**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**







**FORM
      10-Q**





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


**SECURITIES
      EXCHANGE ACT OF 1934**





For
      the
      quarterly period ended: March 31, 2008


or





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


**SECURITIES
      EXCHANGE ACT OF 1934**





Commission
      File Number: 333-39629




**KID
      CASTLE EDUCATIONAL CORPORATION**


(Exact
      name of Registrant as specified in its charter)





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




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




**011-886-2-2218
                5996**(Registrant’s
                telephone number, including area code)**NONE**(Former
                name, former address and former fiscal year, if changed since last
                report)




Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the Registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes **x** No **o**




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




Large
                accelerated filer o
            
            Accelerated
                filer oNon-accelerated
                filer   o
            
            Smaller
                reporting company **x**





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


Yes
o **** **** No x




As
      of
      March 31, 2008, there were 25,000,000 shares of the Registrant’s common stock
      outstanding.








**FORM
      10-Q**




**KID
      CASTLE EDUCATIONAL CORPORATION**




**TABLE
      OF CONTENTS**




PagePART
                  I
              FINANCIAL
                  INFORMATIONItem
                  1.Condensed
                  Consolidated Financial Statements
              
              2a)
                  Condensed Consolidated Balance Sheets as of March 31, 2008 (unaudited)
                  and
                  December 31, 2007
              
              2b)
                  Condensed Consolidated Statements of Operations for the three months
                  ended
                  March 31, 2008 and March 31, 2007 (unaudited)
              
              3c)
                  Condensed Consolidated Statements of Stockholders’ Equity
                  (unaudited)
              
              4d)
                  Condensed Consolidated Statements of Cash Flows for the three months
                  ended
                  March 31, 2008 and March 31, 2007 (unaudited)
              
              5e)
                  Notes to Condensed Consolidated Financial Statements
              
              7Item
                  2.Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              17Item
                  3.Quantitative
                  and Qualitative Disclosures About Market Risk
              
              23Item
                  4.Controls
                  and Procedures
              
              24PART
                  II.
              OTHER
                  INFORMATION
              
              25Item
                  1.Legal
                  Proceedings
              
              25Item
                  1ARisk
                  Factors
              
              25Item
                  2.Unregistered
                  Sales of Equity Securities and Use of Proceeds
              
              26Item
                  3.Defaults
                  upon Senior Securities
              
              26Item
                  4.Submission
                  of Matters to a Vote of Security Holders
              
              26Item
                  5.Other
                  Information
              
              26Item
                  6Exhibits
                  and Reports on Form 8-K
              
              26SIGNATURES
              
              27




-1-





***PART
      I. FINANCIAL INFORMATION***




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




**Kid
      Castle Educational Corporation**


**Condensed
      Consolidated Balance Sheets**


(Expressed
      in US Dollars)





(Unaudited)
              March 31,
              2008
            
            December 31,
              2007ASSETSCurrent
                assetsCash
                and bank balances
            
            $
            1,337,647
            
            $
            1,238,212Bank
                fixed deposits - pledged (Note11)
            
            
            365,928
            
            
            363,562Notes
                and accounts receivable, net (Note 5)
            
            
            2,868,465
            
            
            2,453,868Inventories,
                net (Note 6)
            
            
            1,589,084
            
            
            2,008,739Other
                receivables (Note 7)
            
            
            185,585
            
            
            88,139Prepayments
                and other current assets (Note 8)
            
            
            752,399
            
            
            542,794Pledged
                notes receivable (Note 11)
            
            
            568,698
            
            
            557,983Deferred
                income tax assets
            
            
            67,633
            
            
            42,335Total
                current assets
            
            
            7,735,439
            
            
            7,295,632Deferred
                income tax assets
            
            
            53,641
            
            
            50,481Prepayment
                of long-term investments
            
            
            26,864Long-term
                investments (Note 9)
            
            
            58,981
            
            
            58,625Property
                and equipment, net
            
            
            2,444,109
            
            
            2,312,065Intangible
                assets, net of amortization (Note 10)
            
            
            546,962
            
            
            572,005Long-term
                notes receivable
            
            
            437,078
            
            
            420,636Pledged
                notes receivable (Note 11)
            
            
            243,999
            
            
            183,453Other
                assets
            
            
            250,319
            
            
            268,388Total
                assets
            
            $
            11,797,392
            
            $
            11,161,285LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                liabilitiesBank
                borrowings - short-term and maturing withinone
                year (Note 11)
            
