~~and ~~(the~~accrued ~~“Ministry~~expenses, ofloans ~~Finance”). We~~payable ~~periodically~~– ~~apply~~related ~~funding~~parties, and ~~withdraw~~taxes ~~money~~payable ~~from~~approximate ~~this~~their ~~bank~~fair ~~account~~market ~~upon~~value ~~approval~~based ofon the ~~Ministry~~short-term ofmaturity ~~Finance. This bank account requires a minimum balance~~ of ~~RMB~~these ~~500,000~~instruments. ~~(approximately~~The ~~$75,000)~~Company ordid not ~~less~~identify ~~than~~any ~~either~~assets ~~15% of the Company’s revenues~~ or ~~the~~liabilities ~~aggregate~~that ~~amount~~are ofrequired ~~three~~to ~~months’~~be ~~salaries~~presented ~~for~~on ~~all of~~ the ~~Company’s~~consolidated ~~employees. At~~balance ~~June~~sheets ~~30,~~at ~~2012~~fair ~~and~~value ~~December~~in ~~31,~~accordance ~~2011,~~with ~~restricted~~the ~~cash~~accounting ~~amounted to $97,773 and $205,348, respectively~~guidance.

- 67 -

CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

ASC Topic 825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

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. We deposit our cash with high credit quality financial institutions in the United States and the PRC. At September 30, 2012, we had deposits of $6,356 in banks in the PRC. 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 September 30, 2012.

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~~During the nine months ended September 30, 2012, the Company ~~did~~recorded ~~not~~a ~~consider~~$2,350,634 itimpairment ~~necessary~~loss related to its intangible assets. The Company did not record any impairment charges during the ~~six~~nine months ended ~~June~~September 30, ~~2012 and~~ 2011.

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~~of the Company’s discontinued operations were 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~~8 -

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.

- 7 -

CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Income Taxes

We are governed by the Income Tax Law of the PRC and the U.S. Internal Revenue Code of 1986, as amended. 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.

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.

InNon-controlling 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.Interest

~~Noncontrolling~~Non-controlling ~~Interest~~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 non-controlling 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.

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~~Potentially ~~were~~dilutive nocommon shares consist of common stock issuable for stock subscriptions paid, warrants, and shares issuable pursuant to performance targets. These common stock equivalents may be dilutive in the future. All potentially dilutive ~~securities~~common ~~outstanding~~shares ~~for~~were excluded from the ~~three~~computation ~~months~~of ~~ended~~diluted ~~June~~shares ~~30,~~outstanding ~~2012~~as they would have an anti-dilutive impact on the Company’s net losses and ~~2011.~~consisted of the following:

	September 30,		December 31,
	2012		2011
Warrants		6,000,000		6,000,000
Common shares issuable pursuant to acquisitions performance targets		-		6,500,000
Total		6,000,000		12,500,000

Foreign Currency Translation

~~Our~~The reporting currency of the Company is the U.S. dollar. The functional currency of the parent company is the ~~Chinese~~U.S. ~~Renminbi~~dollar (“and the functional currency of the Company’s operating subsidiaries is the RMB”). In For ~~accordance~~the ~~with~~subsidiaries ~~Section~~and ~~830-20-35~~affiliates, ~~Financial~~whose ~~Accounting~~functional ~~Standards~~currencies ~~Board~~are ~~(“FASB”)~~the ~~Accounting~~RMB, ~~Standards~~in ~~Codification~~accordance (“with ASC”) Section 830-20-35, 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)~~9 -

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.

- 8 -

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.Loss

Comprehensive loss consists of net loss and foreign currency translation adjustments and is presented in the Consolidated Statements of Operations and Comprehensive Loss.

Forward Stock Split

On May 8, 2012, the Company filed a Certificate of Change with the State of Nevada to effect a forward stock split of its outstanding and authorized shares of common stock at a ratio of 2.5 for 1. All share and per share information has been retroactively adjusted to reflect the forward split.

Recently Issued Accounting Pronouncements

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 ofpreviously ~~March~~discussed in Note 1, on December 31, ~~2012~~2010, we ~~determined~~entered into an Exclusive Cooperation Agreement, Share Pledge Agreement, Power of Attorney and Option Agreement with Shaoxing High School and its shareholders which permitted us to ~~sell~~operate the ~~Hefei~~Shaoxing ~~Meihua~~High School, ~~Exclusive~~receive ~~Cooperation~~economic benefits of its operations and ~~associated~~the right to purchase all of its equity interests from its shareholders. We issued 12,000,000 shares of our unregistered common stock valued at $5,040,000 to RGB Trading, the shareholder of Shaoxing High School as consideration for entering into these agreements. The Company and RGB Trading, the shareholders and management of Shaoxing High School, have had on-going disagreements with respect to athe ~~school~~operations weof ~~are~~Shaoxing ~~currently~~High ~~managing~~School. The disagreements commenced during the quarter and nine months ended September 30, or2012. In November 2012, the Company’s management reached a ~~school~~decision that their disagreements with ~~whom~~shareholders weand ~~are~~management inof ~~discussion~~Shaoxing toHigh ~~manage~~School were such that any future operating cooperation between them was not possible. We ~~have~~Accordingly ~~subsequently~~the ~~decided~~Company reached the decision to ~~retain~~deconsolidate the ~~Hefei~~operations ~~Meihua~~of Shaoxing High School ~~Exclusive~~from ~~Cooperation~~the ~~Agreement~~Company effective July 1, 2012. The decision to deconsolidate is being accounted for as a forfeiture of the Company’s investment in Shaoxing High School and ~~associated~~will be presented as if it were a discontinued operation. The Company maintains that the aforementioned agreements with the shareholders of Shaoxing High School give them operational and onfinancial ~~May~~control 25of the Shaoxing High School. The Company’s management believes that these agreements are legal and enforceable in the PRC, ~~2012~~however ~~engaged~~due ~~PTIT~~to the financial reasons, time and effort, resources required to ~~assist~~defend inthese agreements, the Company has determined that pursuit of operational and financial control of Shaoxing High School is not possible. The Company’s management decision to deconsolidate Shaoxing High School is not a relinquishment of ~~the~~their ~~operation~~claim of operational and financial control of the ~~Hefei~~Shaoxing ~~Meihua~~High School based on the aforementioned agreement. ~~Accordingly~~Concurrent with the ~~financial~~Company’ ~~results~~s ~~for~~deconsolidation ~~Hefei~~of ~~Meihua~~Shaoxing High School, asmanagement has determined that any obligation that may arise from Shaoxing High School, that existed prior, or subsequent, to their decision to deconsolidate, is not an obligation of ~~June~~the 30Company. With respect to the 12,000,000 ~~2012~~shares ~~and~~of ~~for~~the Company’s common stock issued to RGB Trading upon having entered into the ~~three~~aforementioned ~~and~~agreements, ~~six~~the ~~months~~Company ~~then~~is ~~ended~~currently ~~are~~analyzing ~~included~~procedures ~~herein~~to recover such shares.

~~NOTE~~As previously discussed in Note 1, on May 30, 2011, we entered into School Control Agreements with Pingtan Lanhua School and its shareholders which permitted us to operate the Pingtan Lanhua School, receive economic benefits of its operation and the right to purchase all of its equity interests from their shareholders. We agreed to issue 9,000,000 shares of our unregistered common stock valued at $2,880,000 to the shareholder of Pingtan Lanhua School as consideration for entering into these agreements. In connection with this transaction, we issued 5,000,000 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 4,000,000 –shares ~~ACQUISITIONS~~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.

As previously discussed in Note 1, onin ~~December~~February 312013, ~~2010,~~the weCompany’s ~~entered~~management ~~into~~reached ana ~~Exclusive~~decision ~~Cooperation~~to ~~Agreement,~~deconsolidate ~~Share~~the ~~Pledge~~operations ~~Agreement~~of Pingtan Lanhua School from the Company effective July 1, ~~Power~~2012. ofThe ~~Attorney~~Company’s ~~and~~decision ~~Option~~to ~~Agreement~~deconsolidate ~~with~~the ~~Shaoxing~~Pingtan ~~High~~Langua School ~~and~~was due to its ~~shareholders~~inability ~~which~~to ~~permit~~provide useffective tooperational ~~operate~~control over the ~~Shaoxing~~school ~~High~~and due to lack of working capital to enforce the School Control Agreement, ~~receive~~and ~~economic~~accordingly, ~~benefits~~any offuture ~~its~~operating ~~operations~~cooperation ~~and~~between ~~the~~them ~~right~~was not feasible. The decision to ~~purchase~~deconsolidate ~~all~~is being accounted for as a forfeiture of ~~its~~the ~~equity~~Company’s ~~interests~~investment ~~from~~in ~~its~~Pingtan ~~shareholders~~Lanhua School and will be presented as if it were a discontinued operation. WeThe ~~issued~~Company ~~4,800,000~~maintains ~~shares~~that the aforementioned agreements with the shareholders of ~~our~~Pingtan ~~unregistered~~Lanhua ~~common~~School ~~stock~~give ~~valued~~them atoperational ~~$5,040,000~~and financial control of the Pingtan Lanhua School. However due to ~~Shaoxing~~the ~~Red~~financial ~~Green~~reasons, ~~Blue~~time ~~Trading~~and ~~Col~~effort, ~~Ltd.~~resources ~~(“RGB~~required ~~Trading”)~~to defend these agreements, the ~~shareholder~~Company has determined that pursuit of ~~Shaoxing~~operational ~~High~~and ~~School~~financial ascontrol ~~consideration~~of ~~for~~Pingtan ~~entering~~Lanhua ~~into~~School ~~these~~is ~~agreements~~not possible. The Company’s

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.

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 which has now been extended to no later than September 30, 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:

- 9 -

CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The favorable lease intangible of Shaoxing High 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 and Hefei Meihua School on August 2, 2011, we recognized goodwill in the amount of $1,286,494 and $3,606,868, respectively.

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.

	June 30, 2012			December 31, 2011
	(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		(392,466	)		(213,337	)
	$	3,831,181		$	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 six months ended June 30, 2012 and 2011 was $179,129 and $56,826, respectively.

