**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: September 30, 2008


or





** ̈**  **TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**





Commission
      File Number: 333-39629




**KID
      CASTLE EDUCATIONAL CORPORATION**


(Exact
      name of Registrant as specified in its charter)





**Florida**
            **59-2549529**(State
                or other jurisdiction of incorporation or organization)
            (IRS
                Employer Identification No.)




**8th
                Floor, No. 98 Min Chuan Road, Hsien Tien**
              **Taipei,
                Taiwan ROC**(Address
                of principal executive offices)




**011-886-2-2218
                5996**(Registrant’s
                telephone number, including area code)**NONE**(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. 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 companyx





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


Yes  ̈  ****  **** No x




As
      of
      September 30, 2008, there were 25,000,000 shares of the Registrant’s common
      stock outstanding.





**FORM
      10-Q**




**KID
      CASTLE EDUCATIONAL CORPORATION**




**TABLE
      OF CONTENTS**




PagePART
                I
            FINANCIAL
                INFORMATIONItem
                1.        Condensed Consolidated
                Financial Statements
            
            2a)
                Condensed Consolidated Balance Sheets as of September 30, 2008 (unaudited)
                and December 31, 2007
            
            2-3b)
                Condensed Consolidated Statements of Operations for the nine months
                ended
                September 30, 2008 and September 30, 2007 (unaudited)
            
            4-5c)
                Condensed Consolidated Statements of Stockholders’ Equity
                (unaudited)
            
            6d)
                Condensed Consolidated Statements of Cash Flows for the nine months
                ended
                September 30, 2008 and September 30, 2007 (unaudited)
            
            7-8e)
                Notes to Condensed Consolidated Financial Statements
            
            9Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            
            18Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            
            23Item
                4. Controls and Procedures
            
            24PART
                II.
            OTHER
                INFORMATION
            
            24Item
                1. Legal Proceedings
            
            24Item
                1A Risk Factors
            
            24Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            25Item
                3. Defaults upon Senior Securities
            
            25Item
                4. Submission of Matters to a Vote of Security Holders
            
            25Item
                5. Other Information
            
            25Item
                6 Exhibits and Reports on Form 8-K
            
            25SIGNATURES
            
            26




-1-


***PART
      I. FINANCIAL INFORMATION***





**ITEM
      1.**  **CONDENSED
      CONSOLIDATED FINANCIAL STATEMENTS**





**Kid
      Castle Educational Corporation**


**Condensed
      Consolidated Balance Sheets**


(Expressed in US Dollars)





(Unaudited)
              September 30,
              2008
            
            December 31,
              2007ASSETSCurrent
                assetsCash
                and bank balances
            
            $
            1,742,176
            
            $
            1,238,212Bank
                fixed deposits - pledged (Note11)
            
            
            79,736
            
            
            363,562Notes
                and accounts receivable, net (Note 5)
            
            
            3,194,618
            
            
            2,453,868Inventories,
                net (Note 6)
            
            
            1,554,168
            
            
            2,008,739Other
                receivables (Note 7)
            
            
            156,157
            
            
            88,139Prepayments
                and other current assets (Note 8)
            
            
            810,823
            
            
            542,794Pledged
                notes receivable (Note 11)
            
            
            384,903
            
            
            557,983Deferred
                income tax assets
            
            
            46,201
            
            
            42,335Total
                current assets
            
            
            7,968,782
            
            
            7,295,632Deferred
                income tax assets
            
            
            51,370
            
            
            50,481Long-term
                investments (Note 9)
            
            
            119,653
            
            
            58,625Property
                and equipment, net
            
            
            2,475,860
            
            
            2,312,065Intangible
                assets, net of amortization (Note 10)
            
            
            421,038
            
            
            572,005Long-term
                notes receivable
            
            
            390,484
            
            
            420,636Pledged
                notes receivable (Note 11)
            
            
            215,630
            
            
            183,453Other
                assets
            
            
            356,048
            
            
            268,388Total
                assets
            
            $
            11,998,865
            
            $
            11,161,285LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                liabilitiesBank
                borrowings - short-term and maturing within one year (Note
                11)
            
            $
            219,044
            
            $
            1,212,534Notes
                and accounts payable
            
            
            931,401
            
            
            389,639Accrued
                expenses
            
            
            1,177,992
            
            
            985,764Other
                payables
            
            
            214,463
            
            
            573,237Deposits
                received
            
            
            905,957
            
            
            912,535Receipts
                in advance (Note 12)
            
            
            2,287,419
            
            
            2,372,403Income
                taxes payable
            
            
            105,041
            
            
            124,418Total
                current liabilities
            
            
            5,841,317
            
            
            6,570,530Bank
                borrowings maturing after one year (Note 11)
            
            
            1,644,657
            
            
            1,752,776Receipts
                in advance (Note 12)
            
            
            1,415,496
            
            
            1,034,260Deposits
                received
            
            
            736,079
            
            
            680,694Deferred
                liability
            
            
            41,810
            
            
            38,787Accrued
                pension liabilities (Note 13)
            
            
            408,330
            
            
            401,893Total
                liabilities
            
            
            10,087,689
            
            
            10,478,940




-2-





**Kid
      Castle Educational Corporation**





**Condensed
      Consolidated Balance Sheets - Continued**


(Expressed
      in US Dollars)





(Unaudited)
              September 30,
              2008
            
            December 31,
              2007Commitments
                and contingencies (Note 15)Minority
                interest
            
            
            224,465
            
            
            162,343Shareholders’
                equityCommon
                stock, no par share :60,000,000
                shares authorized; 25,000,000 issued and outstanding at September
                30, 2008
                and December 31, 2007
            
            
            8,592,138
            
            
            8,592,138Additional
                paid-in capital
            
            
            194,021
            
            
            194,021Legal
                reserve
            
            
            65,320
            
            
            65,320Accumulated
                deficit
            
            
            (5,897,489
            )
            
            (7,179,418
            )Accumulated
                other comprehensive loss
            
            
            (1,039,983
            )
            
            (932,027
            )Net
                loss not recognized as pension cost
            
            
            (227,296
            )
            
            (220,032
            )Total
                shareholders’ equity
            
            
            1,686,711
            
            
            520,002Total
                liabilities and shareholders’ equity
            
            $
            11,998,865
            
            $
            11,161,285




See
      accompanying Notes to Condensed Consolidated Financial
      Statements.


-3-


**Kid
      Castle Educational Corporation**




**Condensed
      Consolidated Statements of Operations (Unaudited)**




(Expressed
      in US Dollars)




Three months ended September 30,2008
            
            2007Operating
                RevenueSales
                of goods
            
            $
            2,764,230
            
            $
            2,935,660Franchising
                income
            
            
            562,351
            
            
            552,254Other
                operating revenue
            
            
            744,000
            
            
            620,038Total
                net operating revenue
            
            
            4,070,581
            
            
            4,107,952Operating
                costsCost
                of goods sold
            
            
            (1,123,317
            )
            
            (1,264,881
            )Cost
                of franchising
            
            
            (73,496
            )
            
            (232,124
            )Other
                operating costs
            
            
            (512,824
            )
            
            (238,917
            )Total
                operating costs
            
            
            (1,709,637
            )
            
            (1,735,922
            )Gross
                profit
            
            
            2,360,944
            
            
            2,372,030Advertising
                costs
            
            
            (1,236
            )
            
            (2,842
            )Other
                operating expenses
            
            
            (1,525,122
            )
            
            (1,463,233
            )Income
                from operations
            
            
            834,586
            
            
            905,955Interest
                expense, net
            
            
            (21,470
            )
            
            (18,161
            )Share
                of income of investments
            
            
            25,429
            
            
            39,253Other
                non-operating income (loss), net
            
            
            13,537
            
            
            (24,151
            )Income
                before income taxes
            
            
            852,082
            
            
            902,896Provision
                for taxes
            
            
            (15,893
            )
            
            (150,545
            )Income
                after income taxes
            
            
            836,189
            
            
            752,351Minority
                interest income
            
            
            (19,713
            )
            
            (45,847
            )Net
                income
            
            $
            816,476
            
            $
            706,504Earnings
                per share - basic and diluted
            
            $
            0.03
            
            $
            0.03Weighted-average
                shares used to compute earnings per share - basic and
                diluted
            
            
            25,000,000
            
            
            25,000,000





See
      accompanying Notes to Condensed Consolidated Financial
      Statements.


