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**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

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**FORM      10-Q**

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

**SECURITIES      EXCHANGE ACT OF 1934**

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

**SECURITIES      EXCHANGE ACT OF 1934**

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**KID      CASTLE EDUCATIONAL CORPORATION**

| **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**

**011-886-22218      5996**

**NONE**

** **
** **
** x**
** **

** **
** **
** **
** **
**x**

** **
** **
**x**

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**FORM      10-Q **

**KID      CASTLE EDUCATIONAL CORPORATION **

**TABLE      OF CONTENTS**

|                    |   |                                     |                                                                                                                                                       | Page |
|-------------------------|--------|------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------|
| PART                I   |   |  FINANCIAL              INFORMATION |                                                                                                                                                       |
|                    |   |  Item 1.                            | Unaudited                Condensed Consolidated Financial Statements                                                                                       | 2    |
|                    |   |                                     | a)                Condensed Consolidated Balance Sheet as of June 30, 2006 and December                31,                2005                             | 2    |
|                    |   |                                     | b)                Condensed Consolidated Statements of Operations for the three months                ended                June 30, 2006 and June 30, 2005 | 3    |
|                    |   |                                     | c)                Condensed Consolidated Statements of Operations for the six months                ended                June 30, 2006 and June 30, 2005   | 4    |
|                    |   |                                     | d)                Condensed Consolidated Statements of Stockholders’ Equity                                                                          | 5    |
|                    |   |                                     | e)                Condensed Consolidated Statements of Cash Flows for the six months                ended                June 30, 2006 and June 30, 2005   | 6    |
|                    |   |                                     | f)                Notes to Condensed Consolidated Financial Statements                                                                                     | 8    |
|                    |   |  Item 2.                            | Management’s                Discussion and Analysis of Financial Condition and Results of                Operations                                  | 23   |
|                    |   |  Item 3.                            | Quantitative                and Qualitative Disclosures About Market Risk                                                                                  | 28   |
|                    |   |  Item 4.                            | Controls                and Procedures                                                                                                                     | 29   |
| PART                II. |   |  OTHER              INFORMATION     |
|                    |   |  Item 1.                            | Legal                Proceedings                                                                                                                           | 31   |
|                    |   |  Item 1A                            | Risk                Factors                                                                                                                                | 31   |
|                    |   |  Item 2.                            | Unregistered                Sales of Equity Securities and Use of Proceeds                                                                                 | 31   |
|                    |   |  Item 3.                            | Defaults                upon Senior Securities                                                                                                             | 31   |
|                    |   |  Item 4.                            | Submission                of Matters to a Vote of Security Holders                                                                                         | 31   |
|                    |   |  Item 5.                            | Other                Information                                                                                                                           | 31   |
|                    |   |  Item 6                             | Exhibits                                                                                                                                                   | 31   |
| SIGNATURES              | 32     |

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***PART      I. FINANCIAL INFORMATION***

| **ITEM              1.** | **FINANCIAL                STATEMENTS** |
|--------------------------|-----------------------------------------|

**Kid      Castle Educational Corporation**

**Condensed      Consolidated Balance Sheets**

|                                                                                              |   | June                30,2006 |       | December                31,2005 |   |
|---------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|---------------------------------|--------|
|                                                                                              |   | (Unaudited)                 |       |                            |   |
| ASSETS                                                                                            |   |                        |       |                            |   |
| Current                assets                                                                     |   |                        |       |                            |   |
| Cash                and bank balances                                                             |   | $                           | 1,285,438  |                            | $      | 613,391 |   |
| Bank                fixed deposits - pledged (Note 12)                                            |   |                        | 129,698    |                            |   | 120,813 |   |
| Notes                and accounts receivable, net (Notes 5)                                       |   |                        | 3,009,621  |                            |   | 2,593,276 |   |
| Inventories,                net (Note 6)                                                          |   |                        | 1,553,396  |                            |   | 2,069,492 |   |
| Other                receivables (Notes 7)                                                        |   |                        | 271,769    |                            |   | 223,063 |   |
| Prepayments                and other current assets (Note 8)                                      |   |                        | 319,025    |                            |   | 411,526 |   |
| Pledged                notes receivable (Note 12)                                                 |   |                        | 650,383    |                            |   | 849,704 |   |
| Deferred                income tax assets                                                         |   |                        | 123,006    |                            |   | 72,992 |   |
| Total                current assets                                                               |   |                        | 7,342,336  |                            |   | 6,954,257 |   |
| Deferred                income tax assets                                                         |   |                        | 48,609     |                            |   | 46,382 |   |
| Long-term                investments (Note 9)                                                     |   |                        | 62,719     |                            |   | 71,158 |   |
| Property                and equipment, net                                                        |   |                        | 1,765,360  |                            |   | 1,808,411 |   |
| Intangible                assets, net of amortization (Note 11)                                   |   |                        | 625,284    |                            |   | 699,246 |   |
| Long-term                notes receivable                                                         |   |                        | 875,663    |                            |   | 482,483 |   |
| Pledged                notes receivable (Note 12)                                                 |   |                        | 188,784    |                            |   | 357,825 |   |
| Other                assets                                                                       |   |                        | 346,883    |                            |   | 563,175 |   |
| Total                assets                                                                       |   | $                           | 11,255,638 |                            | $      | 10,982,937 |   |
| LIABILITIES                AND STOCKHOLDERS’ EQUITY                                         |   |                        |       |                            |   |   |   |
| Current                liabilities                                                                |   |                        |       |                            |   |   |   |
| Bank                borrowings - short-term and maturing within one                year (Note 12) |   | $                           | 1,046,430  |                            | $      | 1,516,906 |   |
| Notes                and accounts payable                                                         |   |                        | 1,369,230  |                            |   | 1,385,478 |   |
| Accrued                expenses                                                                   |   |                        | 728,868    |                            |   | 560,733 |   |
| Amounts                due to related parties (Note 10)                                           |   |                        | 841,437    |                            |   | 977,838 |   |
| Other                payables (Note 14)                                                           |   |                        | 801,372    |                            |   | 1,057,161 |   |
| Deposits                received                                                                  |   |                        | 599,761    |                            |   | 462,007 |   |
| Receipts                in advance (Note 13)                                                      |   |                        | 2,887,189  |                            |   | 2,353,680 |   |
| Income                tax payable                                                                 |   |                        | 226,735    |                            |   | 122,481 |   |
| Other                Current Liabilities                                                          |   |                        | 95,079     |                            |   | — |   |
| Total                current liabilities                                                          |   |                        | 8,596,101  |                            |   | 8,436,284 |   |
| Bank                borrowings maturing after one year (Note 12)                                  |   |                        | 1,347,655  |                            |   | 1,640,391 |   |
| Receipts                in advance (Note 13)                                                      |   |                        | 1,542,355  |                            |   | 1,130,207 |   |
| Deposits                received                                                                  |   |                        | 789,236    |                            |   | 864,196 |   |
| Deferred                liability                                                                 |   |                        | 35,757     |                            |   | 35,416 |   |
| Accrued                pension liabilities (Note 15)                                              |   |                        | 183,145    |                            |   | 174,387 |   |
| Total                liabilities                                                                  |   |                        | 12,494,249 |                            |   | 12,280,881 |   |

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**Kid      Castle Educational Corporation**

**Condensed      Consolidated Balance Sheets - Continued**

|                                                                                                                                                       |   | June                30,2006 |       | December                31,2005 |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|---------------------------------|--------|
|                                                                                                                                                       |   | (Unaudited)                 |       |                            |   |
| Commitments                and contingencies (Note 17)                                                                                                     |   |                        |       |                            |   |
|                                                                                                                                                       |   |                        |       |                            |   |
| Minority                interest                                                                                                                           |   |                        | 42,549     |                            |   | 28,627 |   |
|                                                                                                                                                       |   |                        |       |                            |   |   |   |
| Shareholders’                equity                                                                                                                  |   |                        |       |                            |   |   |   |
| Common                stock, no par share:                                                                                                                 |   |                        |       |                            |   |   |   |
| 25,000,000                shares authorized; 18,999,703 shares issued and outstanding at June                30,                2006 and December 31, 2005 |   |                        | 7,669,308  |                            |   | 7,669,308 |   |
| Additional                paid-in capital                                                                                                                  |   |                        | 194,021    |                            |   | 194,021 |   |
| Legal                reserve                                                                                                                               |   |                        | 65,320     |                            |   | 65,320 |   |
| Accumulated                deficit                                                                                                                         |   |                        | (8,925,276 | )                               |   | (9,010,356 | ) |
| Accumulated                other comprehensive loss                                                                                                        |   |                        | (284,533   | )                               |   | (244,864 | ) |
| Total                shareholders’ equity                                                                                                            |   |                        | (1,281,160 | )                               |   | (1,326,571 | ) |
| Total                liabilities and shareholders’ equity                                                                                            |   | $                           | 11,255,638 |                            | $      | 10,982,937 |   |