- 10 -

CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~Future~~management ~~amortization~~decision ~~expenses~~to ~~for~~deconsolidate ~~intangible~~Pingtan ~~assets~~Lanhua ~~were~~School asis ~~follows:~~not a relinquishment of their claim of operational and financial control of the School based on the School Control Agreement. Concurrent with the Company’s deconsolidation of Pingtan Lanhua School, management has determined that any obligation that may arise from Pingtan Lanhua School, that existed prior, or subsequent, to their decision to deconsolidate, is not an obligation of the Company. With respect to the 5,000,000 shares of the Company’s common stock issued to Crown Union upon having entered into the aforementioned agreements, the Company is currently analyzing procedures to recover such shares.

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

On August 2, 2011 we acquired effective control of Hefei Meihua School through the School Control Agreements. In connection with this transaction, we issued 5,000,000 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 2,500,000 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. In 2012, we issued an additional 630,000 shares of common stock to Crown Union in connection with this acquisition. As previously discussed in Note 1, in February 2013, the Company’s management reached a decision to deconsolidate the operations of Hefei Meihua School from the Company effective July 1, 2012. The Company’s decision to deconsolidate Hefei Meihua School was due to its inability to provide effective operational control over the school and due to lack of working capital to enforce the School Control Agreement, and accordingly, any future operating cooperation between them was not feasible. The decision to deconsolidate is being accounted for as a forfeiture of the Company’s investment in Hefei Meihua School and will be presented as if it were a discontinued operation. The Company maintains that the aforementioned agreements with the shareholders of Hefei Meihua School give them operational and financial control of the Hefei Meihua School. However due to the financial, time and effort, resources required to defend these agreements, the Company has determined that pursuit of operational and financial control of Hefei Meihua School is not possible. The Company’s management decision to deconsolidate Hefei Meihua School is not a relinquishment of their claim of operational and financial control of the School based on the School Control Agreement. Concurrent with the Company’s deconsolidation of Hefei Meihua School, management has determined that any obligation that may arise from Hefei Meihua School, that existed prior, or subsequent, to their decision to deconsolidate, is not an obligation of the Company. With respect to the 5,630,000 shares of the Company’s common stock issued to Crown Union upon having entered into the aforementioned agreements, the Company is currently analyzing procedures to recover such shares.

~~NOTE~~On 6the –accompanying ~~PROPERTY~~consolidated ~~AND~~financials ~~EQUIPMENT~~statements, as of September 30, 2012 and December 31, 2011, and for the three and nine months ended September 30, 2012 and 2011, the Company accounted for Shaoxing High School, Lanhua School and Heifei Meihua School as discontinued operations.

~~Property~~The remaining assets and ~~equipment~~liabilities ~~consisted~~of discontinued operations are presented in the balance sheets under the caption “Assets and Liabilities of Discontinued Operation" and relates to the ~~following~~discontinued operations of the Schools. The carrying amounts of the major classes of these assets and liabilities are summarized as follows:

	Estimated Life		June 30, 2012				December 31, 2011
		September 30, 2012				December 31, 2011
			(unaudited)
Assets:
Automobiles	5 Years		$	158,373			$	157,290
Prepaid expense-related parties		$	-			$	5,667,238
Buildings	10-20 Years			761,384				620,298
Prepaid expense and other current assets			-				245,152
Furniture, fixtures, and equipment	3-10 Years			648,865				1,161,059
Due from related party			-				390,263
Other				3,026				3,251
Restricted cash			-				205,348
				1,571,648				1,941,898
Goodwill			-				5,086,723
Less: Accumulated Depreciation				(43,684	)			(307,656	)
Intangibles			-				1,599,585
			$	1,527,964			$	1,634,242
Property and equipment, net			-				1,634,242
Total assets for discontinued operation		$	-			$	14,828,551
Liabilities:
Accounts payables and accrued expenses			-				871,051
Taxes payable			-				147,279
Deferred revenue			-				1,550,367
Due to related parties			-				136,958
Current liabilities of discontinued operations			-				2,705,655
Deferred revenue – long-term			-				1,002,049
Liabilities of discontinued operations		$	-			$	3,707,704

Depreciation expense for the six months ended June 30, 2012 and 2011 was $282,037, and $119,330, respectively. During the second quarter of fiscal 2012, we disposed obsolete furniture and equipment and incurred a loss on disposition of $53,419, which is included in our statement of operations.

NOTE 7 – DEFERRED REVENUE

Deferred revenue consisted of the following:

	June 30, 2012		December 31, 2011
	(unaudited)
Tuition and school selection fees	$	1,633,601	$	2,472,050
Dormitory fees		-		80,366
Total		1,633,601		2,552,416
Less: Current portion		(596,987)		(1,550,367	)
Long-term portion of deferred revenue	$	1,036,614	$	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.

- 11 -

CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~NOTE~~The 9-following ~~COMMITMENTS~~table sets forth for the three and nine months ended September 30, 2012 and 2011 indicated selected financial data of the Company’s discontinued operations of the Schools.

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).

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2012			2011			2012			2011
Revenues	$	642,832		$	2,296,354		$	4,807,084		$	4,228,715
Cost of sales		776,277			2,172,621			4,072,184			3,071,549
Gross profit		(133,445	)		165,235			734,900			1,157,166
Operating and other non-operating expenses		(682,444	)		(606,759	)		(1,455,541	)		(1,051,225	)
Income from discontinued operations		(815,889	)		(441,524	)		(720,641	)		105,941
Loss from abandonment of discontinued operation		(11,768,686	)		-			(11,768,686	)		-
Loss from discontinued operation	$	(12,584,575	)	$	(441,524	)	$	(12,489,327	)	$	105,941

~~Prior~~NOTE to4 ~~the~~– ~~establishment~~GOODWILL ofAND ~~Hefei~~INTANGIBLE 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.ASSETS

~~Future rent expenses are as follows:~~Goodwill

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

In connection with the acquisition of Hangzhou Education on December 31, 2010, we recognized goodwill in the amount of $479.

InWe ~~November~~account ~~2010,~~for ~~Shaoxing~~goodwill ~~High~~and ~~School~~other ~~entered~~intangible ~~into~~assets ain ~~lease~~accordance ~~agreement~~ with ~~RGB~~the ~~Trading~~provision ~~for a term~~ of 10FASB ~~years~~ASC ~~that~~350 ~~began~~“Intangibles on– ~~January~~Goodwill ~~1, 2011~~ and ~~will~~Other.” ~~expire~~We onconduct ~~December~~impairment ~~31,~~testing ~~2020. The~~on ~~annual~~goodwill ~~rent~~at isleast ~~RMB 3~~annually,~~000,000~~ ~~(approximately~~or ~~$453,700.~~sooner ~~Shaoxing~~when ~~High~~indications ~~School paid the total amount~~ of ~~rent~~impairment ~~due over the term of the lease in advance in December 2010 and amortizes the expense over the term of the lease~~exist.

~~Pingtan~~Intangible 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.Assets

~~NOTE~~On 10October –14, ~~RELATED~~2011, ~~PARTY~~we ~~TRANSACTIONS~~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 2,500,000 shares of our common stock at the valued of $0.30 per share and a three-year warrant exercisable at $0.40 per share for 6,000,000 shares which we valued at $1,688,020 by using the Black Scholes option pricing model. We recognized the License Agreement as an intangible asset with a total value of $2,428,020. The license term is for thirty (30) years and may be terminated by American Education Center only in the event of failure by Frontera (or any assignee) who fails to comply with the terms of the agreement, including a license fee of 2% of net revenues associated with the licensed property, or in the event of insolvency or bankruptcy of Frontera or any assignee. Pursuant to ASC 350-3-25, the Company recognized an intangible asset related to this License Agreement and will amortize it over 30 years. The Company performed an impairment analysis of it long-term assets and on September 30, 2012, due to a lack of working capital to implement its business plan, the Company decided to impair the value of its license agreement and for the three and nine months ended September 30, 2012, the Company recorded an impairment loss of $2,350,634.

WeThe ~~have~~balance ~~specified~~related to the ~~following~~Company’s ~~persons~~intangibles ~~and~~is ~~entities~~ as ~~related parties with balances as of June 30, 2012 and December 31, 2011~~follows:

● "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.

	September 30, 2012		December 31, 2011
	(unaudited)
License agreement	$	-	$	2,428,020

Less: Accumulated amortization		-		(17,295	)
	$	-	$	2,410,725

Amortization expense for the nine months ended September 30, 2012 and 2011 was $60,091 and $0, respectively.

- 12 -

CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~Prepaid~~NOTE ~~expenses-related~~5 ~~parties~~– PROPERTY AND EQUIPMENT

~~Prepaid~~Property ~~expenses-related~~and ~~parties~~equipment ~~were~~consisted asof ~~follows~~the following:

		June 30, 2012				December 31, 2011
	Estimated Life		September 30, 2012				December 31, 2011
		(Unaudited)
			(unaudited)
Prepaid rent		$	4,041,909			$	4,250,428
Furniture, fixtures, and equipment	3 Years		$	35,250			$	-
Prepaid education service fee			1,347,303				1,416,810
Less: Accumulated depreciation				(7,346	)			-
Total			5,389,212				5,667,238
			$	27,904			$	-
Less: current portion			(634,025	)			(629,693	)
Long-term portion of prepaid expense		$	4,755,187			$	5,037,545

InDepreciation ~~November~~expense ~~2010,~~of ~~Shaoxing~~continuing ~~High~~operation ~~School entered into a lease agreement with RGB Trading~~ for athe ~~term~~nine ofmonths 10ended ~~years~~September ~~that began on January 1~~30, ~~2011~~2012 and ~~will~~2011 ~~expire~~was ~~on December 31~~$7, ~~2020. The November 2010 lease~~346, ~~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~~0,~~700)~~ ~~over the 10 year term~~respectively. ~~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.~~

InNOTE ~~November~~6 ~~2010,~~– ~~Shaoxing~~RELATED ~~High~~PARTY 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.TRANSACTIONS