-4-


**Kid
      Castle Educational Corporation**




**Condensed
      Consolidated Statements of Operations (Unaudited)**




(Expressed
      in US Dollars)




Nine months ended September 30,2008
            
            2007Operating
                RevenueSales
                of goods
            
            $
            6,718,848
            
            $
            6,632,008Franchising
                income
            
            
            1,703,194
            
            
            1,642,432Other
                operating revenue
            
            
            1,713,125
            
            
            957,625Total
                net operating revenue
            
            
            10,135,167
            
            
            9,232,065Operating
                costsCost
                of goods sold
            
            
            (2,844,771
            )
            
            (2,795,509
            )Cost
                of franchising
            
            
            (260,292
            )
            
            (343,909
            )Other
                operating costs
            
            
            (1,211,993
            )
            
            (435,283
            )Total
                operating costs
            
            
            (4,317,056
            )
            
            (3,574,701
            )Gross
                profit
            
            
            5,818,111
            
            
            5,657,364Advertising
                costs
            
            
            (24,316
            )
            
            (21,015
            )Other
                operating expenses
            
            
            (4,547,616
            )
            
            (3,845,751
            )Income
                from operations
            
            
            1,246,179
            
            
            1,790,598Interest
                expense, net
            
            
            (70,214
            )
            
            (60,778
            )Share
                of income of investments
            
            
            55,216
            
            
            55,242Other
                non-operating income (loss), net
            
            
            174,385
            
            
            347,078Income
                before income taxes
            
            
            1,405,566
            
            
            2,132,140Provision
                for taxes
            
            
            (75,258
            )
            
            (343,556
            )Income
                after income taxes
            
            
            1,330,308
            
            
            1,788,584Minority
                interest income
            
            
            (48,379
            )
            
            (94,751
            )Net
                income
            
            $
            1,281,929
            
            $
            1,693,833Earnings
                per share - basic and diluted
            
            $
            0.05
            
            $
            0.07Weighted-average
                shares used to compute earnings per share - basic and
                diluted
            
            
            25,000,000
            
            
            25,000,000





See
      accompanying Notes to Condensed Consolidated Financial
      Statements.


-5-


**Kid
      Castle Educational Corporation**




**Condensed
      Consolidated Statements of Stockholders’ Equity**


(Expressed in US Dollars)





Common StockNumber of
              shares
            
            Amount
            
            Additional
              paid-in
              capital
            
            Legal
              reserve
            
            Accumulated
              deficit
            
            Accumulated
              other
              comprehensive
              loss
            
            Net loss not
              recognized as
              pension cost
            
            TotalBalance,
                December 31, 2006
            
            
            25,000,000
            
            $
            8,592,138
            
            $
            194,021
            
            $
            65,320
            
            $
            (9,056,567
            )
            $
            (330,713
            )
            $
            (98,952
            )
            $
            (634,753
            )Net
                income for 2007
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,877,149
            
            
            
            
            
            
            
            
            1,877,149Cumulative
                translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (601,314
            )
            
            
            
            
            (601,314
            )Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,275,835Repayment
                of a liability by issuance of common stock_Net
                loss not recognized as pension cost
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (121,080
            )
            $
            (121,080
            )Balance,
                December 31, 2007
            
            
            25,000,000
            
            $
            8,592,138
            
            $
            194,021
            
            $
            65,320
            
            $
            (7,179,418
            )
            $
            (932,027
            )
            $
            (220,032
            )
            $
            520,002Net
                income for the nine months ended September 30, 2008
                (Unaudited)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,281,929
            
            
            
            
            
            
            
            
            1,281,929Cumulative
                translation adjustment (Unaudited)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (107,956
            )
            
            
            
            
            (107,956
            )Comprehensive
                loss (Unaudited)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,173,973Net
                loss not recognized as pension cost
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (7,264
            )
            
            (7,264
            )Balance,
                September 30, 2008 (Unaudited)
            
            
            25,000,000
            
            $
            8,592,138
            
            $
            194,021
            
            $
            65,320
            
            $
            (5,897,489
            )
            $
            (1,039,983
            )
            $
            (227,296
            )
            $
            1,686,711




See
      accompanying Notes to Condensed Consolidated Financial
      Statements.


-6-


**K**  **id
      Castle Educational Corporation**




**Condensed
      Consolidated Statements of Cash Flows**


**(Unaudited)**


**** (Expressed in US Dollars)




Nine months ended September 30,2008
            
            2007Cash
                flows from operating activitiesNet
                income
            
            $
            1,281,929
            
            $
            1,693,833Adjustments
                to reconcile net income to net cash provided by operating
                activitiesDepreciation
                of property and equipment
            
            
            224,999
            
            
            157,175Impairment
                of goodwill
            
            
            43,946
            
            
            -Amortization
                of intangible assets
            
            
            130,486
            
            
            122,857Allowance
                for sales returns
            
            
            80,455
            
            
            64,379Allowance
                for doubtful debts
            
            
            74,760
            
            
            139,716Reversal
                of allowance for loss on inventory obsolescence and slow-moving
                items
            
            
            (11,253
            )
            
            (360,118
            )Loss
                on disposal of PP&E
            
            
            726
            
            
            2,666Minority
                interests
            
            
            48,379
            
            
            94,751Share
                of income of investments
            
            
            (55,216
            )
            
            (55,242
            )(Increase)/decrease
                in:Notes
                and accounts receivable
            
            
            (926,701
            )
            
            (662,701
            )Inventories
            
            
            508,846
            
            
            372,793Other
                receivables
            
            
            (113,487
            )
            
            108,330Prepayments
                and other current assets
            
            
            (267,809
            )
            
            (45,000
            )Deferred
                income tax assets
            
            
            (3,519
            )
            
            32,997Other
                assets
            
            
            (86,244
            )
            
            76,081Increase/(decrease)
                in:Notes
                and accounts payable
            
            
            551,797
            
            
            (191,414
            )Accrued
                expenses
            
            
            186,367
            
            
            (197,992
            )Other
                payables
            
            
            (334,131
            )
            
            424,960Receipts
                in advance
            
            
            253,755
            
            
            (125,205
            )Income
                taxes payable
            
            
            (21,786
            )
            
            67,748Deferred
                liability
            
            
            2,537
            
            
            1,793Deposits
                received
            
            
            26,628
            
            
            64,777Accrued
                pension liabilities
            
            
            671
            
            
            (11,431
            )Net
                cash provided by operating activities
            
            
            1,596,135
            
            
            1,775,753Cash
                flows from investing activitiesPurchase
                of property and equipment
            
            
            (362,284
            )
            
            (190,691
            )Change
                in investments in associated company
            
            
            -
            
            
            (222,872
            )Acquisition,
                net of cash acquired
            
            
            -
            
            
            58,365Proceeds
                from disposal of property and equipment
            
            
            2,236
            
            
            118Prepayment
                of long-term investments
            
            
            -
            
            
            -Acquisition
                of long-term investments
            
            
            -
            
            
            (854,123
            )Bank
                fixed deposits-pledged
            
            
            297,493
            
            
            (345,622
            )Pledged
                notes receivable
            
            
            155,998
            
            
            (433,690
            )Net
                cash provided by (used in) investing activities
            
            
            93,443
            
            
            (1,988,515
            )




-7-





**K**  **id
      Castle Educational Corporation**





**Condensed
      Consolidated Statements of Cash Flows – Continued**


**(Unaudited)**


(Expressed in US Dollars)




Nine months ended September 30,2008
            
            2007Cash flows
                from financing activitiesProceeds
                from bank borrowings
            
            
            -
            
            
            1,114,717Proceeds
                from loan from related parties
            
            
            127,993
            
            
            4,748Repayment
                of bank borrowings
            
            $
            (1,177,680
            )
            $
            (443,648
            )Repayment
                of loan from stockholders and transactions of related
                parties
            
            
            (42,426
            )
            
            (601,004
            )Net
                cash provided by (used in) financing activities
            
            
            (1,092,113
            )
            
            74,813Net
                increase (decrease) in cash and cash equivalents
            
            
            597,465
            
            
            (137,949
            )Effect
                of exchange rate changes on cash and cash equivalents
            
            
            (93,501
            )
            
            (280,693
            )Cash
                and cash equivalents at beginning of period
            
            
            1,238,212
            
            
            1,419,873Cash
                and cash equivalents at end of period
            
            $
            1,742,176
            
            $
            1,001,231





See
      accompanying Notes to Condensed Consolidated Financial
      Statements.


-8-





**K**  **id
      Castle Educational Corporation**





**Notes
      to Condensed Consolidated Financial Statements**




(Expressed
      in US Dollars)




**NOTE
      1 - ORGANIZATION AND DESCRIPTION OF BUSINESS**




Kid
      Castle Internet Technologies Limited (“KCIT”) was incorporated on December 17,
      1999 under the provisions of the Company Law of the Republic of China (“ROC”) as
      a limited liability company. KCIT is engaged in the business of children’s
      education focusing on the English language. The business comprises publication,
      sales and distribution of related books, magazines, audio and videotapes and
      compact disc, franchising and sales of merchandises complementary to the
      business. KCIT commenced operations in April 2000 when it acquired the above
      business from Kid Castle Enterprises Limited which was formerly owned by Mr.
      Kuo-An Wang and Mr. Yu-En Chiu. Kid Castle Enterprises Limited ceased operations
      on December 25, 2003.