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**Kid      Castle Educational Corporation**

**Condensed      Consolidated Statements of Operations**

|                                                                                                                |   | Three                months ended June 30, |       |
|---------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                                                                                |   | 2006                                       |       | 2005 |   |
|                                                                                                                |   | (Unaudited)                                |       |
| Operating                Revenue                                                                                    |   |                                       |       |   |   |
| Sales                of goods                                                                                       |   | $                                          | 1,309,033  |   | $ | 1,174,176 |   |
| Franchising                income                                                                                   |   |                                       | 688,141    |   |   | 710,121 |   |
| Other                operating revenue                                                                              |   |                                       | (70,988    | ) |   | 156,436 |   |
| Total                net operating revenue                                                                          |   |                                       | 1,926,186  |   |   | 2,040,733 |   |
| Operating                costs                                                                                      |   |                                       |       |   |   |   |   |
| Cost                of goods sold                                                                                   |   |                                       | (562,738   | ) |   | (579,442 | ) |
| Cost                of franchising                                                                                  |   |                                       | (91,242    | ) |   | (63,042 | ) |
| Other                operating costs                                                                                |   |                                       | (39,326    | ) |   | (103,075 | ) |
| Total                operating costs                                                                                |   |                                       | (693,306   | ) |   | (745,559 | ) |
| Gross                profit                                                                                         |   |                                       | 1,232,880  |   |   | 1,295,174 |   |
| Advertising                costs                                                                                    |   |                                       | (14,747    | ) |   | (23,491 | ) |
| Other                operating expenses                                                                             |   |                                       | (1,429,510 | ) |   | (1,465,044 | ) |
| (Loss)                income from operations                                                                        |   |                                       | (211,377   | ) |   | (193,361 | ) |
| Interest                expenses, net                                                                               |   |                                       | (86,752    | ) |   | (56,730 | ) |
| Share                of income (loss) of investments                                                                |   |                                       | (491       | ) |   | — |   |
| Other                non-operating income (loss), net                                                               |   |                                       | 38,910     |   |   | 102,563 |   |
| (Loss)                income before income taxes                                                                    |   |                                       | (259,710   | ) |   | (147,528 | ) |
| Benefit                (provision) for taxes                                                                        |   |                                       | (18,428    | ) |   | (                41,297 | ) |
| (Loss)                income after income taxes                                                                     |   |                                       | (278,138   | ) |   | (188,825 | ) |
| Minority                interest income                                                                             |   |                                       | 5,359      |   |   | (19,202 | ) |
| Net                (loss) income                                                                                    |   | $                                          | (272,779   | ) | $ | (208,027 | ) |
| (Loss)                earnings per share - basic and diluted                                                        |   | $                                          | (0.014     | ) | $ | (                0.01 | ) |
| Weighted-average                shares used to compute (loss) earnings per share - basic and                diluted |   |                                       | 18,999,703 |   |   | 18,999,703 |   |

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**Kid      Castle Educational Corporation**

**Condensed      Consolidated Statements of Operations**

|                                                                                                                |   | Six                months ended June 30, |       |
|---------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|------------|
|                                                                                                                |   | 2006                                     |       | 2005 |   |
|                                                                                                                |   | (Unaudited)                              |       |
| Operating                Revenue                                                                                    |   |                                     |       |   |   |
| Sales                of goods                                                                                       |   | $                                        | 3,529,529  |   | $ | 3,549,331 |   |
| Franchising                income                                                                                   |   |                                     | 1,194,688  |   |   | 1,308,046 |   |
| Other                operating revenue                                                                              |   |                                     | 174,496    |   |   | 306,348 |   |
| Total                net operating revenue                                                                          |   |                                     | 4,898,713  |   |   | 5,163,725 |   |
| Operating                costs                                                                                      |   |                                     |       |   |   |   |   |
| Cost                of goods sold                                                                                   |   |                                     | (1,370,225 | ) |   | (1,507,173 | ) |
| Cost                of franchising                                                                                  |   |                                     | (171,367   | ) |   | (176,655 | ) |
| Other                operating costs                                                                                |   |                                     | (81,577    | ) |   | (177,271 | ) |
| Total                operating costs                                                                                |   |                                     | (1,623,169 | ) |   | (1,861,099 | ) |
| Gross                profit                                                                                         |   |                                     | 3,275,544  |   |   | 3,302,626 |   |
| Advertising                costs                                                                                    |   |                                     | (17,288    | ) |   | (56,854 | ) |
| Other                operating expenses                                                                             |   |                                     | (2,844,640 | ) |   | (3,250,544 | ) |
| (Loss)                income from operations                                                                        |   |                                     | 413,616    |   |   | (4,772 | ) |
| Interest                expenses, net                                                                               |   |                                     | (120,125   | ) |   | (115,983 | ) |
| Share                of income (loss) of investments                                                                |   |                                     | (9,085     | ) |   | 12,483 |   |
| Other                non-operating income (loss), net                                                               |   |                                     | 1,175      |   |   | 53,624 |   |
| (Loss)                income before income taxes                                                                    |   |                                     | 285,581    |   |   | (54,648 | ) |
| Benefit                (provision) for taxes                                                                        |   |                                     | (186,909   | ) |   | (                184,750 | ) |
| (Loss)                income after income taxes                                                                     |   |                                     | 98,672     |   |   | (239,398 | ) |
| Minority                interest income                                                                             |   |                                     | (13,592    | ) |   | (19,059 | ) |
| Net                (loss) income                                                                                    |   | $                                        | 85,080     |   | $ | (258,457 | ) |
| (Loss)                earnings per share - basic and diluted                                                        |   | $                                        | 0.004      |   | $ | (                0.01 | ) |
| Weighted-average                shares used to compute (loss) earnings per share - basic and                diluted |   |                                     | 18,999,703 |   |   | 18,999,703 |   |

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

**Condensed      Consolidated Statements of Stockholders’ Equity**

|                                                                         |   |                Common                Stock |       |  Additional |   |           |   |         |    |  Accumulated                other |   |                              |   |
|------------------------------------------------------------------------------|--------|-------------------------------------------------|------------|------------------|--------|----------------|--------|--------------|---------|----------------------------------------|--------|-----------------------------------|--------|
|                                                                         |   | Number                of shares                 |       | Amount           |   | paid-incapital |   | Legalreserve |    | Accumulateddeficit                     |   | comprehensive                loss |   | Total |   |
| Balance,                December 31, 2004                                    |   |                                            | 18,999,703 |             | $      | 7,669,308      |   | $            | 194,021 |                                   | $      | 65,320                            |   | $ | (7,312,074 | ) | $ | (222,650 | ) | $ | 393,925 |   |
| Net                loss for 2005                                             |   |                                            | -          |             |   | -              |   |         | -       |                                   |   | -                                 |   |   | (1,698,282 | ) |   | - |   |   | (1,698,282 | ) |
| Cumulative                translation adjustment                             |   |                                            | -          |             |   | -              |   |         | -       |                                   |   | -                                 |   |   | - |   |   | (22,214 | ) |   | (22,214 | ) |
| Comprehensive                loss                                            |   |                                            |       |             |   |           |   |         |    |                                   |   |                              |   |   |   |   |   |   |   |   | (1,720,496 | ) |
|                                                                         |   |                                            |       |             |   |           |   |         |    |                                   |   |                              |   |   |   |   |   |   |   |   |   |   |
| Balance,                December 31, 2005                                    |   |                                            | 18,999,703 |             | $      | 7,669,308      |   | $            | 194,021 |                                   | $      | 65,320                            |   | $ | (9,010,356 | ) | $ | (244,864 | ) | $ | (1,326,571 | ) |
| Net                income for the six months ended June 30, 2006 (Unaudited) |   |                                            | -          |             |   | -              |   |         | -       |                                   |   | -                                 |   |   | 85,080 |   |   | - |   |   | 85,080 |   |
| Cumulative                translation adjustment (Unaudited)                 |   |                                            | -          |             |   | -              |   |         | -       |                                   |   | -                                 |   |   | - |   |   | (39,669 | ) |   | (39,669 | ) |
| Comprehensive                loss (Unaudited)                                |   |                                            |       |             |   |           |   |         |    |                                   |   |                              |   |   |   |   |   |   |   |   | 45,411 |   |
|                                                                         |   |                                            |       |             |   |           |   |         |    |                                   |   |                              |   |   |   |   |   |   |   |   |   |   |
| Balance,                June 30, 2006 (Unaudited)                            |   |                                            | 18,999,703 |             | $      | 7,669,308      |   | $            | 194,021 |                                   | $      | 65,320                            |   | $ | (8,925,276 | ) | $ | (284,533 | ) | $ | (1,281,160 | ) |