~~Prior~~We tohave ~~the~~specified ~~establishment of Hefei Meihua School, members of~~ the ~~Company~~following ~~along~~persons ~~with~~and aentities ~~company~~as ~~controlled~~related byparties ~~these members entered into a Building Lease Agreement~~ with ~~Hengyuan~~balances ~~Athletic, on February 10, 2011,~~ as ~~amended on May 25, 2011 (the “School Facility Lease”). Subsequent to the establishment~~ of ~~Meihua~~September ~~School~~30, ~~the~~2012 ~~school facility lease was transferred in title~~ and ~~responsibility~~December ~~to the Company. The School Facility Lease provides for the use and occupancy of a 220~~31,~~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"China ~~the~~Direct” ~~establishment~~refers ofto ~~Hefei~~China ~~Meihua~~Direct ~~School~~Investments, ~~and~~Inc., ina ~~anticipation~~Florida ofcorporation ~~its~~and ~~establishment,~~a ~~future~~substantial ~~members~~stockholder of the Company. ~~along~~● ~~with~~RGB aTrading, ~~company~~which ~~controlled~~in byaddition ~~these~~to ~~members entered~~being ~~into~~the ansole ~~Equipment~~stockholder ~~Lease~~of ~~Agreement~~Shaoxing ~~with~~High ~~Anhui Luhai~~School, ais ~~related~~majority ~~party~~owned ofby ~~the~~Guotong ~~Company’s~~Chen, one of our principal ~~shareholder,~~stockholders. on● ~~February~~"RGB ~~10,~~Education” ~~2011~~refers asto ~~amended~~Zhejiang onRed ~~June~~Green 23Blue Education Group, ~~2011~~Ltd., ~~(the~~a ~~“Equipment~~limited ~~Lease”). The~~liability ~~Equipment~~company ~~Lease~~established ~~provides~~under ~~for~~the laws of the ~~Company’s~~PRC ~~use~~which ofis ~~various~~majority ~~computer~~owned ~~and~~by ~~electronic~~Guotong ~~equipment~~Chen. ● Jinjin Ye, ~~furnishings~~is ~~and~~a ~~other~~former ~~personal~~stockholder ~~property~~of ~~used~~Hangzhou byTechnology. ~~the~~Jinjin ~~Company~~Ye incurrently ~~its~~holds ~~operations. The~~the ~~term~~position of ~~the~~Chief ~~Equipment~~Financial ~~Lease~~Officer ~~commenced~~of onHanghzou ~~March~~Technology. 1,● ~~2011~~"Anhui ~~and~~Luhai” ~~expires~~refers onto ~~December~~Anhui ~~31,~~Luhai ~~2011. Monthly~~Business ~~rent~~School, ~~due~~which ~~over~~is ~~the~~majority ~~term~~owned ofby ~~the~~Xiaoyun ~~Equipment~~Chen, ~~Lease~~a isprincipal ~~RMB~~shareholder ~~16,000~~of ~~(approximately~~Meihua ~~$2,500)~~School. ~~The~~ ~~lease~~● ~~has~~"Hengyuan ~~been~~Athletic” ~~extended~~refers to ~~February~~Hengyuan 28Athletic School, ~~2017~~which ~~and monthly rent~~ is ~~RMB~~majority ~~6,667~~owned ~~(approximately~~by ~~$1,050)~~Xiaoyuan Chen.

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~~were be used for working capital purposes. The promissory note accrues interest at an annual rate of 6%. The principal and accrued interest iswas due on February 21, 2012. During the third quarter of 2012, we borrowed an aggregate of $16,000 under the terms of unsecured promissory notes from China Direct. Under the terms of the promissory notes, the loans shall accrue interest at an annual rate of 6% and the principal and accrued interest is due on different dates in 2013. At ~~June~~September 30, 2012, including accrued interest of $1214,~~206~~538 we had a loan payable-related party of $~~162~~180,~~206~~538. ~~This~~These ~~note~~promissory ~~was~~notes ~~extended~~are due on demand.

Due from related parties

At ~~June~~December 3031, ~~2012~~2011, we have $1390,~~215,743~~263 due from ~~RGB~~Anhui ~~Trading~~Luhai , ~~the~~a ~~sole~~principal ~~stockholder~~shareholder of ~~Shaoxing~~Hefei ~~High~~Meihua School,. isThis ~~majority~~amount ~~owned~~bears byno ~~Guotong Chen~~interest, ~~one~~was ofdue ~~our~~on ~~principal~~demand ~~stockholders~~and was unsecured. This amount ~~bears~~was norepaid ~~interest,~~during isthe ~~due~~nine onmonths ~~demand~~ended ~~and is~~September ~~unsecured~~30, 2012.

- 13 -

CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Due to related parties

Due to related parties of $~~274~~134,~~626~~432 at ~~June~~September 30, 2012 was as follows:

● Loan of $1134,~~245~~317 ~~due~~from to Jinjin Ye ~~and Ruifeng Chen~~ for ~~the~~working ~~outstanding~~capital ~~balance of consideration for the 100% equity interests in Hangzhou Technology, which we acquired in November 2010~~purpose.

● ~~Loan of~~ $~~111,589~~115 ~~from~~due ~~Jinjin~~to YeChina Direct for ~~working~~expenses ~~capital~~China ~~purpose~~Direct paid on our behalf.

●Due ~~Pingtan~~to ~~Lanhua~~related ~~School~~parties ~~owes~~of ~~its shareholders, Qiude Chen and Guangyu Wei~~ $~~161~~16,~~676~~359 ~~for~~at ~~loans they made to us for working capital purposes as of~~ December 31, 2011. ~~These~~was ~~advances~~as ~~are unsecured, non-interest bearing and due upon demand.~~follows:

● $116 due to China Direct for expense China Direct paid on our behalf.

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~~- 1113 ~~– 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

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.

We have 187,500,000 shares of common stock, par value $.001, authorized. At June 30, 2012 and December 31, 2011 there were 73,179,125 and 70,196,625 shares of common stock issued and outstanding, respectively. We issued 5,000,000 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 5,000,000 shares of common stock, valued at $2.5 million to Crown Union in connection with the Hefei Meihua School transaction on August 2, 2011.

In connection with Hefei Meihua School’s acquisition on August 2, 2011, Hefei Meihua Founders have the opportunity to receive an additional 2,500,000 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. On June 5, 2012, we issued 630,000 shares of our common stock to Hefei Meihua School recorded as additional paid in capital. The balance of 1,870,000 shares has not been issued.

- 14 -

CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

OnNOTE ~~February~~7 ~~15,~~– ~~2012,~~SHAREHOLDERS’ ~~we issued 352,500 shares valued at $0.10 per share to Invictus in exchange for furniture and equipments.~~EQUITY

Common Stock

On May 8, 2012, the Company filed a Certificate of Change (the “Certificate”) with the State of Nevada to effect a forward 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 were rounded up to the next whole number. The record date of the Stock Split was May 7, 2012 and the effective date of the Stock Split was May 14, 2012.

On July 2, 2012, we issued 24,000 shares to Judith Denton, our board of director and 576,000 to Joel Mason, our previous Chief Executive Officer for a total value of $330,000. We also issued 720,000 shares with a valued of $396,000 to our attorney and 24,000 shares with a value of $13,200 to a consultant for the services rendered. The Company valued these common shares at the fair value of $0.55 per common share based on the quoted trading price of the common stock on the grant date which is the measurement date. In connection with issuance of these common shares, the Company recorded stock-based compensation of $330,000 and professional fees of $409,200.

On July 27, 2012, we entered into a joint marketing agreement with RedChip Companies, Inc. (“RedChip”) for investor relations program. The term of the agreement is twelve months from the date of this agreement. We agreed to issue 100,000 shares of restricted stock which has value of $116,000 to RedChip in exchange for the services it provides. On September 20, 2012, we issued 100,000 shares to RedChip according to the term of this agreement.

In connection with Hefei Meihua School’s acquisition on August 2, 2011, Hefei Meihua Founders have the opportunity to receive an additional 2,500,000 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. On June 5, 2012, we issued 630,000 shares of our common stock to Hefei Meihua School which was recorded as additional paid in capital. The balance of 1,870,000 shares will not been issued.

On February 15, 2012, we issued 352,500 shares valued at $0.10 per share to Invictus in exchange for furniture and equipment with a fair value of $35,249. The shares were valued at the fair market value on the date of grant.

On February 24, 2012, we completed the sale of 2,000,000 shares of our common stock to Dolton Consulting Services, Inc. at a price of $0.10 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.

OnDuring ~~February~~the ~~15,~~second ~~2011,~~quarter ~~Invictus~~of ~~Advisory~~fiscal ~~Associates~~2012, ~~Inc.~~we ~~(“Invictus”)~~completed ~~transferred~~the tosale ~~China~~of ~~Direct~~440,000 onshares of our ~~behalf~~common stock to Megamind Resources, Inc. at a ~~total~~price of ~~1,500,000~~$0.10 per share. These shares of our common stock ~~previously~~will be issued toin ~~Invictus~~reliance ~~under~~on the ~~Share~~exemption ~~Exchange~~from ~~Agreement~~registration provided by Section 4(2) of the Securities Act of 1933. In addition, ~~valued~~the atrecipient $1of our shares was a sophisticated investor and had access to information normally provided in a prospectus regarding us. In addition,~~800,000~~ the recipient of the shares had the necessary investment intent as ~~compensation~~required ~~for~~by ~~services~~Section ~~under~~4(2) since it agreed to allow us to include a legend on the ~~Consulting~~shares ~~and~~stating ~~Management~~that ~~Agreement~~such ~~entered~~shares ~~into~~are ~~among~~restricted ~~Invictus,~~pursuant ~~China~~to ~~Direct~~Rule 144 of the 1933 Securities Act. These restrictions ensure that these shares would not be immediately redistributed into the market and ustherefore asnot be part of ~~December~~a ~~31,~~"public ~~2010~~offering. In" ~~November~~Based ~~2011~~on an analysis of the above factors, we ~~reimbursed~~have ~~Invictus~~met the requirements to qualify for ~~the~~exemption ~~1,500,000~~under ~~shares~~Section 4(2) of ~~our~~the ~~common~~Securities ~~stock~~Act itof ~~delivered~~1933 tofor ~~China~~the ~~Direct~~above transaction.

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 2,500,000 shares of our common stock at the valued of $0.30 per share and a three-year warrant exercisable at $0.40 per share for 6,000,000 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. (see Note 4).

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 an online distribution campaign and selecting a top financial publishers for the Company. We agreed to issue 500,000 shares of restricted stock which has value of $400,000 to Summit in exchange for the services it provides.

In December 2011, we issued 500,000 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.

In December 2011, we issued 130,000 shares at $0.72 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 200,000 shares at $0.72 per share to the shareholders of Pingtan Lanhua School and 250,000 shares to the shareholders of Hefei Meihua School for the school performance in 2011.