            $
            672,880
            
            $
            1,212,534Notes
                and accounts payable
            
            
            876,628
            
            
            389,639Accrued
                expenses
            
            
            1,237,270
            
            
            985,764Other
                payables
            
            
            261,102
            
            
            573,237Deposits
                received
            
            
            16,011
            
            
            912,535Receipts
                in advance (Note 12)
            
            
            2,428,820
            
            
            2,372,403Income
                tax payable
            
            
            174,499
            
            
            124,418Total
                current liabilities
            
            
            5,667,210
            
            
            6,570,530Bank
                borrowings maturing after one year (Note 11)
            
            
            1,876,788
            
            
            1,752,776Receipts
                in advance (Note 12)
            
            
            1,027,558
            
            
            1,034,260Deposits
                received
            
            
            1,660,496
            
            
            680,694Deferred
                liability
            
            
            40,409
            
            
            38,787Accrued
                pension liabilities (Note 13)
            
            
            426,382
            
            
            401,893Total
                liabilities
            
            
            10,698,843
            
            
            10,478,940




-2-




**Kid
        Castle Educational Corporation**
 
 **Condensed
        Consolidated Balance Sheets - Continued**
 (Expressed
        in US Dollars)
 
 (Unaudited)
                March 31,
                2008
              
              December 31,
                2007Commitments
                  and contingencies (Note 15)Minority
                  interest
              
              
              198,203
              
              
              162,343Shareholders’
                  equityCommon
                  stock, no par share :60,000,000
                  shares authorized; 25,000,000 issued and outstanding at March 31,
                  2008 and
                  December 31, 2007
              
              
              8,592,138
              
              
              8,592,138Additional
                  paid-in capital
              
              
              194,021
              
              
              194,021Legal
                  reserve
              
              
              65,320
              
              
              65,320Accumulated
                  deficit
              
              
              (6,449,191
              )
              
              (7,179,418
              )Accumulated
                  other comprehensive loss
              
              
              (1,264,597
              )
              
              (932,027
              )Net
                  loss not recognized as pension cost
              
              
              (237,345
              )
              
              (220,032
              )Total
                  shareholders’ equity
              
              
              900,346
              
              
              520,002Total
                  liabilities and shareholders’ equity
              
              $
              11,797,392
              
              $
              11,161,285


See
        accompanying Notes to Condensed Consolidated Financial Statements.
  -3-
 **Kid
          Castle Educational Corporation**
  **Condensed
          Consolidated Statements of Operations (Unaudited)**
  (Expressed
          in US Dollars)
  Three months ended March 31,2008
                
                2007Operating
                    RevenueSales
                    of goods
                
                $
                2,364,109
                
                $
                2,434,158Franchising
                    income
                
                
                556,229
                
                
                553,492Other
                    operating revenue
                
                
                479,186
                
                
                253,310Total
                    net operating revenue
                
                
                3,399,524
                
                
                3,240,960Operating
                    costsCost
                    of goods sold
                
                
                (1,007,236
                )
                
                (916,655
                )Cost
                    of franchising
                
                
                (98,309
                )
                
                (101,142
                )Other
                    operating costs
                
                
                (69,957
                )
                
                (48,582
                )Total
                    operating costs
                
                
                (1,175,502
                )
                
                (1,066,379
                )Gross
                    profit
                
                
                2,224,022
                
                
                2,174,581Advertising
                    costs
                
                
                (21,513
                )
                
                (18,085
                )Other
                    operating expenses
                
                
                (1,513,671
                )
                
                (1,282,732
                )Income
                    from operations
                
                
                688,838
                
                
                873,764Interest
                    expense, net
                
                
                (23,101
                )
                
                (21,669
                )Share
                    of income (loss) of investments
                
                
                (2,069
                )
                
                11,468Other
                    non-operating income (loss), net
                
                
                132,158
                
                
                132,601Income
                    before income taxes
                
                
                795,826
                
                
                996,164Provision
                    for taxes
                
                
                (36,897
                )
                
                (172,942
                )Income
                    after income taxes
                
                
                758,929
                
                
                823,222Minority
                    interest income
                
                
                (28,702
                )
                
                (43,520
                )Net
                    income
                
                $
                730,227
                
                $
                779,702Earnings
                    per share - basic and diluted
                
                $
                0.029
                
                $
                0.031Weighted-average
                    shares used to compute earnings per share - basic and
                    diluted
                