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

**Condensed      Consolidated Statements of Cash Flows**

|                                                                                                                     |   | Six                months ended June 30, |       |
|--------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|------------|
|                                                                                                                     |   | 2006                                     |       | 2005 |   |
|                                                                                                                     |   | (Unaudited)                              |       |
|                                                                                                                     |   |                                     |       |   |   |
| Cash                flows from operating activities                                                                      |   |                                     |       |   |   |
| Net                (loss) income                                                                                         |   | $                                        | 85,080     |   | $ | (258,457 | ) |
| Adjustments                to reconcile net (loss) income to net                cash provided by operating activities    |   |                                     |       |   |   |   |   |
| Depreciation                of property and equipment                                                                    |   |                                     | 93,908     |   |   | 223,862 |   |
| Amortization                of intangible assets                                                                         |   |                                     | 83,873     |   |   |   |   |
| Allowance                for sales returns                                                                               |   |                                     | 2,356      |   |   | 92,463 |   |
| Allowance                for doubtful debts                                                                              |   |                                     | 609,912    |   |   | 110,063 |   |
| Provision                (reversal) of allowance for loss on inventory obsolescence and slow-moving                items |   |                                     | 90,588     |   |   | 95,147 |   |
| Minority                interests                                                                                        |   |                                     | 13,592     |   |   | 19,059 |   |
| Share                of loss (gain) of investments                                                                       |   |                                     | 9,085      |   |   | (12,483 | ) |
| (Increase)/decrease                in:                                                                                   |   |                                     |       |   |   |   |   |
| Notes                and accounts receivable                                                                             |   |                                     | (1,369,563 | ) |   | (2,371,422 | ) |
| Inventories                                                                                                              |   |                                     | 456,634    |   |   | (139,918 | ) |
| Other                receivables                                                                                         |   |                                     | 104,051    |   |   | (88,654 | ) |
| Prepayments                and other current assets                                                                      |   |                                     | 98,622     |   |   | (169,392 | ) |
| Deferred                income tax assets                                                                                |   |                                     | (50,939    | ) |   | (34,147 | ) |
| Other                assets                                                                                              |   |                                     | 225,219    |   |   | (                6,510 | ) |
| Increase/(decrease)                in:                                                                                   |   |                                     |       |   |   |   |   |
| Notes                and accounts payable                                                                                |   |                                     | (35,104    | ) |   | 776,387 |   |
| Accrued                expenses                                                                                          |   |                                     | 176,759    |   |   | 153,429 |   |
| Other                payables                                                                                            |   |                                     | (541,031   | ) |   | 228,281 |   |
| Receipts                in advance                                                                                       |   |                                     | 904,189    |   |   | 195,553 |   |
| Income                taxes payable                                                                                      |   |                                     | 103,224    |   |   | 83,722 |   |
| Deferred                liability                                                                                        |   |                                     | (137       | ) |   | — |   |
| Deposits                received                                                                                         |   |                                     | 516,262    |   |   | 102,551 |   |
| Other                current liabilities                                                                                 |   |                                     | 95,652     |   |   | — |   |
| Accrued                pension liabilities                                                                               |   |                                     | (5,971     | ) |   | 59,010 |   |
|                                                                                                                     |   |                                     |       |   |   |   |   |
| Net                cash provided by (used in) operating activities                                                       |   |                                     | 1,666,261  |   |   | (941,456 | ) |

| Cash                flows from investing activities             |   |   |    |   |   |                    |   |
|-----------------------------------------------------------------|--------|--------|---------|--------|--------|-------------------------|--------|
| Purchase                of property and equipment               |   |   | (26,115 | )      |   | (165,947                | )      |
| Proceeds                from disposal of property and equipment |   |   | — |   |   | —                 |   |
| Amount                due from stockholder/director             |   |   | — |   |   | —                 |   |
| Prepayment                of long-term investments              |   |   | — |   |   | —                 |   |
| Acquisition                of long-term investments             |   |   | — |   |   | —                 |   |
| Collection                of long term notes                    |   |   |    |   |   | 240,971                 |   |
| Increase                in interest in associates               |   |   |    |   |   | (                24,977 | )      |
| Bank                fixed deposits - pledged                    |   |   | (7,302  | )      |   | (61,519                 | )      |
| Pledged                notes receivable                         |   |   | 386,928 |   |   | 1,625,505               |   |
| Advances                to ex-CFO                               |   |   | — |   |   | (1,544,244              | )      |
| Repayments                of advances to ex-CFO                 |   |   | — |   |   | 1,544,244               |   |
| Net                cash provided by investing activities        |   |   | 353,511 |   |   | 1,614,033               |   |

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|        |   | Six                months ended June 30, |   |
|--------|--------|------------------------------------------|--------|
|   |   | 2006                                     |   | 2005 |   |
|   |   | (Unaudited)                              |   |
|   |   |                                     |   |   |   |

| Cash                flows from financing activities                                        |   |   |       |   |   |
|--------------------------------------------------------------------------------------------|--------|--------|------------|--------|--------|
| Proceeds                from bank borrowings                                               |   | $      | 215,463    |   | $      | 795,968 |   |
| Proceeds                from loan from a stockholder                                       |   |   | —    |   |   | — |   |
| Repayment                of bank borrowings                                                |   |   | (1,026,017 | )      |   | (1,054,969 | ) |
| Proceeds                from capital leases                                                |   |   | —    |   |   | 57,086 |   |
| Repayment                of capital leases                                                 |   |   | —    |   |   | (65,748 | ) |
| Repayment                of loan from officers/stockholders                                |   |   | (509,847   | )      |   | — |   |
|                                                                                       |   |   |       |   |   |   |   |
| Net                cash used in financing activities                                       |   |   | (1,320,401 | )      |   | (267,657 | ) |
|                                                                                       |   |   |       |   |   |   |   |
| Net                increase in cash and cash equivalents                                   |   |   | 699,371    |   |   | 404,920 |   |
|                                                                                       |   |   |       |   |   |   |   |
| Effect                of exchange rate changes on cash and cash                equivalents |   |   | (27,324    | )      |   | 148,142 |   |
|                                                                                       |   |   |       |   |   |   |   |
| Cash                and cash equivalents at beginning of period                            |   |   | 613,391    |   |   | 213,564 |   |
|                                                                                       |   |   |       |   |   |   |   |
| Cash                and cash equivalents at end of period                                  |   | $      | 1,285,438  |   | $      | 766,626 |   |

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

**Notes      to Condensed Consolidated Financial Statements**

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

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**NOTE      2 - BASIS OF PRESENTATION**

**NOTE      3.1 - RESTATEMENT**

|                                                               |   | As                Previously Reported |      | Restated                Amount |   |
|--------------------------------------------------------------------|--------|---------------------------------------|-----------|--------------------------------|--------|
| Advances                to ex-CFO                                  |   |                                  | —   |                           |   | (1,544,244 | ) |
| Repayments                of advances to ex-CFO                    |   |                                  | —   |                           |   | 1,544,244 |   |
| Net                cash (used in) provided by investing activities |   |                                  | 1,614,033 |                           |   | 1,614,033 |   |

**NOTE      3.2 - SUMMARY OF IMPORTANT ACCOUNTING POLICIES**

----

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

----

**NOTE      4 - RECENT ACCOUNTING PRONOUNCEMENTS**

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

|                                                             |   | **June                30,****2006** |       | **December                31,****2005** |   |
|------------------------------------------------------------------|--------|-------------------------------------|------------|-----------------------------------------|--------|
|                                                             |   | (Unaudited)                         |       |                                    |   |
|                                                             |   |                                |       |                                    |   |
| Notes                and accounts receivable                     |   |                                |       |                                    |   |
| -                Third parties                                   |   | $                                   | 3,959,039  |                                    | $      | 2,944,574 |   |
| -                Related parties (NOTE 10)                       |   |                                | 421,793    |                                    |   | 401,184 |   |
|                                                             |   |                                |       |                                    |   |   |   |
| Total                                                            |   |                                | 4,380,832  |                                    |   | 3,345,758 |   |
| Allowance                for doubtful accounts and sales returns |   |                                | (1,371,211 | )                                       |   | (752,482 | ) |
|                                                             |   |                                |       |                                    |   |   |   |
| Notes                and accounts receivable, net                |   | $                                   | 3,009,621  |                                    | $      | 2,593,276 |   |