In December 2011, we issued a total of 1,200,000 shares which had a total value of $2,160,000 related to Shaoxing High School and Pingtan Lanhua School finders' fee.

During the fourth quarter of 2011, we issued 250,000 shares at $0.20 and 1,151,250 shares at $0.72 to consultants for their services in 2011.

Additional Paid- in Capital

~~During~~In ~~the~~connection ~~second~~with ~~quarter~~Pingtan ofLanhua ~~fiscal~~School’s ~~2012~~acquisition on May 31, we2011, ~~completed~~Pingtan Lanhua Founders have the ~~sale~~opportunity ofto ~~440~~receive an additional 4,000,000 shares of our common stock ~~to Megamind Resources~~, ~~Inc.~~valued at ~~a price of~~ $01.1028 ~~per~~million ~~share.~~if ~~These~~Pingtan ~~shares~~Lanhua ofSchool ~~our~~meets ~~common~~certain ~~stock~~revenue ~~will~~and beearnings ~~issued~~targets induring ~~reliance~~the ontwo ~~the~~year ~~exemption~~period ~~from~~ending ~~registration~~June ~~provided~~30, by2013. ~~Section~~Pursuant ~~4(2)~~to ofASC ~~the~~480-10, ~~Securities~~we ~~Act~~determined ofthat ~~1933.~~the ~~These~~contingent shares ~~have~~did not ~~been~~meet ~~issued~~the asdefinition of ~~June~~a ~~30, 2012~~liability. In ~~addition~~Additionally, ~~the~~we ~~recipient~~considered ofthe ~~our~~guidance ~~shares~~in ~~was~~ASC a815-10-15 ~~sophisticated investor and had access~~ to ~~information~~determine ~~normally~~whether ~~provided~~the inarrangement amet ~~prospectus regarding us. In addition,~~ the ~~recipient~~definition of ~~the~~a ~~shares~~derivative ~~had~~instrument ~~the~~(and ~~necessary~~related ~~investment~~disclosure ~~intent as required by Section 4(2~~requirements) ~~since~~and ~~it agreed~~ to ~~allow~~determine uswhether ~~to include a legend on~~ the ~~shares~~arrangement ~~stating~~would ~~that~~be ~~such~~classified ~~shares~~in ~~are~~equity ~~restricted~~ pursuant to ~~Rule~~ASC ~~144 of the 1933 Securities Act~~815. ~~These~~Pursuant ~~restrictions~~to ~~ensure~~the ~~that~~analysis, ~~these~~the ~~shares~~Company ~~would~~treated ~~not be immediately redistributed into~~ the ~~market~~contingent ~~and~~consideration ~~therefore~~as ~~not be part of a "public offering~~equity." ~~Based~~These onshares anhave ~~analysis~~not ofbeen ~~the~~issued ~~above~~and ~~factors,~~ we ~~have~~recorded ~~met~~ the ~~requirements~~fair tovalue ~~qualify for exemption under Section 4(2)~~ of the ~~Securities~~contingent ~~Act~~consideration ofas ~~1933~~additional ~~for~~paid ~~the~~in ~~above transaction~~capital.

- 1514 -

CHINA EDUCATION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In connection with Pingtan Lanhua School’s acquisition on May 31, 2011, Pingtan Lanhua Founders have the opportunity to receive an additional 4,000,000 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 likely 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 2,500,000 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. On June 5, 2012, we issued 630,000 shares of our common stock to Hefei Meihua School. The balance of 1,870,000 shares has not been issued and we recorded it in our book as additional paid in capital.

Common Stock Warrant

InStock ~~connection~~warrant ofactivity for the ~~Assignment~~nine ~~Agreement~~months ~~with~~ended ~~Frontera~~September ~~on October 14~~30, ~~2011,~~2012 wewas ~~granted~~as common stock purchase warrants to purchase 6,000,000 shares of common stock with a par value $0.001 per share, exercisable at $0.40 per share. The warrant includes a cashless exercise provision and standard anti-dilution provisions.follows:

Our assumptions under the Black Scholes Option Pricing Model for the warrants valued at June 30, 2012 were as follows:

	Number of Warrants		Weighted Average Exercise Price
Balance at December 31, 2011		6,000,000	$	0.40
Granted		-		-
Exercised		-		-
Expired		-		-
Balance at September 30, 2012		6,000,000	$	0.40

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

NOTE 8 – SUBSEQUENT EVENTS

On November 19, 2012, the Company entered into convertible promissory note agreements with two third party companies (the “Holders”) for an aggregate amount of $86,000. These convertible notes are unsecured, bear interest at 8.0% per annum and are payable on demand. Interest shall be calculated on the basis of a 360-day year and the actual number of days elapsed. The Holders shall have the right, exercisable at any time from and after the date of issuance of these convertible promissory notes until the respective note is fully paid, to convert the entire outstanding and unpaid principal of these promissory notes, in whole or in part, upon delivery of a notice of conversion into the Company's common stock at the conversion price which shall be the lesser of 50% of the average of the five lowest closing prices for the Company’s stock during the previous 20 trading days or .08 cents per share, subject to adjustment from time to time for stock splits, stock dividends, combinations, capital reorganizations and similar events relating to the Company’s common stock. If at any time the convertible promissory notes are outstanding the Company shall offer, issue or agree to issue any common stock or securities convertible into or exercisable for shares of common stock (or modify any of the foregoing which may be outstanding) to any person or entity at a price per share or conversion or exercise price per share which shall be less than the then applicable conversion price in respect of the Shares, without the consent of the Holders of these convertible promissory notes, except with respect to Excepted Issuances , then the Company shall issue, for each such occasion, additional shares of Common Stock ~~warrant~~to ~~activity~~each Holder so that the average per share purchase price of the shares of Common Stock issued to the Holder (of only the Conversion Shares still owned by the Holder) is equal to such other lower price per share and the conversion price shall automatically be reduced to such other lower price per share. For the purposes hereof, "Excepted Issuances" means any offer, issuance or agreement to issue any common stock or securities convertible into or exercisable for shares of common s tock (or modify any of the ~~three~~foregoing ~~months~~which ~~ended~~may ~~June~~be 30outstanding) in connection with (i) full or partial consideration in connection with a strategic merger, ~~2012~~consolidation ~~was~~or purchase of substantially all of the securities or assets of corporation or other entity, (ii) the Company’s issuance of securities in connection with strategic license agreements and other partnering arrangements so long as ~~follows:~~such issuances are not for the purpose of raising capital, (iii) the Company’s issuance of Common Stock or the issuance or grants of options to purchase common stock pursuant to the Company’s stock option plans and employee stock purchase plans, (iv) the conversion of any of the convertible promissory notes, (v) the payment of any interest on the promissory notes, and (vi) as has been described in reports filed with the Commission or delivered to the Holder prior to the issuance of these promissory notes.

	Number of Warrants		Weighted Average Exercise Price
Balance at December 31, 2011		6,000,000	$	0.40
Granted		-		-
Exercised		-		-
Expired		-		-
Balance at June 30, 2012		6,000,000	$	0.40

In accordance with the FASB authoritative guidance, the conversion feature of the convertible debt was separated from the host contract and recognized as a derivative instrument. The conversion feature of the debt has been characterized as a derivative liability to be re-measured at the end of every reporting period with the change in value reported in the consolidated statement of operations.

~~NOTE~~On ~~12 - SUBSEQUENT~~January ~~EVENT~~7, 2013, the Company entered into convertible promissory note agreement with China Direct, a related party, for $17,900. This convertible notes is unsecured, bear interest at 6.0% per annum and the principal and any unpaid interest is payable in full no later than the earlier of (the “Maturity Date”) (i) January 7, 2014 or (ii) completion of an offering of the Company’s securities to raise capital. China Direct shall have the right, exercisable at any time from and after the date of issuance of this convertible promissory note until the note is fully paid, to convert the entire outstanding and unpaid principal of these promissory notes, in whole or in part, upon delivery of a notice of conversion into the Company's common stock at the conversion price which shall be the lesser of 50% of the closing price for the Company’s common stock. This arrangement represents a fixed monetary conversion value of $17,900 based on the variable share quantity to be issued.

On- ~~August~~15 19, 2012, the Company entered into an exclusive cooperation agreement, share pledge agreement, power of attorney and option agreement with Shanghai Fuyi Education Information Consulting Co., Ltd. (“Shanghai Fuyi”), which permits us to operate Shanghai Fuyi, receive the 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 “Shanghai Fuyi Agreements.”-

As consideration for entering into the Shanghai Fuyi Agreements, which issued Crown Union a total of 11,000,000 shares (post split) of our unregistered common stock (the Shanghai Fuyi Acquisition Shares”) valued at $1.04. Crown Union entered into a five year option agreement with Shanghai Fuyi shareholders which permits them to acquire shares of the Company’s common stock as follows:

(i) 6,000,000 shares (post split) upon entering into the Shanghai Fuyi Agreements which condition was met on Aug 19, 2012

(ii) 3,000,000 shares (post split) achieving not less than $5,000,000 in gross revenue as determined under US GAAP for any consecutive 12 month period during the period from April 1 2012 to March 31, 2014 and

(iii) 2,000,000 shares (post split) upon achieving not less than $3,000,000 in net income as determined under US GAAP for any consecutive 12 month period during the period from April 1 2012 to March 31, 2014

The number of Shanghai Fuyi Acquisition Shares the Shanghai Fuyi shareholders may purchase from Crown Union shall be reduced and returned to us for cancellation by 2.5 shares for every dollar that the net income from Shanghai Fuyi during any 12 month consecutive period from April 1 2012 to March 31, 2014 as computed under US GAAP is less than $3,000,000. Due to PRC restrictions of foreign investment in China’s education industry, we operate Shanghai Fuyi through contractual arrangements among China Education, Hangzhou Education, and the owners of Shanghai Fuyi.