On
      March
      9, 2001, KCIT formed a wholly-owned subsidiary, Premier Holding Investment
      Property Limited incorporated in the British Virgin Islands, which held the
      entire common stock of Higoal Developments Limited (“Higoal”), a company
      incorporated in the Cayman Islands on March 8, 2001. On September 10, 2001,
      Higoal established a wholly owned subsidiary, Kid Castle Educational Software
      Development Company Limited (“KCES”) in the People’s Republic of China (the
“PRC”). The existing operations of Higoal are principally located in Taiwan and
      are being expanded in the PRC. In June 2002, after KCIT undertook a series
      of
      group restructurings, KCIT became the direct owner of the outstanding shares
      of
      Higoal. Premier Holding Investment Property Limited was then liquidated in
      June
      2003.




On
      September 18, 2002, Higoal issued 11,880,000 shares of common stock to the
      stockholders of KCIT in exchange for 100% of the outstanding common stock of
      KCIT. As a result of this reorganization, KCIT became a wholly owned subsidiary
      of Higoal. On October 1, 2002, Kid Castle Educational Corporation (the
“Company”), formerly King Ball International Technology Limited Corporation,
      entered into an exchange agreement with Higoal whereby the Company issued to
      the
      stockholders of Higoal 11,880,000 shares of common stock of the Company in
      exchange for 100% of the issued and fully paid up capital of
      Higoal.




As
      a
      result of the share exchange, the former stockholders of Higoal hold a majority
      of the Company’s outstanding capital stock. Generally accepted accounting
      principles require in certain circumstances that a company whose stockholders
      retain the majority voting interest in the combined business to be treated
      as
      the acquirer for financial reporting purposes. Accordingly, the acquisition
      has
      been accounted for as a “reverse acquisition” whereby Higoal is deemed to have
      purchased the Company. However, the Company remains the legal entity and the
      registrant for Securities and Exchange Commission (“SEC”) reporting
      purposes.




In
      July
      2003, KCES entered into an agreement with 21 st Century
      Publishing House to incorporate Jiangxi 21 st Century
      Kid Castle Culture Media Co., Ltd (“Culture Media”). It was agreed that KCES and
      21 st Century
      Publishing House would each own 50% of Culture Media and that each party would
      contribute Renminbi (“RMB”) 1 million for its ownership interest. On July 2,
      2004, KCES acquired an additional 40% of in the equity of Culture Media from
      21 st Century
      Publishing House. KCES now owns 90% of Culture Media.




On
      December 27, 2006, KCES established a wholly-owned subsidiary, Shanghai Kid
      Castle Educational Info Constitution Company Limited (“KCEI”) in the PRC, with
      registered total capital of $153,778, in order to operate schools controlled
      by
      us in PRC. As of September 30, 2008, KCEI had total registered capital of
      $507,309.


-9-





The
      Company, Higoal and its subsidiaries are collectively referred to as the
“Group”. The operations of the Group are principally located in Taiwan and the
      PRC.




**NOTE
      2 - BASIS OF PRESENTATION**




The
      accompanying financial data as of September 30, 2008 and for the nine months
      ended September 30, 2008 and 2007 have been prepared by the Group, without
      audit, pursuant to the rules and regulations of the SEC using generally accepted
      accounting principles in the United States. Certain information and footnote
      disclosures normally included in financial statements prepared in accordance
      with accounting principles generally accepted in the United States have been
      condensed or omitted pursuant to such rules and regulations. However, the Group
      believes that the disclosures are adequate to make the information presented
      not
      misleading. These financial statements should be read in conjunction with the
      financial statements and the notes thereto included in the Group’s audited
      annual financial statements for the year ended December 31, 2007.




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      that affect the reported amounts of assets, liabilities, revenues and expenses
      and the disclosure of contingent assets and liabilities. Actual results could
      differ from these estimates.




**NOTE
      3 - SUMMARY OF IMPORTANT ACCOUNTING POLICIES**




REVENUE
      RECOGNITION




Sales
      of
      books, magazines, audio and video tapes, compact disc and other merchandises
      are
      recognized as revenue on the transfer of risks and rewards of ownership, which
      generally coincides with the time when the goods are delivered to customers
      and
      title has passed. Provision is made for expected future sales returns and
      allowances when revenue is recognized.




Franchise
      fees are the annual licensing fees for franchisees to use the Group’s brand name
      and consulting services. Franchising income is recognized on a straight-line
      basis over the terms of the relevant franchise agreements.




ALLOWANCE
      FOR DOUBTFUL ACCOUNTS




An
      allowance for doubtful accounts is provided based on the evaluation of
      collectability and on aging analysis of notes and accounts receivables. Under
      the aging analysis, 100% of any
      amount of overdue receivables in our ROC operations exceeding 365 days would
      be
      recognized as a doubtful account entry. Allowance for doubtful accounts in
      our
      PRC operations are recognized in two categories with varying percentages based
      on the number of days overdue. The categories are (1) overdue receivables
      between 181 and 365 days (based on an analysis of the financial strength of
      each
      customer, an allowance ranging between 10% and 80% is assigned) and (2) overdue
      receivables exceeding 365 days, so allowance of 100% is
      assigned.


-10-





INVENTORIES




Inventories
      are stated at the lower of cost or market. Cost includes all costs of purchase,
      cost of conversion and other costs incurred in bringing the inventories to
      their
      present location and condition, and is calculated using the weighted average
      method. Market value is determined by reference to the sales proceeds of items
      sold in the ordinary course of business after the balance sheet date or to
      management estimates based on prevailing market conditions.





PROPERTY
      AND EQUIPMENT AND DEPRECIATION




Property
      and equipment are stated at cost. Depreciation is computed using the
      straight-line method to allocate the cost of depreciable assets over the
      estimated useful lives of the assets as follows:




Estimated useful life
              (in years)Land
            
            IndefiniteBuildings
            
            50Furniture
                and fixtures
            
            3-10Transportation
                equipment
            
            2.5-5Miscellaneous
                equipment
            
            5-10




Maintenance,
      repairs and minor renewals are charged directly to the statement of operations
      as incurred. When assets are disposed of, the related cost and accumulated
      depreciation thereon are removed from the financial statements and any resulting
      gain or loss is included in the statement of operations.




LONG-LIVED
      ASSETS




Long-lived
      assets are reviewed for impairment whenever events or changes in circumstances
      indicate that the carrying amount of the assets might not be recoverable. The
      Group does not perform a periodic assessment of assets for impairment in the
      absence of such information or indicators. Conditions that would necessitate
      an
      impairment assessment include a significant decline in the observable market
      value of an asset, a significant change in the extent or manner in which an
      asset is used, or a significant adverse change that would indicate that the
      carrying amount of an asset or group of assets is not recoverable. For
      long-lived assets to be held and used, the Group measures fair value based
      on
      quoted market prices or based on discounted estimates of future cash
      flows.




INCOME
      TAXES




The
      Company and its subsidiaries account for income taxes in accordance with
      Statement of Financial Accounting Standards (“SFAS”) No. 109 “Accounting for
      Income Taxes”. Under SFAS No. 109, deferred tax liabilities or assets at the end
      of each period are determined using the currently enacted tax rate. Valuation
      allowances are established when it is considered more likely than not that
      the
      deferred tax assets will not be realized.




INTANGIBLE
      ASSETS




Franchises
      and copyrights are stated at cost and amortized on the straight-line method
      over
      their estimated useful lives of 10 years, the goodwill is tested for impairment
      on a recurring basis.




COMPREHENSIVE
      INCOME (LOSS)




Comprehensive
      income (loss) is defined as the change in equity of a company during a
      period from transactions and other events and circumstances excluding
      transactions resulting from investments from owners and distributions to owners.
      Comprehensive income (loss) is disclosed in the condensed consolidated
      statement of stockholders’ equity.


-11-





NET
      EARNINGS (LOSS) PER COMMON SHARE




The
      Group
      computes net earnings (loss) per share in accordance with SFAS No. 128,
“Earnings per Share”. Under the provisions of SFAS No. 128, basic net earnings
      (loss) per share is computed by dividing the net earnings (loss) available
      to
      common shareholders for the period by the weighted average number of shares
      of
      common stock outstanding during the period. The calculation of diluted net
      earnings (loss) per share gives effect to common stock equivalents. For the
      nine
      months ended September 30, 2008 and 2007, the Group did not have any potential
      common stock shares.




RECLASSIFICATION




The
      presentation of certain prior information has been reclassified to conform
      to
      current presentation.




**NOTE
      4 - RECENT ACCOUNTING PRONOUNCEMENTS**




In
      March
      2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
      and Hedging Activities-an amendment of FASB Statement No. 133.” SFAS No. 161
      gives financial statement users better information about the reporting entity's
      hedges by providing for qualitative disclosures about the objectives and
      strategies for using derivatives, quantitative data about the fair value of
      and
      gains and losses on derivative contracts, and details of credit-risk-related
      contingent features in their hedged positions. SFAS No. 161 is effective for
      financial statements issued for fiscal years beginning after November 15, 2008
      and interim periods within those years. The Group does not expect the adoption
      of SFAS No. 161 to have a material effect on the Group’s Consolidated Financial
      Statements.