----

**NOTE      6 - INVENTORIES**

|                                                                                               |   | **June                30,****2006** |      | **December                31,****2005** |   |
|----------------------------------------------------------------------------------------------------|--------|-------------------------------------|-----------|-----------------------------------------|--------|
|                                                                                               |   | (Unaudited)                         |      |                                    |   |
|                                                                                               |   |                                |      |                                    |   |
| Work                in process                                                                     |   | $                                   | 107,138   |                                    | $      | 127,001 |   |
| Finished                goods and other merchandises                                               |   |                                | 2,300,907 |                                    |   | 2,696,942 |   |
|                                                                                               |   |                                |      |                                    |   |   |   |
|                                                                                               |   |                                | 2,408,045 |                                    |   | 2,823,943 |   |
| Less:                Allowance for obsolete inventories and decline                of market value |   |                                | (854,649  | )                                       |   | (754,451 | ) |
|                                                                                               |   |                                |      |                                    |   |   |   |
|                                                                                               |   | $                                   | 1,553,396 |                                    | $      | 2,069,492 |   |

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

|                                                                                                                                                  |   | **June                  30,****2006** |     | **December                  31,****2005** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|----------|-------------------------------------------|--------|
|                                                                                                                                                  |   | (Unaudited)                           |     |                                      |   |
| Other                  receivables - third parties:                                                                                                   |   |                                  |     |                                      |   |
| Tax                  paid on behalf of landlord                                                                                                       |   | $                                     | —  |                                      | $      | 2,013 |   |
| Advances                  to staff                                                                                                                    |   |                                  | 192,687  |                                      |   | 125,590 |   |
| Grants                  from Market Information Center                                                                                                |   |                                  | —  |                                      |   | — |   |
| Receivables                  from Shanghai Wonderland Educational Resources Co., Ltd. (“Shanghai                  Wonderland”) (Note (i)) |   |                                  | 372,065  |                                      |   | 368,528 |   |
| Other                  receivables                                                                                                                    |   |                                  | 69,396   |                                      |   | 86,141 |   |
| Less                  : Allow for doubtful accounts                                                                                                   |   |                                  | (372,065 | )                                         |   | (368,528 | ) |
|                                                                                                                                                  |   |                                  |     |                                      |   |   |   |
| Sub-total                                                                                                                                             |   |                                  | 262,083  |                                      |   | 213,744 |   |
| Other                  receivables - related parties (NOTE 10)                                                                                        |   |                                  | 9,686    |                                      |   | 9,319 |   |
|                                                                                                                                                  |   | $                                     | 271,769  |                                      | $      | 223,063 |   |

| (i) | Shanghai                    Wonderland was a distributor of the Group. The Group loaned Shanghai                    Wonderland RMB$450,000 (approximately $54,000), RMB$500,000 (approximately                    $60,000) and RMB$2,500,000 (approximately $310,000) for operations                    in                    December 2003, July 2005 and August 2005, respectively. The identified                    loans were unsecured and bore no interest. Shanghai Wonderland                    has fully                    repaid the loan of RMB$450,000 in December 2004 and January 2005.                    As of                    June 30, 2006, Shanghai Wonderland still owes the Group a balance                    of                    RMB$3,000,000 (approximately $372,065). Such sum has now been                    itemized and                    recorded as "allowance for doubtful accounts" compared to its                    prior                    recognition as "Other receivables". |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|                              |   | **June                30,****2006** |    | **December 31,****2005** |   |
|-----------------------------------|--------|-------------------------------------|---------|-------------------------------|--------|
|                              |   | (Unaudited)                         |    |                          |   |
|                              |   |                                |    |                          |   |
| Prepayments                       |   | $                                   | 287,922 |                          | $      | 399,659 |   |
| Temporary                payments |   |                                | 4,409   |                          |   | 11,038 |   |
| Tax                recoverable    |   |                                | — |                          |   | — |   |
| Prepaid                interest   |   |                                | 59      |                          |   | — |   |
| Others                            |   |                                | 26,635  |                          |   | 829 |   |
|                              |   |                                |    |                          |   |   |   |
|                              |   | $                                   | 319,025 |                          | $      | 411,526 |   |

----

**NO**
**TE      9 - INTEREST IN ASSOCIATES**

|                                                                                                                                        |   | **June                30,****2006** |    | **December                31,****2005** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|---------|-----------------------------------------|--------|
|                                                                                                                                        |   | (Unaudited)                         |    |                                    |   |
|                                                                                                                                        |   |                                |    |                                    |   |
| 21st                Century Kid Castle Language and Education Center (“Education                Center”) (Note (i))             |   |                                |    |                                    |   |
| Investment                cost                                                                                                              |   | $                                   | 93,834  |                                    | $      | 92,942 |   |
| Share                of loss                                                                                                                |   |                                | (32,873 | )                                       |   | (40,803 | ) |
|                                                                                                                                        |   |                                |    |                                    |   |   |   |
|                                                                                                                                        |   | $                                   | 60,961  |                                    | $      | 52,139 |   |
|                                                                                                                                        |   |                                |    |                                    |   |   |   |
| Tianjin                Kid Castle Educational Investment Consulting Co., Ltd. (“Tianjin                Consulting”) (Note (ii)) |   |                                |    |                                    |   |   |   |
| Investment                cost                                                                                                              |   | $                                   | 87,579  |                                    | $      | 86,746 |   |
| Share                of loss                                                                                                                |   |                                | (94,997 | )                                       |   | (80,360 | ) |
|                                                                                                                                        |   |                                |    |                                    |   |   |   |
|                                                                                                                                        |   | $                                   | (7,418  | )                                       | $      | 6,386 |   |
|                                                                                                                                        |   |                                |    |                                    |   |   |   |
| Lanbeisi                Education &Culture Industrial Co., Ltd (“Lanbeisi”) (Note                (iii))                     |   |                                |    |                                    |   |   |   |
| Investment                cost                                                                                                              |   | $                                   | 45,040  |                                    | $      | 44,612 |   |
| Share                of loss                                                                                                                |   |                                | (35,864 | )                                       |   | (31,979 | ) |
|                                                                                                                                        |   |                                |    |                                    |   |   |   |
|                                                                                                                                        |   | $                                   | 9,176   |                                    | $      | 12,633 |   |
|                                                                                                                                        |   |                                |    |                                    |   |   |   |
| Total                                                                                                                                       |   | $                                   | 62,719  |                                    | $      | 71,158 |   |

| (i) | In                October 2003, the Group obtained the government’s approval to co-found                Education Center with 21st                Century Publishing House in the PRC. In 2004, Education Center registered                the total capital as RMB$1,500,000, and KCES and 21st                Century 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. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (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. |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| (iii) | On                    April 28, 2004, the Group signed a joint venture agreement with                    Lanbeisi                    Education & Culture Industrial Co., Ltd in Sichuan Province, PRC and                    Sichuan Province Education Institutional Service Center in Sichuan                    Province, PRC. Pursuant to this joint venture agreement, the                    Group,                    Lanbeisi Education & Culture Industrial Co., Ltd and Sichuan Province                    Education Institutional Service Center own, respectively, 45%,                    45% and 10%                    interests in Sichuan Lanbeisi Kid Castle Education Development                    Co., Ltd.                    It has been determined that the Group has significant influence                    and should                    therefore account for its investee using the equity method. |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**NOTE      **
**10      - RELATED PARTY TRANSACTIONS**

| A. | Names                  of related parties and relationship with the Group are as                  follows: |
|----|------------------------------------------------------------------------------------------------------------|