- 16 -

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 and Discontinued Operations

~~Prior~~On ~~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 and was owned by Invictus Advisory Associates, Inc. (“Invictus”), a Florida corporation (69.4%) and Shaoxing Red Green Blue Trading Co., Ltd. (“RGB Trading”), a PRC limited liability company (30.6%). 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 1437,~~800~~000,000 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~~of ~~company~~the 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 411,~~740~~851,~~694~~735 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 iswas for one year, beginning January 1, 2011. As compensation for China Direct’s services under this agreement, Invictus transferred ~~200~~500,000 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~~1,000,000 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~~1,500,000 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~~provided 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~~Due ~~School~~to isChinese aregulatory ~~private~~restrictions ~~primary~~on ~~education~~foreign ~~school~~investments ~~for~~in ~~grades~~Chinese ~~seven~~companies, ~~through~~we ~~twelve~~conducted inour ~~Shaoxing~~business ~~County located~~ in ~~the~~China ~~Zhejiang~~through ~~Province~~contractual inarrangements ~~the~~which ~~PRC.~~make ~~Shaoxing~~up ~~High~~the School ~~offers~~Control ~~unified~~Agreements ~~national~~among ~~core~~China ~~curriculums~~Education, ~~such~~Hangzhou ~~as Chinese~~Education, ~~mathematics,~~and ~~physics,~~the ~~English,~~Schools. ~~history,~~The ~~biology,~~Schools ~~and~~are ~~related~~treated ~~primary~~as ~~courses.~~a ~~Established~~variable interest entity in ~~2002,~~which ~~Shaoxing~~China ~~High~~Education ~~School~~does ~~operates~~have ondirect aor 25controlling ~~acre~~equity ~~campus~~interest and ~~offers~~whose 57historical ~~classes~~financial ~~across~~results ~~six~~will ~~grades. After~~be ~~eight~~consolidated ~~years~~in ofour ~~development,~~financial ~~Shaoxing~~statements ~~High~~in ~~School~~accordance ~~has~~with ~~more~~U.S. ~~than~~generally ~~2,600~~accepted ~~students~~accounting ~~and~~principles ~~over~~("U.S. ~~200 staff members~~GAAP").

~~Pingtan~~As ~~Lanhua~~discussed ~~School~~below isand ~~located~~elsewhere ~~at Lianhua Mountain~~herein, ~~Lancheng~~our ~~Village,~~management ~~Pingtan~~reached ~~County,~~a ~~Fuzhou~~decision ~~City,~~to ~~Fujian~~deconsolidate ~~Province,~~the ~~China.~~operations ~~Lanhua~~of ~~School’s campus is located on 41~~the Schools,~~572~~ ~~square~~Although ~~meters~~a ofdecision ~~land~~was ~~and~~reached isto ~~comprised~~deconsolidate ofthe ~~12 buildings. After 12 years of development~~Schools, ~~Pingtan Lanhua School has approximately 3~~,~~201~~ ~~students~~management ~~and~~intends ~~approximately~~to ~~226~~seek ~~teachers~~out ~~and~~additional ~~support~~education ~~staff~~related ~~encompassing~~opportunities 6domestically ~~grades~~ and 60internationally ~~classes~~outside ~~under~~of ~~middle~~the ~~school~~PRC ~~and~~where ~~high~~we ~~school~~believe ~~sections. Pingtan~~we ~~Lanhua~~will ~~School~~have ~~offers~~more ~~unified~~success ~~national~~and ~~education~~we ~~curriculum,~~are ~~such~~currently asseeking ~~language,~~acquisitions ~~mathematics, physics, English, history~~ and ~~biology~~financing opportunities.

~~Established~~Due into ~~April,~~lack ~~2011~~of ~~the~~investor ~~Hefei~~confidence 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~~PRC ~~quarter of 2012~~market, ~~thess~~we ~~operations~~have ~~were~~had ~~discontinued~~difficulties ~~and~~in ~~Meihua~~obtaining isfinancing nofor ~~longer~~our ~~part~~China-related ofentities ~~operations~~ and ~~is not included in financial statements. However~~accordingly, inwe ~~the~~do ~~second~~not ~~quarter~~have ofsufficient ~~2012,~~working ~~management~~capital ~~decided~~ to ~~continue~~expand ~~the operations of Meihua and~~ our ~~consolidated~~current ~~financial~~business ~~statements~~plan asor ofto ~~June~~complete ~~30,~~certain ~~2012~~development ~~and~~projects ~~for~~in the ~~periods~~PRC ~~ended~~market. ~~June 30~~Accordingly, ~~2012 and 2011 include assets, liabilities, equity and results of operations from Meihua.~~

~~Due~~· toWe ~~Chinese~~have ~~regulatory~~postponed ~~restrictions~~the ondevelopment ~~foreign~~of ~~investments~~all inPRC ~~Chinese~~related ~~companies~~programs, weprogram ~~conduct~~materials ~~our~~and ~~business~~promotional inmaterials ~~China~~being ~~through~~developed ~~contractual~~for ~~arrangements~~American ~~which~~Education ~~make~~Center. upAdditionally, ~~the~~we ~~School~~have ~~Control~~postponed ~~Agreements~~our ~~among~~American ~~China~~ Education, ~~Hangzhou~~Center ~~Education,~~3-day ~~and~~conference ~~the~~that ~~Schools~~was being scheduled. ~~The~~Currently, ~~Schools~~we ~~will~~cannot be ~~treated~~certain as ato ~~variable~~when ~~interest entity in which China Education does have direct~~ or ~~controlling~~if ~~equity~~we ~~interest but whose historical financial results~~ will be ~~consolidated~~able into ~~our~~complete ~~2011~~these ~~financial statements in accordance with U~~programs.~~S. generally accepted accounting principles ("U.S. GAAP").~~

· The release of our “Super-ESL” 17program has been postponed because we do not have working capital to purchase the needed hardware and develop the necessary software required to complete and offer Super-ESL to the academic and/or consumer marketplace. Currently, we cannot be certain as to when or if we will be able to complete this program.

·	We have dissolved our advisory board until we are able to raise working capital.

·	We have delayed other programs due to lack of working capital.

- 16 -

Discontinued Operations

Shaoxing High School. As discussed elsewhere herein, the Company and RGB Trading, the shareholders and management of Shaoxing High School, have had on-going disagreements with respect to the operations of Shaoxing High School. The disagreements commenced during the quarter and nine months ended September 30, 2012. In November 2012 the Company’s management reached a decision that their disagreements with shareholders and management of Shaoxing High School were such that any future operating cooperation between them was not possible, accordingly the Company reached the decision to deconsolidate the operations of Shaoxing High School from the Company effective July 1, 2012 The decision to deconsolidate is being accounted for as a forfeiture of the Company’s investment in Shaoxing High School and will be presented as if it were a discontinued operation. We maintain that the aforementioned agreements with the shareholders of Shaoxing High School give them operational and financial control of the Shaoxing High School. Our management believes that these agreements are legal and enforceable in the PRC, however due to the financial, time and effort, resources required to defend these agreements the Company has determined that pursuit of operational and financial control of Shaoxing High School is not possible. Our decision to deconsolidate Shaoxing High School is not a relinquishment of our claim of operational and financial control of the school based on the aforementioned agreement. Concurrent with our deconsolidation of Shaoxing High School, management has determined that any obligation that may arise from Shaoxing High School, that existed prior, or subsequent, to their decision to deconsolidate, is not an obligation of the Company. With respect to the 12,000,000 shares of the Company’s common stock issued to RGB Trading upon having entered into the aforementioned agreements, we are currently analyzing procedures to recover such shares.

Pingtan Lanhua School. As discussed elsewhere herein, in February 2013, our management reached a decision to deconsolidate the operations of Pingtan Lanhua School from the Company effective July 1, 2012. Our decision to deconsolidate the Pingtan Langua School was due to our inability to provide effective operational control over the school and due to lack of working capital to enforce the School Control Agreement, and accordingly, any future operating cooperation between them was not feasible. The decision to deconsolidate is being accounted for as a forfeiture of our investment in Pingtan Lanhua School and will be presented as if it were a discontinued operation. We maintain that the aforementioned agreements with the shareholders of Pingtan Lanhua School give us operational and financial control of the Pingtan Lanhua School. However due to the financial, time and effort, resources required to defend these agreements, we have determined that pursuit of operational and financial control of Pingtan Lanhua School is not possible. Our management decision to deconsolidate Pingtan Lanhua School is not a relinquishment of our claim of operational and financial control of the School based on the School Control Agreement. Concurrent with the deconsolidation of Pingtan Lanhua School, management has determined that any obligation that may arise from Pingtan Lanhua School, that existed prior, or subsequent, to their decision to deconsolidate, is not an obligation of the Company. With respect to the 5,000,000 shares of the Company’s common stock issued to Crown Union upon having entered into the aforementioned agreements, we are currently analyzing procedures to recover such shares.

Hefei Meihua School. As discussed elsewhere herein, in February 2013, our management reached a decision to deconsolidate the operations of Hefei Meihua School from the Company effective July 1, 2012. Our decision to deconsolidate the Hefei Meihua School was due to its inability to provide effective operational control over the school and due to lack of working capital to enforce the School Control Agreement, and accordingly, any future operating cooperation between them was not feasible. The decision to deconsolidate is being accounted for as a forfeiture of our investment in Hefei Meihua School and will be presented as if it were a discontinued operation. We maintain that the aforementioned agreements with the shareholders of Hefei Meihua School give us operational and financial control of the Hefei Meihua School. However due to the financial, time and effort, resources required to defend these agreements, we have determined that pursuit of operational and financial control of Hefei Meihua School is not possible. Our decision to deconsolidate Hefei Meihua School is not a relinquishment of our claim of operational and financial control of the School based on the School Control Agreement. Concurrent with the deconsolidation of Hefei Meihua School, management has determined that any obligation that may arise from Hefei Meihua School, that existed prior, or subsequent, to their decision to deconsolidate, is not an obligation of the Company. With respect to the 5,630,000 shares of the Company’s common stock issued to Crown Union upon having entered into the aforementioned agreements, we are currently analyzing procedures to recover such shares.

RESULTS OF OPERATIONS

For the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2012 as compared to the same period in 2011.

The following discussion of results of operations shows the results of our operating entities, China Education International, Inc. China Education, and Hangzhou Education, as a continuing operation, and the operations of the Schools as discontinued operations,

Net Revenues

~~Net~~ During ~~revenues~~the ~~for~~three ~~the~~and ~~quarter~~nine months ended ~~June~~September 30, 2012 ~~were $2.6 million, an increase of 70.6%, which were derived from tuition, school selection fees~~ and ~~dormitory fees, as compared to $1.5 million for the same period in~~ 2011 ~~which was based on two schools~~, ~~Shaoxing~~we ~~High~~did ~~School~~not ~~and~~recognize ~~Pingtan~~any ~~Lanhua School. The increase in~~ revenues ~~for~~from ~~the~~our ~~quarter~~operating ~~ended June 30, 2012 was due primarily to the operations of three schools namely, Shaoxing High School, Pingtan Lanhua School and Meihua School~~entities.