Other
      recent accounting pronouncements issued by the FASB (including its Emerging
      Issues Task Force), the AICPA, and the SEC did not or are not believed by
      management to have a material impact on the Group’s present or future
      Consolidated Financial Statements.





In
      December 2007, the FASB released SFAS No. 141(R), “Business Combinations.” This
      standard revises and enhances the guidance set forth in SFAS No. 141 by
      establishing a definition for the “acquirer,” providing additional guidance on
      the recognition of acquired contingencies and noncontrolling interests, and
      broadening the scope of the standard to include all transactions involving
      a
      transfer in control, irrespective of the consideration involved in the transfer.
      SFAS No. 141(R) is effective for business combinations for which the acquisition
      date occurs in a fiscal year beginning on or after December 15, 2008. Although
      the standard will not have any impact on our current Consolidated Financial
      Statements, application of the new guidance could be significant to the Company
      in the context of future merger and acquisition activity.





In
      December 2007, the FASB released SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements-an amendment of ARB No. 51.” This statement
      amends ARB 51 to establish accounting and reporting standards for the
      noncontrolling interest in a subsidiary and for the deconsolidation of a
      subsidiary. It clarifies that a noncontrolling interest in a subsidiary is
      an
      ownership interest in the consolidated entity that should be reported as equity
      in the consolidated financial statements. SFAS No. 160 is effective for fiscal
      years, and interim periods within those fiscal years, beginning on or after
      December 15, 2008. We do not expect the standard to have a material impact
      on
      our Consolidated Financial Statements.


-12-





In
      February 2007, the FASB released SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities." The standard is effective for
      fiscal years beginning after November 15, 2007. The standard provides entities
      the ability, on an elective basis, to report most financial assets and financial
      liabilities at fair value, with corresponding gains and losses recognized in
      current earnings. We did not elect the fair value option under SFAS No. 159
      as
      of January 1, 2008 for any of our financial assets and liabilities that were
      not
      already accounted for at fair value. We will consider applying the fair value
      option to future transactions as provided by the standard.




**NOTE**  **5
      - NOTES AND ACCOUNTS RECEIVABLE**





**September 30,**
              **2008**
            
            **December 31,**
              **2007**(Unaudited)Notes
                and accounts receivable-
                Third parties
            
            $
            3,686,733
            
            $
            2,757,425-
                Related parties
            
            
            72,143
            
            
            150,363Total
            
            
            3,758,876
            
            
            2,907,788Allowance
                for doubtful accounts and sales returns
            
            
            (564,258
            )
            
            (453,920
            )Notes
                and accounts receivable, net
            
            $
            3,194,618
            
            $
            2,453,868





**NOTE
      6 - INVENTORIES**





**September 30,**
              **2008**
            
            **December 31,**
              **2007**(Unaudited)Work
                in process
            
            $
            111,983
            
            $
            180,985Finished
                goods and other merchandises
            
            
            1,760,126
            
            
            2,151,9621,872,109
            
            
            2,332,947Less:
                Allowance for obsolete inventories and decline of market
                value
            
            
            (317,941
            )
            
            (324,208
            )$
            1,554,168
            
            $
            2,008,739





**NOTE**  **7
      - OTHER RECEIVABLES**





**September 30,**
              **2008**
            
            **December 31,**
              **2007**(Unaudited)Other
                receivables - third parties:Tax
                paid on behalf of landlord
            
            $
            
            
            $Advances
                to staff
            
            
            109,125
            
            
            87,188Grants
                from Market Information CenterOther
                receivables
            
            
            45,967
            
            
            633Sub-total
            
            
            155,092
            
            
            87,821Other
                receivables - related parties
            
            
            1,065
            
            
            318$
            156,157
            
            $
            88,139




-13-





**NOTE
      8**  **-
      PREPAYMENTS AND OTHER CURRENT ASSETS**




**September 30,**
              **2008**
            
            **December 31,**
              **2007**(Unaudited)Prepayments
            
            $
            810,741
            
            $
            523,199Temporary
                payments
            
            
            82
            
            
            15,598Prepaid
                interest
            
            
            -
            
            
            2,713Others
            
            
            -
            
            
            1,284$
            810,823
            
            $
            542,794





**NOTE
      9- INTEREST IN ASSOCIATES**




**September 30,**
              **2008**
            
            **December 31,**
              **2007**(Unaudited)21stCentury Kid Castle Language and Education Center (“Education Center”)
                (Note (i))Investment
                cost
            
            $
            109,720
            
            $
            101,787Share
                of loss
            
            
            8,494
            
            
            (39,641
            )$
            118,214
            
            $
            62,146Tianjin
                Kid Castle Educational Investment Consulting Co., Ltd. (“Tianjin
                Consulting”) (Note (ii))Investment
                cost
            
            $
            102,405
            
            $
            95,000Share
                of loss
            
            
            (100,966
            )
            
            (98,521
            )$
            1,439
            
            $
            (3,521
            )Total
            
            $
            119,653
            
            $
            58,625




Note:




(i)
            In
                October 2003, the Group obtained the PRC government’s approval to co-found
                Education Center with 21stCentury Publishing House in the PRC. In 2004, Education Center registered
                the total capital as RMB 1,500,000, and KCES and 21stCentury Publishing House each owns 50% of the investee. It has been
                determined that the Group has significant influence and should therefore
                account for its investee on the equity
                method.




-14-





For
      the
      nine months ended September 30, 2008 and 2007, the Group recognized investment
      income accounted for under the equity method in Education Center of $50,097
      and
      $ 50,601, respectively.




(ii)
            On
                April 1, 2004, the Group signed a joint venture agreement with Tianjin
                Foreign Enterprises & Experts Service Corp., in Tianjin City, PRC.
                Pursuant to this joint venture agreement, the Group and Tianjin Foreign
                Enterprises & Experts Service Corp. each owns a 50% interest in
                Tianjin Kid Castle Educational Investment Consulting Co., Ltd. It
                has been
                determined that the Group has significant influence and should therefore
                account for its investee on the equity
                method.




For
      the
      nine months ended September 30, 2008 and 2007, the Group recognized an
      investment revenue of $5,119 and $5,698, respectively, accounted for under
      the
      equity method, in Tianjin Consulting.





**NOTE**  **10
      - INTANGIBLE ASSETS**




**September 30,**
              **2008**
            
            **December 31,**
              **2007**(Unaudited)Gross
                carrying amountFranchise
            
            $
            1,064,646
            
            $
            1,049,538Copyrights
            
            
            625,841
            
            
            616,960Goodwill
            
            
            235,236
            
            
            218,227Less:
                Accumulated amortizationFranchise
            
            
            (904,949
            )
            
            (813,392
            )Copyrights
            
            
            (531,965
            )
            
            (478,144
            )(1,436,914
            )
            
            (1,291,536
            )Less:
                Impairment of goodwillGoodwill
            
            
            (67,771
            )
            
            (21,184
            )**Net**
            
            $
            421,038
            
            $
            572,005




Amortization
      charged to operations was $130,486 and $122,857 for the nine months ended
      September 30, 2008 and 2007, respectively. The impairment of goodwill was
      $43,946 for the nine months ended September 30, 2008.




The
      estimated aggregate amortization expenses for each of the two succeeding fiscal
      years are as follows:





2009
            
            $
            169,0482010
            
            
            42,263$
            211,311





**NOTE
      11 - BANK BORROWINGS**




Notes
            
            **September 30,**
              **2008**
            
            **December 31,**
              **2007**(Unaudited)Bank
                term loans
            
            
            (i)
            
            $
            455,559
            
            $
            580,553Short-term
                unsecured bank loans
            
            
            (ii)
            
            
            31,292
            
            
            1,027,446Mid-term
                secured bank loan
            
            
            (iii)
            
            
            1,376,849
            
            
            1,357,3111,863,700
            
            
            2,965,310Less:
                Balances maturing within one year included in current
                liabilitiesBank
                term loans
            
            
            
            
            
            —
            
            
            185,088Short-term
                unsecured bank loans
            
            
            
            
            
            31,292
            
            
            1,027,446Mid-term
                secured bank loan
            
            
            
            
            
            187,752
            
            
            —219,044
            
            
            1,212,534Bank
                borrowings maturing after one year
            
            
            
            
            $
            1,644,656
            
            $
            1,752,776




Note:




(i)
            This
                line item represents bank loans that have been secured by a pledge
                of
                post-dated checks amounting to $904,682 and $753,962 that we have
                received
                from franchisees and the Group’s bank deposits of $27,752 and $22,053 as
                of September 30, 2008 and December 31, 2007, respectively, for the
                purpose
                of financing operations. The repayment dates of the loans coincided
                with
                the maturity dates of the corresponding pledged post-dated checks,
                which
                were extended on October 1, 2008 and will be due on September 30,
                2009.
                The weighted average interest rates were 5.86% and 5.85% per annum as
                of September 30, 2008 and 2007,
                respectively.