| **Names                of related parties**                                                                                     |   | **Relationship                with the Company**                                                                                                                                                                                                                     |
|---------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Mr. Kuo-An                Wang                                                                                             |   | In                October 2005 resigned as chairman of the board of directors, president                and                chief executive officer of the Company. On October 18, 2006 resigned                as                director of the board of directors. |
| Mr. Yu-En                Chiu                                                                                              |   | On                June 1, 2006 resigned as chief financial officer and director of                the board                of directors. Mr. Chiu remained the Chairman of PRC operation until                February 28, 2007,                                     |
|                                                                                                                            |   |                                                                                                                                                                                                                                                                 |
| Mr. Min-Tan                Yang                                                                                            |   | Director                and chief executive officer of the Company since November 2,                2005.                                                                                                                                                            |
|                                                                                                                            |   |                                                                                                                                                                                                                                                                 |
| Mr. Suang-Yi                Pai                                                                                            |   | Director                and chairman of the board of directors since November 2, 2005.                                                                                                                                                                               |
|                                                                                                                            |   |                                                                                                                                                                                                                                                                 |
| Private                Kid Castle Short Term Language Cram School (“PKC                Language”)                   |   | Its                chairman of the board of directors is Mr. Yu-En                Chiu.                                                                                                                                                                         |
|                                                                                                                            |   |                                                                                                                                                                                                                                                                 |
| Taipei                Country Private Kid Castle Short Term Language Cram School (“TCP                PKC”)         |   | Its                chairman of the board of directors is Mr. Yu-En                Chiu.                                                                                                                                                                         |
|                                                                                                                            |   |                                                                                                                                                                                                                                                                 |
| Taipei                Country Private Chevady Preschool (“TCP Chevady”)                                             |   | Its                chairman of the board of directors is Mr. Yu-En                Chiu.                                                                                                                                                                         |
|                                                                                                                            |   |                                                                                                                                                                                                                                                                 |
| Taipei                Country Private Chung-hua Preschool (“TCP Chung-hua”)                                         |   | Its                chairman of the board of directors is Mr. Yu-En Chiu.                                                                                                                                                                                             |
|                                                                                                                            |   |                                                                                                                                                                                                                                                                 |
| Taipei                Country Private Wonderland Preschool (“TCP Wonderland”)                                       |   | Its                chairman of the board of directors is Mr. Yu-En                Chiu.                                                                                                                                                                         |
|                                                                                                                            |   |                                                                                                                                                                                                                                                                 |
| Taipei                City Private Kid Castle Preschool (“TCP Kid Castle”)                                          |   | Its                chairman of the board of directors is Mr. Yu-En                Chiu.                                                                                                                                                                         |
|                                                                                                                            |   |                                                                                                                                                                                                                                                                 |
| Taipei                Country Private Kid’s Castle Yin Cyun Preschool(“TCP Yin                Cyun”)          |   | Its                chairman of the board of directors is Mr. Min-Tan                Yang.                                                                                                                                                                       |
|                                                                                                                            |   |                                                                                                                                                                                                                                                                 |
| Taipei                Country Private Yin Tzu Preschool (“TCP Yin Tzu”)                                             |   | Its                chairman of the board of directors is Mr. Min-Tan                Yang.                                                                                                                                                                       |
|                                                                                                                            |   |                                                                                                                                                                                                                                                                 |
| Private                Kuan Lung Short Term Language Cram School (“Kuan Lung                Language”)              |   | Its                chairman of the board of directors is Mr. Min-Tan                Yang.                                                                                                                                                                       |
|                                                                                                                            |   |                                                                                                                                                                                                                                                                 |
| Taipei                City Private Chu Sheng Preschool (“TCP Chu Sheng”)                                            |   | Its                chairman of the board of directors is Mr. Min-Tan                Yang.                                                                                                                                                                       |
|                                                                                                                            |   |                                                                                                                                                                                                                                                                 |
| Taipei                Country Private Chu Yao Preschool (“TCP Chu Yao”)                                             |   | Its                chairman of the board of directors is Mr. Min-Tan                Yang.                                                                                                                                                                       |
|                                                                                                                            |   |                                                                                                                                                                                                                                                                 |
| Private                Liang Yu Language & Computer School ("Liang Yu                Language")                             |   | Its                chairman of the board of directors is Mr. Min-Tan                Yang.                                                                                                                                                                       |
|                                                                                                                            |   |                                                                                                                                                                                                                                                                 |
| 21st                Century Publishing House (“Publishing House”)                                                   |   | A                joint venture partner (third-party after July 2004).                                                                                                                                                                                                |
|                                                                                                                            |   |                                                                                                                                                                                                                                                                 |
| Jiangxi                21st Century Kid Castle Culture Media Co., Ltd (“Culture                Media”)              |   | An                investment accounted for under the equity method before July 2, 2004.                It                has become a consolidated entity after July 2, 2004.                                                                                        |
|                                                                                                                            |   |                                                                                                                                                                                                                                                                 |
| 21st                Century Kid Castle Language and Education Center (“Education                Center”)            |   | An                investment accounted for under the equity method.                                                                                                                                                                                                  |
|                                                                                                                            |   |                                                                                                                                                                                                                                                                 |
| Tianjin                Kid Castle Educational Investment Consulting Co., Ltd. (“Tianjin                Consulting”) |   | An                investment accounted for under the equity method.                                                                                                                                                                                                  |
|                                                                                                                            |   |                                                                                                                                                                                                                                                                 |
| Sichuan                Lanbeisi Kid Castle Education Development Co., Ltd.                (“Lanbeisi”)              |   | An                investment accounted for under the equity                method.                                                                                                                                                                                   |

----

| B. | Significant                  transactions and balances with related parties are as                  follows: |
|----|--------------------------------------------------------------------------------------------------------------|

|   |                                          |   | **Six                months ended June 30,** |    |
|--------|-----------------------------------------------|--------|----------------------------------------------|---------|
|   |                                          |   | **2006**                                     |    | **2005** |   |
|   |                                          |   | (Unaudited)                                  |    |
| (i)    | Sales                  to:                    |   |                                         |    |   |   |
|   | -                PKC Language                 |   | $                                            | — |   | $ | 5,425 |   |
|   | -                TCP PKC                      |   |                                         | — |   |   | 5,425 |   |
|   | -                TCP Chung-hua                |   |                                         | 3,468   |   |   | 15,508 |   |
|   | -                TCP Chevady                  |   |                                         | — |   |   | 4,917 |   |
|   | -                TCP Wonderland               |   |                                         | — |   |   | 4,917 |   |
|   | -                TCP Kid Castle               |   |                                         | — |   |   | 9,823 |   |
|   | -                Kuan Lung Language           |   |                                         | 7,924   |   |   | — |   |
|   | -                TCP Chu Yao                  |   |                                         | 18,212  |   |   | — |   |
|   | -                TCP                Chu Sheng |   |                                         | 7,636   |   |   | — |   |
|   | -                TCP Yin Cyun                 |   |                                         | 41,636  |   |   | — |   |
|   | -                TCP Yin Tzu                  |   |                                         | 21,835  |   |   | — |   |
|   | -                Liang Yu Language            |   |                                         | 27,197  |   |   | — |   |
|   | -                English School               |   |                                         | 10,532  |   |   | 1,838 |   |
|   | -                Tianjin Consulting           |   |                                         | 16,802  |   |   | 176 |   |
|   | -                Lanbeisi                     |   |                                         | 9,907   |   |   | 3,947 |   |
|   |                                          |   |                                         |    |   |   |   |   |
|   |                                          |   | $                                            | 165,149 |   | $ | 51,976 |   |
|   |                                          |   |                                         |    |   |   |   |   |
| (ii)   | Rental                  income from:          |   |                                         |    |   |   |   |   |
|   | -                CCE                          |   | $                                            | 1,242   |   | $ | 951 |   |
|   |                                          |   |                                         |    |   |   |   |   |
|   |                                          |   | $                                            | 1,242   |   | $ | 951 |   |
|   |                                          |   |                                         |    |   |   |   |   |
| (iii)  | Franchising                  income from:     |   |                                         |    |   |   |   |   |
|   | -                TCP Kid Castle               |   | $                                            | — |   | $ | 6,811 |   |
|   | -                TCP Chung-Hua                |   |                                         | — |   |   | — |   |
|   | -                TCP Wonderland               |   |                                         | — |   |   | 3,406 |   |
|   | -                TCP Chu Sheng                |   |                                         | 5,810   |   |   | — |   |
|   | -                TCP Yin Cyun                 |   |                                         | 2,556   |   |   | — |   |
|   | -                TCP Yin Tzu                  |   |                                         | 5,577   |   |   | — |   |
|   | -                Liang Yu Language            |   | $                                            | 1,242   |   | $ | — |   |
|   |                                          |   |                                         |    |   |   |   |   |
|   |                                          |   | $                                            | 15,185  |   | $ | 10,217 |   |

| (iv) | The                  two directors and stockholders, Mr. Min-Tan Yang and Mr. Suang-Yi                  Pai,                  have given personal guarantees to certain bank loans and borrowings.                  Please see the details as described in Note 12 - Bank                  Borrowings. |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| (v) | Accounts                and notes receivable - related                parties: |
|-----|--------------------------------------------------------------------------------|