~~Net~~- ~~revenues~~17 for the six months ended June 30, 2012 were $4.2 million, an increase of 63.5%, which were derived from tuition, school selection fees and dormitory fees, as compared to $2.5 million for the same period in 2011 which was based on two schools, Shaoxing High School and Pingtan Lanhua School. The increase in revenues for the six months ended June 30, 2012 was due primarily to the operations of three schools namely, Shaoxing High School, Pingtan Lanhua School and Meihua School.-

Cost of Sales

Cost of sales for the quarter ended June 30, 2012 were $2.1 million, resulting in a gross profit of $0.5 million, with a gross margin of 12.4%, as compared to cost of sales of $0.9 million, gross profit of $0.6 million, with a gross margin of 42.0% for 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.

Cost of sales for six months ended June 30, 2012 were $3.3 million, resulting in a gross profit of $0.9 million, with a gross margin of 20.9%, as compared to cost of sales of $1.6 million, gross profit of $1.0 million, with a gross margin of 39.0% for 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

~~Total~~For the three months ended September 30, 2012, operating expenses ~~for~~increased by $3,254,083 as compared to the ~~quarter~~comparable period in 2011. For the nine months ended ~~June~~September 30, 2012, ~~were~~operating ~~$0.7~~expenses ~~million,~~increased anby ~~increase~~$1,707,518 ofor 8214.6%, ~~primarily~~as ~~due~~compared to ~~general~~the ~~and~~comparable ~~administrative~~period ~~expenses~~in ~~associated~~2011. ~~with~~For the ~~operations~~three and nine months ended September 30, 2012 and 2011, operating expenses consisted of the ~~schools.~~following:

Total operating expenses for six months ended June 30, 2012 were $1.4 million, a decrease of 41.9%, 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").

	For the three months ended September 30,				For the nine months ended September 30,
	2012		2011		2012		2011
Selling expenses	$	-	$	-	$	43,249	$	46,207
Consulting expense-related party		-		-		-		1,800,000
General and administrative		966,061		62,612		1,355,539		152,448
Impairment loss		2,350,634		-		2,350,634		-

	$	3,316,695	$	62,612	$	3,706,173	$	1,998,655

For the three and nine months ended September 30, 2012, selling expenses increased (decreased) by $0 and $2,958 as compared to the comparable prior period, respectively. The change in selling expenses for the three and nine month period ended September 30, 2012 as compared to the comparable period in 2011 was not material.

During the three and nine months ended September 30, 2011, we incurred share-based consulting and management fee paid to China Direct, a related party, in the amount of $0 and $1.8 million, respectively. The fees paid to China Direct included 400,000 shares of our common stock valued at $1.2 million as a non-recurring payment for its work in connection with our December 2010 acquisition of China Education and 200,000 shares of our common stock valued at $0.6 million as payment for consulting and advisory services which China Direct agreed to provide to us during 2011. We did not incur such expense in the 2012 period.

For the three and nine months ended September 30, 2012 and 2011, general administrative expenses increased by $903,449 and $1,203,091, respectively. These increases were primarily due to an increase in compensation and professional fees. On July 2, 2012, we issued 1,444,000 shares of our common stock for compensation and professional fees with a fair value of $855,200. Accordingly, during the three and nine months ended September 30, 2012, we recorded stock compensation expense of $330,000 and professional fees of $525,200. We expect general and administrative expenses to increase as we expect to incur legal, accounting and other professional fees related to being a public company.

During the three and nine months ended September 30, 2012, we recorded an impairment loss of $2,350,634 related to the impairment of our license agreement with Frontera. We performed an impairment analysis of our long-term assets and on September 30, 2012, due to a lack of working capital to implement our business plan, we decided to impair the value of our license agreement.

Other Expense

For the three and nine months ended September 30, 2012, other expense, consisting of interest expense , increased by $232 and $1,556, as compared to the comparable period in 2011. The increase was primarily due to an increase in borrowings from China Direct, a related party.

- 18 -

(Loss) Income from Discontinued Operations

The following table sets forth for the three and nine months ended September 30, 2012 and 2011 indicated selected financial data of the Company’s discontinued operations of our Schools

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2012			2011			2012			2011
Revenues	$	642,832		$	2,296,354		$	4,807,084		$	4,228,715
Cost of sales		776,277			2,172,621			4,072,184			3,071,549
Gross profit		(133,445	)		165,235			734,900			1,157,166
Operating and other non-operating expenses		(682,444	)		(606,759	)		(1,455,541	)		(1,051,225	)
Income from discontinued operations		(815,889	)		(441,524	)		(720,641	)		105,941
Loss from abandonment of discontinued operation		(11,768,686	)		-			(11,768,686	)		-
Loss from discontinued operation	$	(12,584,575	)	$	(441,524	)	$	(12,489,327	)	$	105,941

Net (loss) income

We recorded a net loss of $~~0.2~~15,903,728 ~~million~~ for the quarter ended ~~June~~September 30, 2012 or $(0.22) per common share (basic and diluted), as compared to a net ~~income~~loss of $506,362, or $(0.301) ~~million~~per common share (basic and diluted) for the same period in 2011. ~~which~~We recorded a net loss of $16,202,446 or $(0.22) per common share (basic and diluted) for nine months ended September 30, 2012, as compared to $1,898,104 or $(0.03) per common share (basic and diluted) for the same period in 2011. The increase in net loss was primarily due to ~~lower~~an ~~gross~~increase ~~profit~~in operating expenses, ~~coupled~~including ~~with~~an ~~increased~~impairment ~~operating~~loss ~~expenses~~of $2,350,634 and a loss from discontinued operations as discussed above.

We recorded a net loss of $0.5 million for six months ended June 30, 2012, as compared to $1.4 million for the same period in 2011. The decrease was primarily due to lower operating expenses in the six months ended June 30, 2012, compared with the same period in 2011.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is the ability of a company to generate enough cash to meet its operational cash requirements. As of ~~June~~September 30, 2012, we had cash of $~~0.5~~6,813 ~~million~~ and a working capital ofdeficit ~~$1.2 million, exclusive~~ of $~~0.6 million of deferred revenue~~629,944, as compared to a working capital deficit of $~~1.4~~174,532 ~~million~~ at December 31, 2011~~, exclusive of $1.6 million of deferred revenue.~~

~~Prepaid~~ Material ~~expense~~changes ~~and~~in ~~other~~our current assets ~~represent advance payments for goods~~ and ~~services~~liabilities ~~made~~were byprimarily ~~Shaoxing~~attributable ~~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 $1.0 million as of June 30, 2012.~~:

~~Due~~· ~~from~~A ~~related~~decrease ~~parties~~in ~~consist~~cash ofand ~~funds~~cash weequivalents ~~advanced~~of to$1,694,008 ~~RGB~~due ~~Trading,~~to the ~~sole~~deconsolidation ~~stockholder~~ of ~~Shaoxing~~the ~~High~~Schools ~~School,~~ and adue ~~trading~~to ~~company~~cash ~~majority~~used ~~owned~~in byoperating ~~Mr.~~activities ~~Guotong Chen, one~~ of ~~our~~approximately ~~principal stockholders. As of June 30, 2012, due from related parties totaled~~ $1~~.2 million~~, ~~which bears no interest and was due on demand~~440,000.

-· 18A -decrease in assets from discontinued operations of $1,053,950 due to the deconsolidation of the Schools,

~~Deferred~~· ~~revenue~~An ~~represents~~increase ~~tuition received~~ in ~~advance,~~accounts ~~which~~payable ~~will be recorded as revenues as services have been rendered in the future. As~~ of ~~June 30~~$64,168 ~~2012~~due ~~and~~to ~~December~~a ~~31,~~lack ~~2011,~~of ~~deferred~~working ~~revenue~~capital ~~totaled~~to ~~$1.6~~pay ~~million~~our ~~and $2.5 million~~vendors, ~~respectively.~~

~~Our~~· ~~balance~~An ~~sheet~~increase ~~also includes restricted cash as a non-current asset~~ in ~~the~~due ~~amount~~to ofrelated ~~$0.1~~parties ~~million and $0.2 million as~~ of ~~June 30~~$118,311 ~~2012~~due ~~and~~to ~~December~~an ~~31,~~increase ~~2011, respectively,~~ in ~~the~~working ~~form~~capital ofadvances 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~~related ~~bank~~parties, ~~account upon approval of the Ministry of Finance People’s Republic of China.~~and,

On· ~~February~~A ~~22,~~decrease ~~2011,~~in weliabilities ~~borrowed $150,000~~ from ~~China~~discontinued ~~Direct,~~operations ~~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%~~$98,263 ~~with principal and accrued interest~~ due onto ~~February~~the ~~21,~~deconsolidation ~~2012. This~~of ~~note~~the ~~was extended on demand on February 21~~Schools, ~~2012.~~

We On ~~expect~~February ~~that~~22, ~~our~~2011, ~~cash~~we onborrowed ~~hand~~$150,000 ~~cash~~from ~~flow~~China weDirect, ~~expect~~a torelated ~~generate~~party, ~~from~~under ~~operations~~the interms ~~fiscal~~of ~~2012~~a promissory note. The proceeds from this loan will be ~~sufficient~~used tofor ~~sustain~~working ~~our~~capital ~~operations~~purposes. The ~~for~~promissory note accrues interest at ~~least~~an ~~the~~annual ~~next~~rate ~~twelve~~of ~~months~~6%, with principal and accrued interest due on February 21, 2012. ~~However~~ This note was extended on demand on February 21, 2012. Additionally, during the ~~following~~third ~~events~~quarter ~~are~~of ~~reasonably~~2012, ~~likely~~we toborrowed ~~require~~an usaggregate toof ~~raise~~$16,000 ~~additional~~under ~~capital~~the similar terms.