For
      the
      nine months ended September 30, 2008 and 2007, interest expense charged to
      operations in respect of bank loans was $25,134 and $4,438,
      respectively.




(ii)
            In
                August 2005, KCIT obtained an unsecured short-term loan to finance
                the
                Group’s operations in the amount of $304,553, which was collateralized
                by
                KCIT’s refundable deposits of $60,911 and notes receivables approximating
                30% of the loan balance, and guaranteed by two directors and stockholders
                of the Group. The loan bore interest at the lending bank’s basic fixed
                deposit rate plus 3.29% per annum, which was extended in February
                2007 and
                was due in February 2008. Of the principal, $146,186 is repayable
                in 12
                equal monthly installments. The loan was fully repaid on November
                28,
                2007.





-15-





In
      May
      2007, KCES obtained a $339,287 short-term loan to finance the Group’s
      operations. The loan was guaranteed by Director Min Tan Yang and KCIT, and
      was
      collateralized by $340,000 of KCIT deposits. It was due in April 2008. The
      loan
      bore interest at the PRC basic borrowing rate per annum. The loan was fully
      repaid on April 10, 2008.





For
      the
      nine months ended September 30, 2008 and 2007, interest expense charged to
      operations in respect of the above unsecured short-term loans was $421 and
      $31,008, respectively.




(iii)
            In
                August 2005, KCIT obtained a bank loan in the principal amount of
                $944,115
                to repay its mortgage loan that was originally granted by a bank
                on August
                10, 2003 and to finance its operations. The loan was secured by the
                Group’s land and buildings and personal guarantees provide by two
                directors of the Group. The loan bore interest at the lending bank’s basic
                fixed deposit rate plus 0.69% per annum for the years 2005 to 2007,
                and
                plus 1.69% per annum for the year 2008.  On August 10, 2005, the
                bank extended the term of the loan and it was repayable in 84 equal
                monthly installments starting on August 10, 2012. The loan was fully
                repaid on November 28, 2007.




In
      February 2005, KCIT obtained a new bank loan of $456,830, which bore interest
      at
      6% per annum and was repayable in 36 equal monthly installments. The last
      installment was due on February 2, 2008 and the loan was fully repaid on
      January 9, 2008.




In
      August
      2005, KCIT obtained a new bank loan of $213,187, which was repayable in 60
      equal
      monthly installments. The last installment was due on August 10, 2010, however,
      the loan was fully repaid on November 28, 2007.





In
      November 28, 2007, KCIT obtained a new bank loan of $1,542,401. The loan is
      secured by the Group’s land and buildings and is personally guaranteed by two
      directors of the Group. It bears interest at the lending bank’s basic fixed
      deposit rate plus 1.45% per annum. Of the principal, $370,176 is repayable
      in 24
      equal monthly installments. A final balloon payment of $1,172,225 is due on
      November 28, 2009. The applicable interest rate was approximately 3.6% per
      annum
      as of September 2008 and December 2007.




For
      the
      nine months ended September 30, 2008 and 2007, interest expense charged to
      operations amounted to $42,592 and $28,559, respectively.





**NOTE
      12 - RECEIPTS IN ADVANCE**




The
      balance comprises:





Notes
            
            **September 30,**
              **2008**
            
            **December 31,**
              **2007**(Unaudited)Current
                liabilities:Sales
                deposits received
            
            
            (i)
            
            $
            635,625
            
            $
            303,258Franchising
                income received
            
            
            (ii)
            
            
            1,196,966
            
            
            1,456,267Subscription
                fees received
            
            
            (iii)
            
            
            433,446
            
            
            516,136Others
            
            
            
            
            
            20,728
            
            
            96,742Related
                parties
            
            
            
            
            
            654
            
            
            —2,287,419
            
            
            2,372,403Long-term
                liabilities:Franchising
                income received
            
            
            (ii)
            
            
            1,415,496
            
            
            1,034,260$
            3,702,915
            
            $
            3,406,663




-16-





Note:




(i)
        The balance represents receipts in advance from customers for goods sold
      to them.




(ii)
        The balance mainly represents franchising income received in advance
      which is attributable to the periods after the respective period end dates.




(iii)
        The balance   represents subscription fees received in advance for
      subscription of magazines published by the Group.




**NOTE
      13 - RETIREMENT PLANS**





The
      Group maintains tax-qualified defined contribution and benefit retirement plans
      for its employees in accordance with the ROC Labor Standard Law. As a result,
      the Group currently maintains two different retirement plans with contribution
      and benefit calculation formulas. On July 1, 2005, the Bureau of National Health
      Insurance issued new labor retirement pension regulations in Taiwan. The Group
      has a new defined contribution retirement plan (the “New Plan”) covering all
      regular employees of KCIT. KCIT contributes monthly an amount equal to 6% of
      the
      employees’ base salaries and wages to the Bureau of National Health Insurance.
      The Group still maintains the former benefit retirement plan (the “Old Plan”)
      which commenced in September 2003, and only applies to the regular
      employees of KCIT who were employed prior to June 2005. KCIT contributes monthly
      an amount equal to 2% of the employees’ total salaries and wages to an
      independent retirement trust fund deposited with the Central Trust of China
      in
      accordance with the ROC Labor Standards Law in Taiwan. The retirement fund
      is
      not included in the Group’s financial statements. Net periodic pension cost is
      based on annual actuarial valuations which use the projected unit credit cost
      method of calculation and is charged to the consolidated statement of operations
      on a systematic basis over the average remaining service lives of current
      employees. Under the Old Plan, the employees are entitled to receive retirement
      benefits upon retirement in the manner stipulated by the ROC Labor Standard
      Law
      in Taiwan. The benefits under the old plan are based on various factors such
      as
      years of service and the final base salary preceding retirement.





The
      net periodic pension cost is as follows:




**Nine months ended September 30,****2008**
            
            **2007**(Unaudited)Service
                cost
            
            $
            
            
            $Interest
                cost
            
            
            9,684
            
            
            9,162Expected
                return on assets
            
            
            (1,569
            )
            
            (1,818
            )Amortization
                of unrecognized loss
            
            
            2,424
            
            
            2,217Net
                periodic pension cost
            
            $
            10,539
            
            $
            9,561




-17-





**NOTE**  **14
      - GEOGRAPHICAL SEGMENTS**




The
      Group
      is principally engaged in the business of child educational teaching materials
      and related services focusing on English language in Taiwan and the PRC.
      Accordingly, the Group has two reportable geographic segments: Taiwan and the
      PRC. The Group evaluates the performance of each geographic segment based on
      its
      net income or loss. The Group also accounts for inter-segment sales as if the
      sales were made to third parties. Information concerning the operations in
      these
      geographical segments is as follows:





Taiwan
            
            The
                PRC
            
            Total
            
            Corporate
            
            Eliminations
            
            ConsolidatedNine months
              ended
              September 30,
              2008
            
            Nine months
              ended
              September 30,
              2007
            
            Nine months
              ended
              September 30,
              2008
            
            Nine months
              ended
              September 30,
              2007
            
            Nine months
              ended
              September 30,
              2008
            
            Nine months
              ended
              September 30,
              2007
            
            Nine months
              ended
              September 30,
              2008
            
            Nine months
              ended
              September 30,
              2007
            
            Nine months
              ended
              September 30,
              2008
            
            Nine months
              ended
              September 30,
              2007
            
            Nine months
              ended
              September 30,
              2008
            
            Nine months
              ended
              September 30,
              2007RevenueExternal
                revenue
            
            $
            5,193,759
            
            $
            5,287,849
            
            $
            4,941,408
            
            $
            3,944,216
            
            $
            10,135,167
            
            $
            9,232,065
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            10,135,167
            
            $
            9,232,065Inter-segment
                revenue
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —$
            5,193,759
            
            $
            5,287,849
            
            $
            4,941,408
            
            $
            3,944,216
            
            $
            10,135,167
            
            $
            9,232,065
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            10,135,167
            
            $
            9,232,065Profit
                from
              Operations
            
            $
            673,668
            
            $
            946,475
            
            $
            683,818
            
            $
            973,485
            
            $
            1,357,486
            
            $
            1,919,960
            
            $
            (111,307
            )
            $
            (129,362
            )
            $
            —
            
            $
            —
            
            $
            1,246,179
            
            $
            1,790,598Capital
                expenditures
            
            $
            75,863
            
            $
            35,359
            
            $
            207,126
            
            $
            41,408
            
            $
            282,989
            
            $
            76,767
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            282,989
            
            $
            76,767





September 30,
                2008
              
              December 31,
                2007
              
              September 30,
                2008
              
              December 31,
                2007
              
              September 30,
                2008
              
              December 31,
                2007
              
              September 30,
                2008
              
              December 31,
                2007
              
              September 30,
                2008
              
              December 31,
                2007
              
              September 30,
                2008
              
              December 31,
                2007Total assets
              
              $
              7,417,665
              
              $
              7,495,418
              
              $
              5,023,622
              
              $
              4,063,399
              
              $
              12,441,287
              
              $
              11,558,817
              
              $
              2,901
              
              $
              2,597
              
              $
              (445,323
              )
              $
              (400,129
              )
              $
              11,998,865
              
              $
              11,161,285




**NOTE
      15 - COMMITMENT AND CONTINGENCIES**





**A.
      Lease Commitment**





As of September 30, 2008, the Company’s future minimum
      lease payments under a non-cancelable operating lease expiring in excess of
      one
      year are as follows:




Years
                ending December 31,2009
            
            $
            484,0122010
            
            
            276,5132011
            
            
            342,9702012
            
            
            712,496Years
                2013 to 2017
            
            
            1,264,272$
            3,080,263





**B.
      Going concern**





The
      accompanying financial statements have been prepared assuming the Group will
      continue as a going concern. The financial statements do not include any
      adjustments to reflect the possible future effects on the recoverability and
      classification of assets or the amounts and classification of liabilities that
      may result from the outcome of this uncertainty.




**ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATION**





This
      report contains certain forward-looking statements within the meaning of Section
      21E of the Securities and Exchange Act of 1934, as amended, and information
      relating to us that are based on the beliefs and assumptions made by our
      management as well as information currently available to the management. When
      used in this document, the words “anticipate,” “believe,” “estimate,” “expect”
and similar expressions, are intended to identify forward-looking statements.
      Such statements reflect our current views with respect to future events and
      are
      subject to certain risks, uncertainties and assumptions. If one or more of
      these
      risks or uncertainties materialize, or if underlying assumptions prove
      incorrect, actual results may vary materially from those described herein as
      anticipated, believed, estimated or expected. Certain of these risks and
      uncertainties are discussed under the caption “Factors That May Affect Our
      Future Results And Financial Condition” contained herein and other factors
      disclosed in our filings with the SEC including, but not limited to our Annual
      Report on Form 10-K for the year ended December 31, 2007. We do not intend
      to update these forward-looking statements.


-18-





**OVERVIEW**




We are a leading provider in the PRC and Taiwan of English-language
      instruction and educational services to children for whom Chinese is the primary
      language. Our focus is on children between two and twelve years old. In 2007
      we
      taught or provided educational materials for approximately 1,300,000 students
      at
      over 7,430 locations through our franchise and cooperative school
      operations.





We
      commenced operations in 1986 as an English-language school, and since then
      we
      have expanded our franchise operations to provide bilingual kindergarten
      instruction, computer training, and tutorial services. In September 1999, we
      began offering a variety of multimedia, including educational videos, textbooks,
      workbooks, and educational software, authored by us as fully functional,
      stand-alone products or as supplements to our classroom-based and Internet-based
      instruction.





We
      have
      incurred operating losses during most of our operating history. However, we
      have
      been profitable since 2007. The accumulated deficit has improved since Messrs.
      Pai and Yang have assumed their respective management roles, and as of September
      30, 2008, the balance of accumulated deficit was $5,897,489. Although we still
      have an accumulated deficit, we have positive cash flow from operations. Barring
      significant, unforeseen developments in the PRC, we believe we can decrease
      our
      reliance on loans from shareholders and banks to meet our funding requirements
      in the future. Despite our expectation to decrease reliance on loans, we may
      again be required to seek additional financing to meet our funding requirements
      and no assurances can be given that bank loans or loans from shareholders will
      be available in the future. If we are unable to secure sufficient financing,
      our
      liquidity position would be adversely affected, and we may need to seek a more
      expensive source of funding to finance our operations.




**CRITICAL
      ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES**





Our
      discussion and analysis of our financial condition and results of operations
      are
      based upon our financial statements, which have been prepared in accordance
      with
      accounting principles generally accepted in the United States. The preparation
      of these financial statements requires us to make estimates and judgments that
      affect the reported amounts of assets, liabilities, revenues and expenses,
      and
      related disclosure of contingent assets and liabilities. On an on-going basis,
      we evaluate our estimates, including those related to product returns, bad
      debts, inventories, equity investments, income taxes, financing operations,
      pensions, commitments and contingencies. We base our estimates on historical
      experience and on various other assumptions that are believed to be reasonable
      under the circumstances, the results of which form the basis for making
      judgments about the carrying values of assets and liabilities that are not
      readily apparent from other sources. Actual results may differ from these
      estimates under different assumptions or conditions. We believe the following
      critical accounting policies affect our more significant judgments and estimates
      used in the preparation of our financial statements.





**Revenue
      Recognition.** We
      recognize sales of teaching materials and educational tools and equipment as
      revenue when title of the product and risk of ownership are transferred to
      the
      customer, which occurs at the time of delivery, or when the goods arrive at
      the
      customer designated location, depending on the associated shipping terms.
      Additionally, we deliver products sold by our distributors directly to the
      distributors’ customers and as such the delivered goods are recognized as
      revenue in a similar way as sales to our direct customers. We estimate sales
      returns and discounts based on historical experience and record them as
      reductions to revenues. If market conditions were to decline, we may take
      actions to increase sales discounts, possibly resulting in an incremental
      reduction of revenue at the time when revenues are recognized.




**Allowance
      for Doubtful Accounts.** We
      maintain allowances for doubtful accounts for estimated losses resulting from
      the inability of our customers to make required payments. If the financial
      condition of our customers were to deteriorate, resulting in an impairment
      of
      their ability to make payments, additional allowances may be
      required.


-19-


**Allowance
      for Obsolete Inventories and Lower of Cost or Market.** We write
      down our inventory for estimated obsolescence or unmarketable inventory equal
      to
      the difference between the cost of inventory and the estimated market value
      based upon assumptions about inventory aging, future demand and market
      conditions. If actual market conditions are less favorable than those projected
      by management, additional inventory write-downs may be required.





**Investment
      Impairments.** We hold
      equity interests in companies having operations in areas within our strategic
      focus. We record an investment impairment charge when we believe an investment
      has experienced a decline in value that is not temporary. Future adverse changes
      in market conditions or poor operating results of underlying investments could
      result in losses or an inability to recover the carrying value of the
      investments that may not be reflected in an investment’s current carrying value,
      thereby possibly requiring an impairment charge in the future.





**Fixed
      Assets and Depreciation.** Our
      fixed assets are stated at cost. Major improvements and betterments to existing
      facilities and equipment are capitalized. Expenditures for maintenance and
      repairs that do not extend the life of the applicable asset are charged to
      expense as incurred. Buildings are depreciated over a 50-year term. Fixtures
      and
      equipment are depreciated using the straight-line method over their estimated
      useful lives, which range from two-and-a-half years to ten years.





**Impairment
      of Long-Lived Assets.** We
      review our fixed assets and other long-lived assets for impairment whenever
      events or changes in circumstances indicate that the carrying amount of an
      asset
      may not be recoverable. Recoverability of assets to be held and used is measured
      by a comparison of the carrying amount of an asset to undiscounted future net
      cash flows expected to be generated by the asset over its remaining useful
      life.
      If such assets are considered to be impaired, the impairment to be recognized
      is
      measured by the amount by which the carrying amount of the assets exceeds the
      fair value of the assets. The estimate of fair value is generally based on
      quoted market prices or on the best available information, including prices
      for
      similar assets and the results of using other valuation techniques.





As
      of September 30, 2008, the balance of our amortizable intangible assets was
      $421,038, including franchise-related intangible assets of $159,697 and
      copyrights of $93,876. The amortizable intangible assets are amortized on a
      straight-line basis over estimated useful lives of 10 years. The balance of
      goodwill was $167,465, which is tested for impairment on a recurring basis.
      In
      determining the useful lives and recoverability of the intangibles, assumptions
      must be made regarding estimated future cash flows and other factors to
      determine the fair value of the assets, which may not represent the true fair
      value. If these estimates or their related assumptions change in the future,
      there may be significant impact on our results of operations in the period
      of
      the change incurred.





**Income
      Taxes.** We
      account for income taxes under the asset and liability method. Deferred tax
      assets and liabilities are recognized for the future tax consequences
      attributable to differences between the financial statement carrying amounts
      of
      existing assets and liabilities and their respective tax bases, and tax loss
      carry-forwards. 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
      income in the period that includes the enactment date. Deferred tax assets
      are
      subject to valuation allowances based upon management’s estimates of
      realizability. Actual results may differ significantly from management’s
      estimate.





**RESULTS
      OF OPERATIONS**





**Three
      Months Ended September 30, 2008 compared to Three Months Ended September 30,
      2007**





**Total
      Net Operating Revenue.** Total
      net
      operating revenue consists of sales of goods, franchising income and other
      operating revenue. Total net operating revenues decreased by $37,371, or 1%,
      to
      $4,070,581 for the three months ended September 30, 2008 from $4,107,952 for
      the
      three months ended September 30, 2007. The decrease in total net operating
      revenue in third quarter 2008 consisted of the decrease in sales of goods of
      $171,430, increase in the franchising income of $10,097, and increase in other
      operating revenue of $123,962.