| Name                  of related parties               |   |   | **June                    30,****2006** |   |   | **Decenber                  31,****2005** |   |
|--------------------------------------------------------|--------|--------|-----------------------------------------|--------|--------|-------------------------------------------|--------|
|                                                   |   |   | (Unaudited)                             |   |   |                                      |   |
|                                                   |   |   |                                    |   |   |                                      |   |
| -                  PKC Language                        |   |   | 39,007                                  |   |   | 26,147                                    |   |
| -                  TCP PKC                             |   |   | 39,007                                  |   |   | 52,294                                    |   |
| -                  TCP Chung-hua                       |   |   | 51,131                                  |   |   | 53,665                                    |   |
| -                  TCP Chevady                         |   |   | 48,290                                  |   |   | 48,685                                    |   |
| -                  TCP Wonderland                      |   |   | 48,290                                  |   |   | 48,685                                    |   |
| -                  TCP Kid Castle                      |   |   | 56,531                                  |   |   | 58,172                                    |   |
| -                  Kuan Lung Language                  |   |   | 2,050                                   |   |   | —                                   |   |
| -                  TCP Chu Yao                         |   |   | 20,260                                  |   |   | —                                   |   |
| -                  TCP Chu Sheng                       |   |   | 12,706                                  |   |   | —                                   |   |
| -                  TCP Yin Cyun                        |   |   | 39,443                                  |   |   | 33,585                                    |   |
| -                  TCP Yin Tzu                         |   |   | 14,451                                  |   |   | 29,062                                    |   |
| -                  Liang Yu Language                   |   |   | 9,145                                   |   |   | 12,071                                    |   |
| -                  Education Center                    |   |   | —                                 |   |   | —                                   |   |
| -                  Tianjin                  Consulting |   |   | 18,193                                  |   |   | 20,826                                    |   |
| -                  Lanbeisi                            |   |   | 23,289                                  |   |   | 17,992                                    |   |
|                                                   |   |   |                                    |   |   |                                      |   |
|                                                   |   | $      | 421,793                                 |   | $      | 401,184                                   |   |

| (vii) | Other                receivables - related parties: |
|-------|-----------------------------------------------------|

| Name                  of related parties                     |   |   | **June                  30,****2006** |   |   | **December                  31,****2005** |   |
|--------------------------------------------------------------|--------|--------|---------------------------------------|--------|--------|-------------------------------------------|--------|
|                                                         |   |   | (Unaudited)                           |   |   |                                      |   |
|                                                         |   |   |                                  |   |   |                                      |   |
| Amount                  due from Publishing House (Note 1)   |   | $      | —                               |   | $      | —                                   |   |
| Amount                  due from Education Center (Note 2)   |   |   | 278                                   |   |   | —                                   |   |
| Amount                  due from Tianjin Consulting (Note 3) |   |   | 15                                    |   |   | 15                                        |   |
| Amount                  due from Lanbeisi (Note 4)           |   |   | 9,393                                 |   |   | 9,304                                     |   |
|                                                         |   |   |                                  |   |   |                                      |   |
|                                                         |   | $      | 9,686                                 |   | $      | 9,319                                     |   |

| 1. | As                of December 31, 2003, the amount due from Publishing House consists                primarily of amounts due under a loan of RMB$1,000,000 (approximately                $120,000 from the Group to Publishing House for the incorporation                of                Culture Media). The loan is unsecured and bears no interest. Pursuant                to                the terms of the loan, Publishing House was obligated to repay the                loan on                or before June 27, 2004 or it would be required to transfer its 40%                ownership interest in Culture Media to the Group. On July 2, 2004,                as                Publishing House did not repay the loan, the Group decided to take                over                the 40% ownership from Publishing House, and therefore, the Group’s                ownership in Culture Media has increased to 90% and Culture Media                has                become a consolidated entity. |
|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| 2. | Education                Center was founded in October 2003. The amount due from the associate                is                mainly inventory purchases paid by the Group on behalf of Education                Center. The amount due from this related party has no fixed repayment                term                and bears no interest. |
|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3. | Tianjin                Consulting was incorporated in April 2004. The Group paid certain                pre-operating costs on behalf of Tianjin Consulting. The amount due                from                this related party has no fixed repayment term and bears no                interest. |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4. | Lanbeisi                was incorporated in April 2004. The Group paid pre-operating costs                of                RMB$75,000 (approximately $9,000) on behalf of Lanbeisi. The amount                due                from this related party has no fixed repayment term and bears no                interest. |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (viii) | Significant                transactions and balances with related parties are as                follows: |
|--------|----------------------------------------------------------------------------------------------------------|

|  **Name                of Related Parties** |   |   | **June                30,****2006** |   |   | **December                31,****2005** |   |
|--------------------------------------------------|--------|--------|-------------------------------------|--------|--------|-----------------------------------------|--------|
|                                             |   |   |                                |   |   |                                    |   |
| Mr. Kuo-An                Wang              |   | $      | —                             |   | $      | 60,911                                  |   |
|                                             |   |   |                                |   |   |                                    |   |
| Mr. Min-Tan                Yang (note 1)    |   | $      | 840,789                             |   | $      | 840,789                                 |   |
|                                             |   |   |                                |   |   |                                    |   |
| Mr. Suang-Yi                Pai             |   | $      | —                             |   | $      | 76,138                                  |   |
|                                             |   |   |                                |   |   |                                    |   |
| Education                Center                  |   | $      | 520                                 |   | $      | —                                 |   |
|                                             |   |   |                                |   |   |                                    |   |
| Lanbeisi                                         |   | $      | 128                                 |   | $      | —                                 |   |
|                                             |   |   |                                |   |   |                                    |   |
|                                             |   | $      | 841,437                             |   | $      | 977,838                                 |   |

----

**NOTE      **
**11      - INTANGIBLE ASSETS**

|                                                  |   | **June                        30,****2006** |       | **December                        31,****2005** |   |
|-------------------------------------------------------|--------|---------------------------------------------|------------|-------------------------------------------------|--------|
|                                                  |   | (Unaudited)                                 |       |                                            |   |
|                                                  |   |                                        |       |                                            |   |
| Gross                        carrying amount          |   |                                        |       |                                            |   |
| Franchise                                             |   | $                                           | 1,050,122  |                                            | $      | 1,036,178 |   |
| Copyrights                                            |   |                                        | 617,303    |                                            |   | 609,106 |   |
|                                                  |   |                                        |       |                                            |   |   |   |
|                                                  |   |                                        | 1,667,425  |                                            |   | 1,645,284 |   |
| Less:                        Accumulated amortization |   |                                        |       |                                            |   |   |   |
| Franchise                                             |   |                                        | (656,326   | )                                               |   | (595,802 | ) |
| Copyrights                                            |   |                                        | (385,815   | )                                               |   | (350,236 | ) |
|                                                  |   |                                        |       |                                            |   |   |   |
|                                                  |   |                                        | (1,042,141 | )                                               |   | (946,038 | ) |
|                                                  |   |                                        |       |                                            |   |   |   |
| **Net**                                               |   | $                                           | 625,284    |                                            | $      | 699,246 |   |

| 2007   |   | $      | 167,747 |   |
|--------|--------|--------|---------|--------|
| 2008   |   |   | 167,747 |   |
| 2009   |   |   | 167,747 |   |
| 2010   |   |   | 38,170  |   |
|   |   |   |    |   |
|   |   | $      | 541,411 |   |

**NOTE      12 - BANK BORROWINGS**

|                                                                                                  |   |   | Notes  |   |   | **June                30,****2006** |   |   | **December                31,****2005** |   |
|-------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|-------------------------------------|--------|--------|-----------------------------------------|--------|
|                                                                                                  |   |   |   |   |   | (Unaudited)                         |   |   |                                    |   |
|                                                                                                  |   |   |   |   |   |                                |   |   |                                    |   |
| Bank                term loans                                                                        |   |   | (i)    |   | $      | 318,870                             |   | $      | 564,704                                 |   |
| Short-term                unsecured bank loans                                                        |   |   | (ii)   |   |   | 498,493                             |   |   | 539,583                                 |   |
| Mid-term                loan                                                                          |   |   | (iii)  |   |   | 268,957                             |   |   | 586,436                                 |   |
| Mid-term                secured bank loan                                                             |   |   | (iv)   |   |   | 1,307,765                           |   |   | 1,466,574                               |   |
|                                                                                                  |   |   |   |   |   |                                |   |   |                                    |   |
|                                                                                                  |   |   |   |   |   | 2,394,085                           |   |   | 3,157,297                               |   |
| Less:                Balances maturing within one year included in current                liabilities |   |   |   |   |   |                                |   |   |                                    |   |
| Bank                term loans                                                                        |   |   |   |   |   | 82,038                              |   |   | 145,042                                 |   |
| Short-term                unsecured bank loans                                                        |   |   |   |   |   | 498,493                             |   |   | 539,583                                 |   |
| Mid-term                loan                                                                          |   |   |   |   |   | 157,248                             |   |   | 586,436                                 |   |