                
                25,000,000
                
                
                25,000,000
 
 See
          accompanying Notes to Condensed Consolidated Financial
          Statements.
  -4-
 **K** **id
          Castle Educational Corporation**
  **Condensed
          Consolidated Statements of Stockholders’ Equity**
 (Expressed
          in US Dollars)
  Common StockNumber of
                    shares
                  
                  Amount
                  
                  Additional
                    paid-in
                    capital
                  
                  Legal
                    reserve
                  
                  Accumulated
                    deficit
                  
                  Accumulated
                    other
                    comprehensive
                    loss
                  
                  Net loss not
                    recognized as
                    pension cost
                  
                  TotalBalance,
                      December 31, 2006
                  
                  
                  25,000,000
                  
                  $
                  8,592,138
                  
                  $
                  194,021
                  
                  $
                  65,320
                  
                  $
                  (9,056,567
                  )
                  $
                  (330,713
                  )
                  $
                  (98,952
                  )
                  $
                  (634,753
                  )Net
                      income for 2007
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,877,149
                  
                  
                  
                  
                  
                  
                  
                  
                  1,877,149Cumulative
                      translation adjustment
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (601,314
                  )
                  
                  
                  
                  
                  (601,314
                  )Comprehensive
                      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,275,835Repayment
                      of a liability by issuance of common stockNet
                      loss not recognized as pension cost
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (121,080
                  )
                  $
                  (121,080
                  )Balance,
                      December 31, 2007
                  
                  
                  25,000,000
                  
                  $
                  8,592,138
                  
                  $
                  194,021
                  
                  $
                  65,320
                  
                  $
                  (7,179,418
                  )
                  $
                  (932,027
                  )
                  $
                  (220,032
                  )
                  $
                  520,002Net
                      income for the three months ended March 31, 2008
                      (Unaudited)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  730,227
                  
                  
                  
                  
                  
                  
                  
                  
                  730,227Cumulative
                      translation adjustment (Unaudited)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (332,570
                  )
                  
                  
                  
                  
                  (332,570
                  )Comprehensive
                      loss (Unaudited)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  397,657Net
                      loss not recognized as pension cost
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (17,313
                  )
                  
                  (17,313
                  )Balance,
                      March 31, 2008 (Unaudited)
                  
                  
                  25,000,000
                  
                  $
                  8,592,138
                  
                  $
                  194,021
                  
                  $
                  65,320
                  
                  $
                  (6,449,191
                  )
                  $
                  (1,264,597
                  )
                  $
                  (237,345
                  )
                  $
                  900,346
 See
          accompanying Notes to Condensed Consolidated Financial
          Statements.
  -5-
 **K** **id
          Castle Educational Corporation**
  **Condensed
          Consolidated Statements of Cash Flows**
 **(Unaudited)**
 **** (Expressed
          in US Dollars)
  Three months ended March 31,2008
                
                2007Cash
                    flows from operating activitiesNet
                    income
                
                $
                730,227
                
                $
                779,702Adjustments
                    to reconcile net income tonet
                    cash provided by operating activitiesDepreciation
                    of property and equipment
                
                
                66,622
                
                
                49,605Write-off
                    of goodwill
                
                
                11,224Amortization
                    of intangible assets
                
                
                42,836
                
                
                41,031Allowance
                    for sales returns
                
                
                82,723
                
                
                85,270Allowance
                    for doubtful debts
                
                
                81,955
                
                
                10,991Reversal
                    of allowance for loss on inventory obsolescence and slow-moving
                    items
                
                
                (23,684
                )
                
                (134,081
                )Loss
                    on disposal of PP&E
                
                
                715Minority
                    interests
                
                
                28,702
                
                
                43,520Share
                    of loss (gain) of investments
                
                
                2,069
                
                
                (11,468
                )(Increase)/decrease
                    in:Notes
                    and accounts receivable
                
                
                (531,916
                )
                
                (1,074,483
                )Inventories
                
                
                546,540
                
                
                484,994Other
                    receivables
                
                
                13,829
                
                
                143,735Prepayments
                    and other current assets
                
                
                (172,246
                )
                
                (52,731
                )Deferred
                    income tax assets
                
                
                (22,287
                )
                
                1,120Other
                    assets
                
                
                32,970
                
                
                255Increase/(decrease)
                    in:Notes
                    and accounts payable
                