**Sales
      of goods.** The
      decrease in sales of goods, from $2,935,660 for the three months ended September
      30, 2007 to $2,764,230 for the three months ended September 30, 2008, a decrease
      of $171,430 or 6%, was mainly due to decrease of sales in our Taiwan
      operations.





**Franchising
      income.** The
      increase in franchising income, from $552,254 for the three months ended
      September 30, 2007 to $562,351 for the three months ended September 30, 2008,
      or
      2%, was mainly due to the increase in franchising income in our Shanghai
      operations.





**Other
      operating revenue.** Our
      other
      operating revenues represent revenues from other activities and services such
      as
      training of teachers, arranging for personal English language tutors, organizing
      field trips and educational fairs, fees for designing the school layout of
      our
      franchised schools, and tuition from school controlled by us. Other operating
      revenue increased by $123,962, to $744,000 for the three months ended September
      30, 2008 from $620,038 for the three months ended September 30, 2007. The
      increase was mainly due to revenues derived from operating schools controlled
      by
      us in the PRC and Taiwan.





**Gross
      Profit.** Gross
      profit decreased by $11,086, or 0.5%, to $2,360,944 for the three months ended
      September 30, 2008 from $2,372,030 for the three months ended September 30,
      2007. This was mainly due to increase in other operating costs from our
      operations of schools controlled by us in the PRC and Taiwan.





**Total
      Operating Expenses.** Total
      operating expenses increased by $60,283, or 4%, to $1,526,358 for the three
      months ended September 30, 2008 from $1,466,075 for the three months ended
      September 30, 2007, principally due to increases in expenditures to fund daily
      operations in our Shanghai operations.





**Other
      Operating Expenses.** Other
      operating expenses increased by $61,889, or 4%, to $1,525,122 for the three
      months ended September 30, 2008 from $1,463,233 for the three months ended
      September 30, 2007, principally due to increases in daily expenditures in our
      Shanghai operations.





**Interest
      Expenses, Net.** Net
      interest expenses increased by $3,309, or 18%, to $21,470 for the three months
      ended September 30, 2008 from $18,161 for the three months ended September
      30,
      2007, primarily due to the increase of the borrowings during the three months
      ended September 30, 2008 compared to the three months ended September 30, 2007.





**Provision
      for Taxes.** Provision
      for taxes for the three months ended September 30, 2008 and 2007 were $15,893
      and $150,545, respectively. These provisions for income taxes relate to income
      taxes resulting from our operations in Taiwan.


-20-


**Nine
      Months Ended September 30, 2008 compared to Nine Months Ended September 30,
      2007**





**Total
      Net Operating Revenue.** Total
      net operating revenue consists of sales of goods, franchising income and other
      operating revenue. Total net operating revenues increased by $903,102, or 10%,
      to $10,135,167 for the nine months ended September 30, 2008 from $9,232,065
      for
      the nine months ended September 30, 2007. This was mainly due to the increase
      in
      sales of goods of $86,840, franchising income of $60,762, and other operating
      revenues of $755,500.





**Sales
      of goods.** The
      increase in sales of goods, from $6,632,008 for the nine months ended September
      30, 2007 to $6,718,848, for the nine months ended September 30, 2008 (a 1%
      increase), was mainly due to the increase in net sales of goods in Shanghai
      operations.





**Franchising
      income.** The 4%
      increase in franchising income, from $1,642,432 for the nine months ended
      September 30, 2007 to $1,703,194, for the nine months ended September 30, 2008,
      was mainly due to the increase in franchising income from our Shanghai
      operations.





**Other
      operating revenue.** Our
      other operating revenues represent revenues from other activities and services
      such as training of teachers, arranging for personal English language tutors,
      organizing field trips and educational fairs, fees for designing the school
      layout of our franchised schools, and the tuition from schools. Other operating
      revenue increased by $755,500, or 79%, to $1,713,125 for the nine months ended
      September 30, 2008 from $957,625 for the nine months ended September 30, 2007.
      A
      major portion of the increase was due to increases in operating revenue from
      schools controlled by us in the PRC and Taiwan.





**Gross
      Profit.** Gross
      profit increased by $160,747, or 3%, to $5,818,111 for the nine months ended
      September 30, 2008, from $5,657,364 for the nine months ended September 30,
      2007. The increase in Gross Profit was mainly due to the increase in revenue
      from our Shanghai operations.





**Total
      Operating Expenses.** Total
      operating expenses increased by $705,166, or 18%, to $4,571,932 for the nine
      months ended September 30, 2008, from $3,866,766 for the nine months ended
      September 30, 2007. The increase in total operating expenses was mainly due
      to
      increases in expenditures to fund daily operations in our Shanghai
      operations.





**Other
      Operating Expenses.** Other
      operating expenses increased by $701,865, or 18%, to $4,547,616 for the nine
      months ended September 30, 2008, from $3,845,751 for the nine months ended
      September 30, 2007.The increase in operating expenses was mainly due to
      increases in expenditures to fund daily operations in our Shanghai
      operations.





**Interest
      Expenses, Net.** Net
      interest expenses increased by $9,436, or 16%, to $70,214 for the nine months
      ended September 30, 2008 from $60,778 for the nine months ended September 30,
      2007. The increase in net interest expenses was mainly due to the increase
      of
      the borrowings during the nine months ended September 30, 2008, compared to
      the
      nine months ended September 30, 2007. (See Note 11 to our Condensed Consolidated
      Financial Statements for more information.)





**Other
      Non-operating Income, Net.** Net
      other non-operating income decreased by $172,693, or 50%, to $174,385 for the
      nine months ended September 30, 2008, from $347,078 for the nine months ended
      September 30, 2007. The decrease in net other non-operating income was mainly
      due to the reduction in the allowance for obsolete inventory from $360,118
      for
      the nine months ended September 30, 2007 to $11,253 for the nine months ended
      September 30, 2008.


-21-


**Provision
      for Taxes.** Provision for taxes for the nine months ended September 30, 2008 and 2007 were
      $75,258 and $343,556, respectively. These provisions for income taxes relate
      to
      income taxes resulting from our operations in Taiwan.





**LIQUIDITY
      AND CAPITAL RESOURCES**





As
      of September 30, 2008, our principal sources of liquidity included cash and
      bank
      balances of $1,742,176, which increased $503,964 from the balance of $1,238,212
      at December 31, 2007. The increase was mainly due to continuing
      profitability of our operations.





We
      have
      assertively expanded our business in the PRC. The Shanghai operations have
      turned profitable in 2006, and the Group has turned profitable in the first
      quarter of 2007. We anticipate continued expansion of the demand for learning
      materials and an increase in the number of franchise schools. Furthermore,
      we
      foresee better utilization of capital and funds as we identify and implement
      alternatives for restructuring and refinancing. In order to increase its profit
      margin, the Group has operated direct-owned schools since 2007. Due to the
      rapid
      expansion in our Shanghai operations, the Group foresees additional need for
      funds in the near future to facilitate its expansion plans during 2008. As
      discussed in Note 11 to our Condensed Consolidated Financial Statements, the
      majority of the Group’s existing loans are guaranteed by two directors of the
      Group who have expressed their willingness to continue to support the Group
      until other sources of funds have been obtained. Moreover, management believes
      that, with continuous growth in the sales in the PRC, the existing directors’
support, and the new bank facilities, the Group will have sufficient funds
      for
      operations. The financial statements do not include any adjustments to reflect
      the possible future effects on the recoverability and classification of assets
      or the amounts and classification of liabilities that may result from the
      outcome of this uncertainty.





Net
      cash provided by operating activities was $1,596,135 and $1,775,753 during
      the
      nine months ended September 30, 2008 and 2007, respectively. The $179,618
      difference was primarily attributed to (i) an increase in net income of
      $1,281,929 during the nine months ended September 30, 2008, compared to an
      increase of net income of $1,693,833 during the nine months ended September
      30,
      2007, (ii) an increase in notes and accounts receivable of $926,701 during
      the
      nine months ended September 30, 2008, compared to an increase of notes and
      accounts receivable of $662,701 during the nine months ended September 30,
      2007
      and (iii) a decrease of reversal of allowance for loss on inventory obsolescence
      and slow-moving items in the amounts of $11,253 during the nine months ended
      September 30, 2008, compared to a decrease of reversal of allowance for loss
      on
      inventory obsolescence and slow-moving items in the amounts of $360,118 during
      the nine months ended September 30, 2007.





Net
      cash provided by investing activities was $93,443 during the nine months ended
      September 30, 2008 and net cash used in investing activities was $1,988,515
      during the nine months ended September 30, 2007. The $2,081,958 difference
      was
      primarily attributable to an acquisition during the nine months ended September
      30, 2007.