•On AnFebruary ~~increase~~24, in2012, ~~working~~we ~~capital~~completed ~~requirements to finance~~ the ~~growth~~sale of ~~the~~2,000,000 ~~Schools~~shares ~~• Acquisitions~~ of ~~additional~~our ~~schools,~~common ~~with~~stock ~~related increases~~ to ~~capital~~Dolton ~~expenditures~~Consulting Services, ~~marketing~~Inc. ~~and~~at ~~administrative~~a ~~expenses~~price ~~to support the growth~~ of ~~our~~$0.10 ~~company;~~per •share. ~~The~~During ~~costs~~the ~~for~~second ~~recruitment~~quarter ~~and retention~~ of ~~additional~~fiscal ~~management~~2012, ~~and~~we ~~personnel~~completed tothe ~~support~~sale ~~our~~of ~~operations~~440,000 ~~and~~shares ~~expansion~~of ~~plans;~~our ~~and~~common •stock ~~The~~to ~~additional~~Megamind ~~costs~~Resources, ~~including~~Inc. ~~legal~~at ~~accounting~~a ~~and~~price ~~consulting fees,~~ of ~~being~~$0.10 aper ~~public~~share. ~~company~~We ~~and~~used the ~~related~~proceeds ~~compliance~~from ~~activities~~these transactions for working capital.

~~Our~~- ~~business~~19 plan contemplates the acquisition of additional education related organizations through contractual agreements similar to those of the Schools Control Agreements. We expect that the consideration for gaining control of these organizations will be comprised entirely of new issuances of our common stock.-

On November 19, 2012, we entered into convertible promissory note agreements with two third party companies (the “Holders”) for an aggregate amount of $86,000. These convertible notes are unsecured, bear interest at 8.0% per annum and are payable on demand. Interest shall be calculated on the basis of a 360-day year and the actual number of days elapsed. The Holders shall have the right, exercisable at any time from and after the date of issuance of these convertible promissory notes until the respective note is fully paid, to convert the entire outstanding and unpaid principal of these promissory notes, in whole or in part, upon delivery of a notice of conversion into the Company's common stock at the conversion price which shall be the lesser of 50% of the average of the five lowest closing prices for the Company’s stock during the previous 20 trading days or .08 cents per share, subject to adjustment from time to time for stock splits, stock dividends, combinations, capital reorganizations and similar events relating to the Company’s common stock. If at any time the convertible promissory notes are outstanding the Company shall offer, issue or agree to issue any common stock or securities convertible into or exercisable for shares of common stock (or modify any of the foregoing which may be outstanding) to any person or entity at a price per share or conversion or exercise price per share which shall be less than the then applicable conversion price in respect of the Shares, without the consent of the Holders of these convertible promissory notes, except with respect to Excepted Issuances , then the Company shall issue, for each such occasion, additional shares of Common Stock to each Holder so that the average per share purchase price of the shares of Common Stock issued to the Holder (of only the Conversion Shares still owned by the Holder) is equal to such other lower price per share and the conversion price shall automatically be reduced to such other lower price per share. For the purposes hereof, "Excepted Issuances" means any offer, issuance or agreement to issue any common stock or securities convertible into or exercisable for shares of common s tock (or modify any of the foregoing which may be outstanding) in connection with (i) full or partial consideration in connection with a strategic merger, consolidation or purchase of substantially all of the securities or assets of corporation or other entity, (ii) the Company’s issuance of securities in connection with strategic license agreements and other partnering arrangements so long as such issuances are not for the purpose of raising capital, (iii) the Company’s issuance of Common Stock or the issuance or grants of options to purchase common stock pursuant to the Company’s stock option plans and employee stock purchase plans, (iv) the conversion of any of the convertible promissory notes, (v) the payment of any interest on the promissory notes, and (vi) as has been described in reports filed with the Commission or delivered to the Holder prior to the issuance of these promissory notes.

On January 7, 2013, we entered into convertible promissory note agreement with China Direct, a related party, for $17,900. This convertible notes is unsecured, bear interest at 6.0% per annum and the principal and any unpaid interest is payable in full no later than the earlier of (the “Maturity Date”) (i) January 7, 2014 or (ii) completion of an offering of the Company’s securities to raise capital. China Direct shall have the right, exercisable at any time from and after the date of issuance of this convertible promissory note until the note is fully paid, to convert the entire outstanding and unpaid principal of these promissory notes, in whole or in part, upon delivery of a notice of conversion into the Company's common stock at the conversion price which shall be the lesser of 50% of the closing price for the Company’s common stock,.This arrangement represents a fixed monetary conversion value of $17,900 based on the variable share quantity to be issued.

The following events are reasonably likely to require us to raise additional capital.

	•		An increase in working capital requirements to finance our operations;
	•		An increase in work capital to finance the acquisition of operating entities:
	•		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 operating entities including additional education related organizations.

Analysis of Cash Flow

~~Net~~We ~~cash~~require ~~used~~working incapital to pay operating ~~activities~~expense, including audit, legal and related fees, associated with our reporting obligations under the Securities Exchange Act of 1934. We estimate that funds required for the ~~six~~next twelve months ~~ended~~of ~~June~~operations ~~30,~~to ~~2012~~be ~~was~~approximately $1500,000.4 We ~~million,~~presently ~~primarily~~do ~~due~~not tohave ~~unfavorable~~any ~~changes~~source of $0working capital.9 ~~million~~As inof ~~deferred~~September ~~revenue~~30, ~~$0.8~~2012, ~~million~~we innever ~~due~~received any service fees we are entitled to from ~~related~~our ~~parties,~~Schools ~~partially~~as ~~offset~~the funds have been retained by ~~non-cash~~the ~~reconciliation~~schools ~~items~~for working capital purposes and we will not receive any funds from the Schools in ~~depreciation~~the future. It is possible that we will not have sufficient funds to pay our operating expenses in future periods, our ability to continue as a going concern is in jeopardy and ~~amortization~~investors could lose their entire investment in our company.

Net cash (used in) ~~investing~~provided by operating activities for the nine months ended September 30, 2012 and 2011 was $~~0.2~~(1,439,697) ~~million~~and ~~for~~$1,676,965, respectively. For the ~~six~~nine months ended ~~June~~September 30, 2012, ~~primarily~~net ~~due~~cash toused ~~capital~~in ~~expenditures~~operations ~~for~~consisted ~~school~~of ~~building~~cash ~~improvements~~used to fund our net loss and ~~purchase~~to fund a net increase in net assets of ~~operating~~discontinued ~~equipment~~operations.

~~Net~~- ~~cash~~20 ~~provided by financing activities for the six months ended June 30, 2011 was $0.4 million, due primarily to proceeds from capital raised and advances from related parties.~~-

Net cash used in investing activities was $674,278 for the nine months ended September 30, 2012, primarily due to capital expenditures for school building improvements and purchase of operating equipment (discontinued operations) of $232,540, and a decrease in cash of $441,738 related to deconsolidation of the Schools. Net cash used in investing activities was $55,858 for the nine months ended September 30, 2011, primarily due to capital expenditures for school building improvements and purchase of operating equipment (discontinued operations) of $317,326 offset by cash received from acquisitions of $261,467.

Net cash provided by financing activities for the nine months ended September 30, 2012 was $408,908, due primarily to proceeds from capital raised and advances/loans from related parties $244,000 and $164,908, respectively. Net cash used in financing activities for the nine months ended September 30, 2011 was $(360,219) primarily due to the payment of related party advances of $515,783 offset by proceeds from related party loans of $150,000.

CONTRACTUAL OBLIGATIONS

We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our financial position, results of operations, and cash flows.

The following tables summarize our contractual obligations as of September 30, 2012 and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

	Payments due by period
Contractual obligations	Total		Less than 1 year		1-3 Years		3-5 Years		5+ Years
Loans payable – related parties	$	180,538	$	180,538	$	-	$	-	$	-

Total contractual obligations	$	180,538	$	180,538	$	-	$	-	$	-

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.

- 19 -

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.

- 21 -

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~~Prior to the deconsolidation of the Schools, ~~are~~the Schools were considered a VIE and we ~~are~~were 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~~exercised 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~~had 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. Effective on July 1, 2012, the Schools are presented in the accompanying consolidated financial statements as a discontinued operation.

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 ~~June~~September 30, 2012.

Based on this evaluation we concluded that as of ~~June~~September 30, 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. In addition, subsequent to September 30, 2012 we failed to timely file this Quarterly Report on Form 10-Q for the period ended September 30, 2012 with the SEC currently, we do not have sufficient working capital funds to hire a full-time chief financial officer.

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 ~~six~~nine months ended ~~June~~September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

- 22 -

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

- 20 -

ITEM 1A. RISK FACTORS.

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

We may not be able to obtain sufficient capital to fund our current operations and planned expansion strategy and may be forced to limit the scope of our growth strategy and operations.

Our ability to implement our growth strategy and to fund our operations is dependent on our ability to raise additional capital. Our ability to attract additional capital may be adversely impacted by the deconsolidation of the Schools, our lack of a full-time chief financial officer, and a lack of working capital to fund our operations. In addition, because our common stock is quoted in the over the counter market, and as a result of the recent increased scrutiny of China-based U.S. public companies, our ability to raise capital may be further adversely impacted. If adequate additional financing is not available on reasonable terms, we may not be able to fund our current administrative operations or implement our expansion plans in the PRC and we would have to modify our business plans accordingly. There is no assurance that additional financing will be available to us. In connection with our growth strategy, we will require a capital investment and accordingly, we may not have sufficient capital to fund our current or future operations without additional capital investments. Our capital needs will depend on numerous factors, including our profitability, the actual versus planned cost to operate and maintain schools in the PRC and the amount of our operational, business development and capital expenditures, including acquisitions. We cannot assure you that we will be able to obtain capital in the future to meet our needs. If we cannot obtain additional funding, we may be required to substantially curtail our operations, limit our marketing efforts or delay the future acquisition of schools or any other business. These types of reductions could materially adversely affect our business and our ability to compete in future periods. Even if we do find a source of additional capital, we may not be able to negotiate acceptable terms and conditions for obtaining the additional capital. Any future capital investments could dilute or otherwise materially and adversely affect the holdings or rights of our existing stockholders. In addition, new equity or convertible debt securities issued by us to obtain financing could have rights, preferences and privileges senior to our common stock. We cannot give you any assurance that any additional financing will be available on terms that will be acceptable to us, or at all.