----

|                                                     |   |  Notes   |   |  **June                  30,****2006**  |   |  **December                  31,****2005**  |   |
|----------------------------------------------------------|--------|-------------------------|--------|---------------------------------------------------|--------|-------------------------------------------------------|--------|
|                                                     |   |               |   |  (Unaudited)                            |   |                                             |   |
|                                                     |   |                    |   |                                         |   |                                             |   |
| Mid-term                  secured bank loan              |   |                    |   |                                              |   | 308,651                                               |   |   | 245,845 |   |
|                                                     |   |                    |   |                                              |   |                                                  |   |   |   |   |
|                                                     |   |                    |   |                                              |   | 1,046,430                                             |   |   | 1,516,906 |   |
|                                                     |   |                    |   |                                              |   |                                                  |   |   |   |   |
| Bank                  borrowings maturing after one year |   |                    |   |                                              | $      | 1,347,655                                             |   | $ | 1,640,391 |   |

| (i) | This                line item represents bank loans that have been secured by a pledge                of                post-dated checks amounting to $590,761 and $873,215 that we have                received                from franchisees and the Group’s bank deposits of $47,301 and $46,456 as                of June 30, 2006 and December 31, 2005, 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. The                weighted average interest rates were 6.055% and 5.88% per annum as of                June 30, 2006 and 2005, respectively. For the six months ended June                30,                2006 and 2005, the interest expenses charged to operations amounted                to                $12,887 and $27,775, respectively. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (ii) | In                August 2005, KCIT obtained an unsecured short-term loan in the amount                of                $304,553 and was extended on February 2006, which was collateralized                by                notes receivables in the amount approximately the loan balance, the                KCIT’s                refundable deposits of $60,911 and notes receivables approximating                30% of                loan balance, and guaranteed by two directors and stockholders of                the                Group, to finance the Group’s operations. The loan bears interest at the                lending bank’s basic borrowing rate plus 3.29% per annum and is due and                payable in August 2006. The applicable interest rate is approximately                5%                per annum as of June 30, 2006. |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In                April 2006, KCIT obtained an unsecured short-term loan in the amount                of                $214,173, which was guaranteed by two directors and stockholders                of the                Group, to finance the Group’s operations. The loan bears interest at the                Taiwan basic borrowing rate plus 1.65% per annum and was fully settled                in                March 2007. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | For                the six months ended June 30, 2006 and 2005, the interest expense                charged                to operations from the above six unsecured short-term loans amounted                to                $14,622 and $28,504, respectively. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (iii) | In                June 2005, KCIT obtained a loan of $609,106 from a financial institution,                which bore interest at 5% per annum and was repayable in 18 equal                monthly                installments, to finance the Group’s operations. The last installment was                due on December 13, 2006. As of June 30, 2006, the loan was collateralized                by the KCIT’s refundable deposits of 121,821 and notes receivables                approximating 20% of loan balance, and the Group repaid                $406,376. |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | For                the six months ended June 30, 2006 and 2005, the interest expenses                charged                to operations from the aforementioned loans amounted to $8,600 and                $34,836, respectively. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (iv) | 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, 2005 and to finance its operations. The loan is secured by the                Group’s                land and buildings and personal guarantees provide by two directors                of the                Group. The loan bears interest at the lending bank’s basic fixed deposit                rate plus 0.69% between annum for the year 2005 to 2007, and plus                1.69%                from the annum for the year 2008.  On August 10, 2005, the bank                extended the term of the loan and the Group repays the loan, which                is now                repayable in 84 equal monthly installments starting August 10, 2012.                As of June 30, 2006, the applicable interest rate is approximately                2.4%,                the Group repaid $44,287 |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | In                February 2005, KCIT obtained a new bank loan of $456,830, which bears                interest at 6% per annum and is repayable in 36 equal monthly                installments. The last installment will be due on February 2, 2008,                was collateralized by notes receivables in 30% approximating the                loan                balance, and guaranteed by two directors of the Group. As of June                30,                2006, the Group repaid $196,724 |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In                August 2005, KCIT obtained a new bank loan of $213,187, which bears                interest at 3.7% per annum, and is repayable in 60 equal monthly                installments. The last installment will be due on August 10, 2010,                and                guaranteed by two directors of the Group. As of June 30, 2006, the                Group                repaid $33,511 |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | For                the six months ended June 30, 2006 and 2005, the interest expense                charged                to operations amounted to $25,378 and $29,298,                respectively. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**NOTE      1**
**3      - RECEIPTS IN ADVANCE**

|                                       |   |   | Notes  |   |   | **June                30,****2006** |   |   | **December                31,****2005** |   |
|--------------------------------------------|--------|--------|--------|--------|--------|-------------------------------------|--------|--------|-----------------------------------------|--------|
|                                       |   |   |   |   |   | (Unaudited)                         |   |   |                                    |   |
|                                       |   |   |   |   |   |                                |   |   |                                    |   |
| Current                liabilities:        |   |   |   |   |   |                                |   |   |                                    |   |
| Sales                deposits received     |   |   | (i)    |   | $      | 964,227                             |   | $      | 682,553                                 |   |
| Franchising                income received |   |   | (ii)   |   |   | 1,592,603                           |   |   | 1,391,625                               |   |
| Subscription                fees received  |   |   | (iii)  |   |   | 308,058                             |   |   | 234,342                                 |   |
| Others                                     |   |   |   |   |   | 22,301                              |   |   | 45,160                                  |   |
|                                       |   |   |   |   |   | 2,887,189                           |   |   | 2,353,680                               |   |
|                                       |   |   |   |   |   |                                |   |   |                                    |   |
| Long-term                liabilities:      |   |   |   |   |   |                                |   |   |                                    |   |
| Franchising                income received |   |   | (ii)   |   |   | 1,542,355                           |   |   | 1,130,207                               |   |
|                                       |   |   |   |   |   |                                |   |   |                                    |   |
|                                       |   |   |   |   | $      | 4,429,544                           |   | $      | 3,483,887                               |   |

| (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      14 **
**-      OTHER PAYABLES**

----

**NOTE      15 - RETIREMENT PLANS**

|                                               |   | **Six                  months ended June 30,** |
|----------------------------------------------------|--------|------------------------------------------------|
|                                               |   |  **2006**                                 |   |  **2005** |   |
|                                               |   | (Unaudited)                                    |
| Service                  cost                      |   | $                                              | — |   | $ | 25,500 |   |
| Interest                  cost                     |   |                                           | 6,181 |   |   | 4,884 |   |
| Expected                  return on assets         |   |                                           | (2,455 | ) |   | (1,697 | ) |
| Amortization                  of unrecognized loss |   |                                           | 1,496 |   |   | 428 |   |
|                                               |   |                                           |   |   |   |  |   |
| Net                  periodic pension cost         |   | $                                              | 5,222 |   | $ | 29,115 |   |