Net
      cash used in financing activities during the nine months ended September 30,
      2008 was $1,092,113, compared to net cash provided by financing activities
      of
      $74,813 during the nine months ended September 30, 2007. The $1,166,926
      difference was primarily attributable to (i)$1,177,680 in cash used in repayment
      of bank borrowings during the nine months ended September 30, 2008, compared
      to
      $443,648 used for the same purpose during the nine months ended September 30,
      2007 and (ii) proceeds from bank borrowings of $1,114,717 during the nine months
      ended September 30, 2007.





**Off-Balance
      Sheet Arrangements**





As
      of September 30, 2008, we did not engage in any off-balance sheet arrangements
      as defined in Item 303(a)(4) of Regulation S-K promulgated by the SEC
      under the Securities Exchange Act of 1934.


-22-


**Bank
      Borrowing**





One
      of our financing sources is from bank borrowings. As of September 30, 2008
      and
      2007, the balances of bank borrowings, including current and non-current
      portions, were $1,863,701 and $2,437,302, respectively.





**Pension
      Benefit**





As of July 1, 2005, the Group maintains two different
      retirement plans, according to the ROC Labor Standard Law, a non-contributory
      and funded defined contribution retirement plan covering all regular employees
      of KCIT, our subsidiary in Taiwan, and the benefit retirement plan which
      commenced in September 2003, and only applies to the regular employees of KCIT
      who were employed prior to June 2005, as described in Note14 to our Condensed
      Consolidated Financial Statements. The benefits expected to be paid in each
      of
      the next five fiscal years, and in the aggregate for the five fiscal years
      thereafter are $0 and $16,735, respectively. We also make defined contributions
      to a retirement benefits plan for our employees in the PRC in accordance with
      local regulations. The contributions made by us for the nine months ended
      September 30, 2008 and 2007 amounted to $41,865, and $39,611,
      respectively.





**New
      Accounting Pronouncements**





See
      Note
      4 to the Consolidated Financial Statements





**Non-GAAP
      Financial Measures**





None.




**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





We
      are exposed to market risk, including from changes in certain foreign currency
      exchange rates and interest rates. All of these market risks arise in the normal
      course of business, as we do not engage in speculative trading activities.
      We
      have not entered into derivative or hedging transactions to manage risk in
      connection with such fluctuations.





The
      following analysis provides quantitative information regarding our exposure
      to
      foreign currency exchange risk and interest rate risk.





***Interest
      rate exposure***





We
      are
      exposed to fluctuating interest rates related to variable rate bank borrowings.
      In analyzing the effect of interest rate fluctuations based on the average
      balances of our outstanding bank borrowings for fiscal year 2008, we have
      projected that, if interest rates were to increase by one percent, the result
      would be an annual increase in our interest expense of $21,413. This analysis
      does not take into consideration the effect of changes in the level of overall
      economic activity on interest rate fluctuations.





***Foreign
      currency exposure***





We
      have operations in both Taiwan and the PRC. The functional currency of Higoal
      and its subsidiary, KCIT, is NT Dollars and the financial records are
      maintained and the financial statements are prepared for these entities in
      NT
      Dollars. The functional currency of KCES, of its consolidated
      investee, Culture Media, and of KCEI is RMB and the financial
      records are maintained and the financial statements are prepared for these
      entities in RMB. In the normal course of business, these operations are not
      exposed to fluctuations in currency values. We do not generally enter into
      derivative financial instruments in the normal course of business, nor do we
      use
      such instruments for speculative purposes. The translation from the applicable
      local currency assets and liabilities to the U.S. Dollar is performed using
      exchange rates in effect at the balance sheet date except for shareholders’
equity, which is translated at historical exchange rates. Revenue and expense
      accounts are translated using average exchange rates during the period. Gains
      and losses resulting from such translations are recorded as a cumulative
      translation adjustment, a separate component of shareholders’
equity.


-23-


**ITEM
      4. CONTROLS AND PROCEDURES**





**  ***Conclusion
      Regarding the Effectiveness of Disclosure Controls and
      Procedures***





Pursuant
      to Exchange Act Rule 13a-15(b) our management has performed an evaluation of
      the
      effectiveness of our disclosure controls and procedures. The term disclosure
      controls and procedures as defined in Exchange Act Rule Rule 13a-15(e) means
      controls and other procedures of an issuer that are designed to ensure that
      information required to be disclosed by the issuer in the reports that it files
      or submits under the Exchange Act is recorded, processed, summarized and
      reported, within the time periods specified in the SEC’s rules and forms.
      Disclosure controls and procedures include, without limitation, controls and
      procedures designed to ensure that information required to be disclosed by
      an
      issuer in the reports that it files or submits under the Exchange Act is
      accumulated and communicated to the issuer's management, including its principal
      executive and principal financial officers, or persons performing similar
      functions, as appropriate to allow timely decisions regarding required
      disclosure.





Based
      on
      deficiencies noted by our auditors, problems discovered relating to misuse
      of
      company funds by a company officer, and other issues noted in our management’s
      evaluation our conclusion is that as of September 30, 2008 our disclosure
      controls and procedures were ineffective. We are taking measures to improve
      our
      disclosure controls and procedures, including instituting a new Enterprise
      Resource Planning (“ERP”) system and engaging an outside accounting firm to
      advise the Company with respect to setting up internal auditing and other
      controls and procedures. The ERP system, when fully operational, will enable
      the
      centralization of all information required to be disclosed pursuant to the
      Exchange Act to be digitally recorded, processed, summarized and reported in
      a
      timely and secured manner. During the last phase of ERP system integration,
      certain difficulties were encountered that have prevented the ERP system to
      be
      satisfactorily declared effective and independently operational by the
      management. In addition to that, the original dates scheduled to conduct certain
      assessments has also been interfered since the company hired to assist the
      implementation of the new ERP system unexpectedly ceased its operation in
      September 2008. The Company is assertively seeking to engage a new system
      consulting company to continue the integration process. It is anticipated by
      management that the new system will become fully operational in the fourth
      fiscal quarter 2009. The old system used by the Company will then be phased
      out.




The
      Company recognizes that the disclosure controls and procedures were inadequate;
      it is assertively attending to the inadequacy and believes that implementation
      of ERP will significantly strengthen the Company’s disclosure controls and
      procedures.





***Changes
      in Internal Control Over Financial Reporting***  **




There
      were no changes in the Company’s internal control over financial reporting
      during the quarter ended September 30, 2008 that have materially affected,
      or
      are reasonably likely to materially affect, our internal control over financial
      reporting.





During
      the last quarter, we have continued to implement a comprehensive ERP system
      that, when fully operational, will enhance our internal controls over financial
      reporting. The ERP system has been fully installed and the system has been
      running in parallel with the old system since 2007. The system is expected
      to be
      fully operational in the fourth fiscal quarter 2009. The ERP system will perform
      the following functions:





 ̈
            Maintain
                detailed records and produce comprehensive financial statements on
                a
                periodic basis allowing management to review and detect irregular
                financial activities;




 ̈
            Place
                different check-points on the progression of ordinary monetary activities
                of the business; and




 ̈
            Delineate
                individual and/departmental responsibilities and effectively separate
                respective departmental transactions so as to prevent occurrence
                of
                intentional misappropriation of
                funds.





**PART
      II OTHER INFORMATION**




**ITEM
      1. LEGAL PROCEEDINGS**





We have no material pending legal proceedings.




**ITEM
      1A. RISK FACTORS**





In
      addition to the other information set forth in this report, you should carefully
      consider the factors discussed in Part 1, “Item 1A. Risk Factors” in
      our Annual Report on Form 10-K for the year ended December 31, 2007, which
      could materially affect our business, financial condition or future results.
      We
      caution the reader that these risk factors may not be exhaustive. We operate
      in
      a continually changing business environment and new risk facts emerge from
      time
      to time. Management cannot predict such new risk factors, nor can we assess
      the
      impact, if any, of such new risk factors on our business or the extent to which
      any factor, or combination of factors, may impact our business. There have
      not
      been any material changes during the quarter ended September 30, 2008 from
      the
      risk factors disclosed in the above-mentioned Form 10-K for the year ended
      December 31, 2007.


-24-


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





None.




**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





None.




**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





None.




**ITEM
      5. OTHER INFORMATION**





None.




**ITEM
      6. EXHIBITS**




A.
            
            Exhibits31.1
            
            Rule 13a-14(a)
                Certification of Principal Executive Officer31.2
            
            Rule 13a-14(a)
                Certification of Principal Financial Officer32.1
            
            Section 1350
                Certification of Principal Executive Officer and Principal Financial
                Officer


-25-


**SIGNATURES**




In
      accordance with the requirements of the Exchange Act, the Registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.





Dated:
      November 13, 2008





By:
            /s/
                Suang-Yi PaiName:
            Suang-Yi
                PaiTitle:
            Chief
                Financial Officer