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

~~During~~On ~~the~~July ~~second~~2, ~~quarter of fiscal~~ 2012, we ~~completed~~issued ~~the sale of 440~~24,000 shares ~~of our common stock~~ to ~~Megamind~~Judith ~~Resources~~Denton, ~~Inc.~~our atboard ~~a price~~ of ~~$0.10~~director ~~per~~and ~~share.~~576,000 ~~These~~to ~~shares~~Joel ofMason, our ~~common~~previous ~~stock~~Chief ~~will~~Executive beOfficer ~~issued~~for ina ~~reliance~~total onvalue ~~the exemption from registration provided by Section 4(2)~~ of ~~the Securities Act of 1933~~$330,000. ~~These~~We ~~shares~~also ~~have not been~~ issued ~~as of June 30~~720, ~~2012. In~~000 ~~addition, the recipient of our~~ shares ~~was~~with a ~~sophisticated~~valued ~~investor~~of ~~and~~$396,000 ~~had access~~ to ~~information~~our ~~normally~~attorney ~~provided~~and ~~in a prospectus regarding us. In addition~~24,000 ~~the recipient of the~~ shares ~~had~~with ~~the~~a ~~necessary~~value ~~investment~~of ~~intent~~$13,200 ~~as required by Section 4(2) since it agreed~~ to ~~allow us to include~~ a ~~legend~~consultant onfor the ~~shares~~services ~~stating~~rendered. ~~that~~The ~~such~~recipients ~~shares~~were ~~are~~accredited ~~restricted~~investors ~~pursuant~~and ~~to Rule 144 of~~ the ~~1933~~issuances ~~Securities~~were ~~Act.~~exempt ~~These~~from ~~restrictions~~registration ~~ensure~~under ~~that these shares would not be immediately redistributed into~~ the ~~market~~Securities ~~and~~Act ~~therefore not be part~~ of a1933, ~~"public~~as ~~offering." Based on an analysis of the above factors~~amended, wein ~~have~~reliance ~~met~~on ~~the~~exemptions ~~requirements~~provided toby ~~qualify for exemption under~~ Section 4(2) of ~~the~~that ~~Securities Act of 1933 for the above transaction~~act.

InOn ~~connection~~July ~~with~~27, ~~Hefei~~2012, ~~Meihua~~we ~~School’s~~entered ~~acquisition~~into ona ~~August~~joint 2,marketing ~~2011~~agreement with RedChip Companies, ~~Hefei~~Inc. ~~Meihua~~for ~~Founders~~investor ~~have~~relations ~~the~~program. ~~opportunity~~The toterm ~~receive~~of anthe ~~additional~~agreement ~~2,500,000~~is ~~shares~~12 ofmonths ~~our~~from ~~common~~the ~~stock,~~date ~~valued~~of atthis $1agreement.25 We ~~million~~agreed ifto ~~Hefei~~issue ~~Meihua~~100,000 ~~School~~shares ~~meets~~of ~~certain~~our ~~revenue~~common ~~and~~stock ~~earnings~~which ~~targets~~has ~~during~~value ~~the~~of ~~two~~$116,000 ~~year~~to ~~period~~RedChip ~~ending~~in ~~August~~exchange 1,for ~~2013~~the services it provides. On ~~June~~September 520, 2012, we issued ~~630~~100,000 shares to RedChip according to the term of ~~our~~this ~~common~~agreement. The ~~stock~~recipient towas ~~Hefei~~an ~~Meihua~~accredited ~~School~~or ~~recorded~~otherwise assophisticated ~~additional~~investor ~~paid~~who inhad ~~capital.~~access to information concerning our company. The ~~balance~~issuance was exempt from registration under the Securities Act of 11933,~~870~~ as amended,~~000~~ ~~shares~~in ~~has~~reliance ~~not~~on ~~been~~Section ~~issued~~4(2) of that act.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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ITEM 5. OTHER INFORMATION.

~~None~~In November 2012 our management reached a decision that their disagreements with shareholders and management of the Schools were such that any future operating cooperation between them was not possible, accordingly we reached the decision to deconsolidate the operations of Shaoxing High School from the Company effective July 1, 2012 On the accompanying consolidated financial statements, as of September 30, 2012 and December 31, 2012, and for the three and nine months ended September 30, 2012 and 2011,we accounted for Shaoxing High School as a discontinued operation. In connection with this discontinued operations, for the three and nine months ended September 30, 2012, we recorded a loss from discontinued operations of $(6,176,281) and $(5,718,302), respectively.

In February 2013, our management reached a decision to deconsolidate the operations of Pingtan Lanhua School and Hefei Meihua School from the Company effective July 1, 2012. Our decision to deconsolidate the Pingtan Lanhua School and Hefei Meihua School was due to our inability to provide effective operational control over the school and due to lack of working capital to enforce the School Control Agreement, and accordingly, any future operating cooperation between them was not feasible. The decision to deconsolidate is being accounted for as a forfeiture of our investment in Pingtan Lanhua School and Hefei Meihua School and are presented as if they were a discontinued operation. We maintain that the aforementioned agreements with the shareholders of Pingtan Lanhua School and Hefei Meihua School give us operational and financial control of the Pingtan Lanhua School and Hefei Meihua School. However due to the financial reasons, time and effort, resources required to defend these agreements, we have determined that pursuit of operational and financial control of Pingtan Lanhua School and Hefei Meihua School is not possible. Our decision to deconsolidate Pingtan Lanhua School and Hefei Meihua School is not a relinquishment of our claim of operational and financial control of the schools based on the School Control Agreement. Concurrent with the deconsolidation of Pingtan Lanhua School and Hefei Meihua School, management has determined that any obligation that may arise from Pingtan Lanhua School and Hefei Meihua School, that existed prior, or subsequent, to their decision to deconsolidate, is not an obligation of the Company. With respect to the 10,630,000 shares of the Company’s common stock issued to Crown Union upon having entered into the aforementioned agreements, we are currently analyzing procedures to recover such shares.

On February 22, 2011, we borrowed $150,000 from China Direct under the terms of an unsecured promissory note. The proceeds were used for working capital purposes. The promissory note accrues interest at an annual rate of 6%. The principal and accrued interest was due on February 21, 2012. This amount remains outstanding. During the third quarter of 2012, we borrowed an aggregate of $16,000 under the terms of unsecured promissory notes from China Direct. Under the terms of the promissory notes, the loans shall accrue interest at an annual rate of 6% and the principal and accrued interest is due on different dates in 2013. At September 30, 2012, including accrued interest of $14,538 we had a loan payable-related party of $180,538. These promissory notes are due on demand.

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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.
10.1		Exclusive Cooperation Agreement dated August 19, 2012 between Hangzhou Kunjiang Education Technology Co., Ltd. and Shanghai Fuyi Education Information Consulting Co. Ltd. (Incorporated by reference to the Current Report on Form 8-K as filed on August 23, 2012).
	10.40	Letter of Management Confirmation for Hefei Meihua Vocational Training School dated as of August 17, 2012 between Peng Tuo Information Technology Co., Ltd. and China Education International, Inc. *
10.2		Share Pledge Agreement dated August 19, 2012 between Hangzhou Kunjiang Education Technology Co., Ltd. and Fenlong Xu and Wei Xu (Incorporated by reference to the Current Report on Form 8-K as filed on August 23, 2012).
	10.41	Exclusive Cooperation Agreement between Hangzhou Kunjiang Education Technology Co., Ltd., Shanghi Fuyi Education Information Consulting Co. Ltd, Fenglong Xu and Wei Xu.*
10.3		Power of Attorney dated August 19, 2012 between China Education Schools Co., Ltd and Shanghai Fuyi (Incorporated by reference to the Current Report on Form 8-K as filed on August 23, 2012).
	10.42	Share Pledge Agreement between Hangzhou Kunjiang Education Technology Co. Ltd., Fenglong Xu and Wei Xu.*
10.4		Option Agreement dated August 19, 2012 between Crown Union Resources Limited and Fenglong Xu and Wei Xu and China Education, as Collateral Agent (Incorporated by reference to the Current Report on Form 8-K as filed on August 23, 2012).
	10.43	Power of Attorney between Shanghai Fuyi Education Information Consulting Co. Ltd., Fenglong Xu and Wei Xu.*
10.5		Call Option Agreement dated August 19, 2012 between Fenglong Xu and Wei Xu and China Education Schools Co., Ltd. (Incorporated by reference to the Current Report on Form 8-K as filed on August 23, 2012).
	10.44	Call Option Agreement between Fenglong Xu, Wei Xu and China Education Services, Ltd.*
10.7		License Agreement dated September 1, 2010 between American Education Center, Inc. and Frontera Associates, Inc.*
	10.45	Option Agreement between Fenglong Xu, Wei Xu and Crown Union Resources Limited.*
10.8		Joint Marketing Agreement dated July 27, 2012 between China Education International, Inc. and RedChip Companies, Inc.*
	31.1	Section 302 Certification of Chief Executive Officer.*
10.9		Convertible Note for $20,000 dated November 19, 2012 between China Education International Inc. and Marjorie Group, LLC*
	31.2	Section 302 Certification of Principal Financial and Accounting Officer.*
10.10		Convertible Note for $66,000 dated November 19, 2012 between China Education International Inc. and Marjorie Group, LLC*
	32.1	Section 906 Certification of Chief Executive Officer and Principal Financial and Accounting Officer.*
10.11		Promissory Note dated January 7, 2013 between China Education International Inc. and China Direct Investments, Inc.*
31.1		Section 302 Certification of Chief Executive Officer*
31.2		Section 302 Certification of Chief Financial Officer*
32.1		Section 906 Certification of Chief Executive Officer and Chief Financial 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.
	**		ToIn beaccordance ~~filed~~with ~~within~~Regulation S-T, the ~~earlier~~XBRL-formatted ofinteractive 30data ~~days~~files ~~from~~that ~~the~~comprise ~~due~~Exhibit ~~date~~101 orin ~~filing date of~~ this ~~report~~Quarterly ~~pursuant~~Report toon ~~the~~Form ~~grace~~10-Q ~~period~~shall ~~provided~~be ~~for~~deemed ~~the~~“furnished” ~~filing of the first interactive data exhibit that includes detailed tagging of its footnotes~~ and ~~schedules~~not “filed”.

- 2125 -

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: August 20, 2012	/s/ Joel Mason
Date: March 6, 2013	/s/ Li (Lisa) Liu
	Joel Mason, Chief Executive Officer, Chairman of the Board of Directors and Chief Financial Officer
	Li (Lisa) Liu, Chief Executive Officer and Chief Financial Officer

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Filing Compare · CHINA EDUCATION INTERNATIONAL, INC.