**NOTE      16 - GEOGRAPHICAL SEGMENTS**

|                                         |   | Taiwan                                                             | The                PRC | Total                                                              | Corporate | Eliminations                                                       | Consolidated |
|----------------------------------------------|--------|--------------------------------------------------------------------|------------------------|--------------------------------------------------------------------|-----------|--------------------------------------------------------------------|--------------|
|                                         |   |  Six                months ended June                30, 2006 |                   |  Six                months ended June                30, 2005 |      |  Six                months ended June                30, 2006 |         |  Six                months ended June                30, 2005 |   |  Six                months ended June                30, 2006 |   |  Six                months ended June                30, 2005 |   |  Six                months ended June                30, 2006 |   |  Six                months ended June                30, 2005 |   |  Six                months ended June                30, 2006 |   |  Six                months ended June                30, 2005 |   |  Six                months ended June                30, 2006 |   |  Six                months ended June                30, 2005 |   |
|                                         |   |                                                               |                   |                                                               |      |                                                               |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                      |   |                                                               |                   |                                                               |      |                                                               |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                revenue              |   | $                                                                  | 3,436,956              |                                                               | $         | 3,651,100                                                          |         | $ | 1,462,323 |   | $ | 1,508,438 |   | $ | 4,899,279 |   | $ | 5,159,538 |   | $ | — |   | $ | 4,187 |   | $ | — |   | $ | — |   | $ | 4,899,279 |   | $ | 5,163,725 |   |
| Inter-segment                revenue         |   |                                                               | (566                   | )                                                                  |      | —                                                            |         |   | — |   |   | — |   |   | (566 | ) |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   | (566 | ) |   | — |   |
|                                         |   |                                                               |                   |                                                               |      |                                                               |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                         |   | $                                                                  | 3,436,390              |                                                               | $         | 3,651,100                                                          |         | $ | 1,462,323 |   | $ | 1,508,438 |   | $ | 4,898,713 |   | $ | 3,119,328 |   | $ | — |   | $ | 4,187 |   | $ | — |   | $ | — |   | $ | 4,898,713 |   | $ | 3,122,992 |   |
|                                         |   |                                                               |                   |                                                               |      |                                                               |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Profit                (loss) from Operations |   | $                                                                  | 425,672                |                                                               | $         | 395,666                                                            |         | $ | 113,846 |   | $ | (279,098 | ) | $ | 539,518 |   | $ | 116,568 |   | $ | (125,902 | ) | $ | (121,339 | ) | $ | — |   | $ | — |   | $ | 413,616 |   | $ | (4,772 | ) |
|                                         |   |                                                               |                   |                                                               |      |                                                               |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital                expenditures          |   | $                                                                  | 20,865                 |                                                               | $         | 8,460                                                              |         | $ | 5,094 |   | $ | 14,687 |   | $ | 25,959 |   | $ | 23,147 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 25,959 |   | $ | 23,147 |   |

|                        |   |  June                30, 2006 |      | December                31, 2005 |   |  June                30, 2006 |   |  December                31, 2005 |      |  June                30, 2006 |   | December                31, 2005 |   |  June                30, 2006 |       |  December                31, 2005 |   |  June                30, 2006 |   | December                31, 2005 |   |  June                30, 2006 |   | December                31, 2005 |   |
|-----------------------------|--------|------------------------------------|-----------|----------------------------------|--------|------------------------------------|--------|----------------------------------------|-----------|------------------------------------|--------|----------------------------------|--------|------------------------------------|------------|----------------------------------------|--------|------------------------------------|--------|----------------------------------|--------|------------------------------------|--------|----------------------------------|--------|
| Total                assets |   | $                                  | 9,289,779 |                             | $      | 8,503,513                          |   | $                                      | 2,052,738 |                               | $      | 2,311,798                        |   | $                                  | 11,342,517 |                                   | $      | 10,815,311                         |   | $                                | 33,345 |                               | $      | 299,141                          |   | $ | (120,224 | ) | $ | (131,515 | ) | $ | 11,255,638 |   | $ | 10,982,937 |   |

----

**NOTE      17 - COMMITMENT AND CONTINGENCIES**

**A.      Lease Commitment**

| Years                ending December 31, |   |   |         |   |
|------------------------------------------|--------|--------|---------|--------|
| 2007                                     |   | $      | 244,847 |   |
| 2008                                     |   |   | 61,481  |   |
| 2009                                     |   |   | 20,494  |   |
| 2010                                     |   |   | — |   |
| 2011                                     |   |   | — |   |
|                                     |   |   |         |   |
|                                     |   | $      | 326,822 |   |

**B.      Going concern**

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

----

**GENERAL**

**CRITICAL      ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES**

**Revenue      Recognition. **

**Allowance      for Doubtful Accounts. **

**Allowance      for Obsolete Inventories and Lower of Cost or Market. **

**Investment      Impairments. **

----

**Fixed      Assets and Depreciation. **

**Impairment      of Long-Lived Assets. **

**Income      Taxes. **

**RESULTS      OF OPERATIONS**

**Comparison      of The Three Months Ended June 30, 2006 and 2005**

**Total      Net Operating Revenue. **

**Sales      of goods. **

**Franchising      income. **

**Other      operating revenue. **

----

**Gross      Profit. **

**Total      Operating Expenses. **

**Other      Operating Expenses. **

**Interest      Expenses, Net. **

**Provision      for Taxes. **

**Comparison      of The Six Months Ended June 30, 2006 and 2005**

**Total      Net Operating Revenue. **

**Sales      of goods. **

**Franchising      income. **

**Other      operating revenue. **

**Gross      Profit. **

**Total      Operating Expenses. **

----

**Other      Operating Expenses. **

**Interest      Expenses, Net. **

**Provision      for Taxes. **

**LIQUIDITY      AND CAPITAL RESOURCES**

**Comparison      of Fiscal Years 2006 and 2005**

**Off-Balance      Sheet Arrangements**

**Contractual      Obligations**

|                                       |   | **Payments                Due by Period** |
|--------------------------------------------|--------|-------------------------------------------|
|                                       |   |                                      | **Total** |   |   | **2006** |   |   | **2007** |   |   | **2008** |   |   | **2009** |   |   | **2010** |   |   | **Thereafter** |   |
|                                       |   | **(Thousand                dollars)**     |
| **Contractual                obligations** |
| Bank                borrowing              |   |                                      | 3,157 |   |   | 1,643 |   |   | 515 |   |   | 147 |   |   | 93 |   |   | 93 |   |   | 666 |   |
| Pension                benefit             |   |                                      | 29 |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   | 29 |   |
| Operating                leases            |   |                                      | 1,644 |   |   | 305 |   |   | 248 |   |   | 222 |   |   | 208 |   |   | 135 |   |   | 526 |   |
| Total                                      |   |                                      | 4,830 |   |   | 1,948 |   |   | 763 |   |   | 369 |   |   | 301 |   |   | 228 |   |   | 1,221 |   |

----

**Bank      Borrowing**

**Pension      Benefit**

**Going      Concern**

**NEW      ACCOUNTING PRONOUNCEMENTS**

**Non-GAAP      Financial Measures**

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

----

***Interest      rate exposure***

***Foreign      currency exposure***

| **ITEM              **4.**** | **CONTROLS                AND PROCEDURES**  |
|------------------------------|--------------------------------------------------|

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

----

***Management’s      Report on Internal Control Over Financial Reporting***
* *

|   | · | 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. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------|

|   | · | Delineate                individual unit/departmental responsibilities and effectively separate                respective departmental transactions so as to avoid intentional                misappropriation of funds from taking place. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | All                departments requesting funds must obtain written approval from the                Chief                Executive Officer or the Chairman of the Board before the accounting                department may commence processing payments. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | All                fund transfer applications must be approved by the applicable department                supervisor before the application may be processed. No one can authorize                their own application. This is applicable to all staff including                staff at                the managerial level. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Fund                transfer applications in the PRC must additionally be approved by                the                headquarters in Taiwan. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | All                fund transfer applications must be accompanied by supporting                documentation, such as a copy of the relevant contract copy of the                relevant invoice or stock pre-payment statement. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Stock                purchases require the approval of the supervisor or manager of the                relevant department, the approval of the accounts department, and                a stock                receipt and suppliers’ certification. Finally the application must be                approved by the Chairman of the Board before funds may be released. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | All                pre-payments must be tracked by the fund applicant and the payments                must                be cleared within the month of payment or in accordance with the                date                stipulated in the relevant contract. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**PART      II OTHER INFORMATION**

| **ITEM              **1.**** | **LEGAL                PROCEEDINGS**  |
|------------------------------|--------------------------------------------|

| **ITEM****1A.** | **RISK                FACTORS** |
|-----------------|---------------------------------|

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

| **ITEM              **3.**** | **DEFAULTS                UPON SENIOR SECURITIES**  |
|------------------------------|----------------------------------------------------------|

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

| **ITEM              **5.**** | **OTHER                INFORMATION**  |
|------------------------------|--------------------------------------------|

| **ITEM              **6.**** | **EXHIBITS** |
|------------------------------|--------------|

| A.   |   | Exhibits                                                                                                                     |
|------|--------|------------------------------------------------------------------------------------------------------------------------------|
| 31.1 |   | Rule 13a-14(a)                Certification of Principal Executive Officer                                              |
| 31.2 |   | Rule 13a-14(a)                Certification of Principal Financial Officer                                              |
| 32.1 |   | Section 1350                Certification of Principal Executive Officer and Principal Financial                Officer |

----

**SIGNATURES**

|   |   |      |                                                                                  |
|--------|--------|-----------|---------------------------------------------------------------------------------------|
|   |   |  By: | /s/ Suang-Yi              Pai                                          |
|        |   |      | Name:Suang-Yi              Pai Title: Chief              Financial Officer  |

----