                
                450,301
                
                
                (148,526
                )Accrued
                    expenses
                
                
                198,549
                
                
                (255,080
                )Other
                    payables
                
                
                (291,538
                )
                
                185,280Receipts
                    in advance
                
                
                (147,636
                )
                
                (160,588
                )Income
                    taxes payable
                
                
                40,679
                
                
                170,833Deferred
                    liability
                
                
                (656
                )
                
                774Deposits
                    received
                
                
                (10,781
                )
                
                13,426Accrued
                    pension liabilities
                
                
                661
                
                
                3,504Net
                    cash provided by operating activities
                
                
                1,129,858
                
                
                177,083Cash
                    flows from investing activitiesPurchase
                    of property and equipment
                
                
                (64,757
                )
                
                (50,716
                )Proceeds
                    from disposal of property and equipment
                
                
                2,202
                
                
                —Prepayment
                    of long-term investments
                
                
                (26,076
                )
                
                —Bank
                    fixed deposits-pledged
                
                
                18,609
                
                
                2Pledged
                    notes receivable
                
                
                (26,536
                )
                
                71,831Net
                    cash provided by (used in) investing activities
                
                
                (96,558
                )
                
                21,117


-6-




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





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


**(Unaudited)**


(Expressed
      in US Dollars)




Three months ended March 31,2008
            
            2007Cash
                flows from financing activitiesRepayment
                of bank borrowings
            
            $
            (573,968
            )
            $
            (113,635
            )Repayment
                of loan from stockholders and transactions of related
                parties
            
            
            (31,108
            )
            
            (262,343
            )Net
                cash used in financing activities
            
            
            (605,076
            )
            
            (375,978
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            428,224
            
            
            (177,778
            )Effect
                of exchange rate changes on cash and cash equivalents
            
            
            (328,789
            )
            
            (16,285
            )Cash
                and cash equivalents at beginning of period
            
            
            1,238,212
            
            
            1,419,873Cash
                and cash equivalents at end of period
            
            $
            1,337,647
            
            $
            1,225,810





See
      accompanying Notes to Condensed Consolidated Financial Statements.




-7-




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




**Notes
      to Condensed Consolidated Financial Statements**




(Expressed
      in US Dollars)




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




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




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




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




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




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




On
      December 27, 2006, KCES established a wholly-owned subsidiary, Shanghai Kid
      Castle Educational Info Constitution Company Limited (“KCEI”) in the PRC, with
      registered total capital of RMB1,200,000, in order to operate schools controlled
      by us in PRC. As of March 31, 2008, KCEI had total registered capital of
      RMB2,000,000.




-8-




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




**NOTE
      2 - BASIS OF PRESENTATION**




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




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




Since
      inception, the Group had incurred operating losses during most of its reporting
      periods, although the Group has been profitable since 2007. The accumulated
      deficit has improved since Messrs. Pai and Yang have assumed their respective
      management roles, and as of March 31, 2008, the balance of accumulated deficit
      was $6,449,191. Although we had an accumulated deficit, we have positive cash
      flow from operations. Barring significant, unforeseen development in PRC, we
      believe we can decrease our reliance on loans from shareholders and banks to
      meet our funding requirements in the future. Despite our expectation to decrease
      reliance on loans, we may again be required to seek additional financing to
      meet
      our funding requirements and no assurances can be given that bank loans or
      loans
      from shareholders will be available in the future. If we are unable to secure
      sufficient financing, our liquidity position would be adversely affected, and
      we
      may need to seek a more expensive source of funding to finance our
      operations.




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




REVENUE
      RECOGNITION




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




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




ALLOWANCE
      FOR DOUBTFUL ACCOUNTS




An
      allowance for doubtful accounts is provided based on the evaluation of
      collectibility and on aging analysis of notes and accounts
      receivables.




-9-




INVENTORIES




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




PROPERTY
      AND EQUIPMENT AND DEPRECIATION




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




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




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




LONG-LIVED
      ASSETS




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




INCOME
      TAXES




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




INTANGIBLE
      ASSETS




Franchises
      and copyrights are stated at cost and amortized on the straight-line method
      over
      their estimated useful lives of 10 years, the goodwill is amortized on the
      straight-line basis over estimated the useful lives of 5 years.




COMPREHENSIVE
      INCOME (LOSS)




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




-10-




NET
      EARNINGS (LOSS) PER COMMON SHARE




The
      Group
      computes net earnings (loss) per share in accordance with SFAS No. 128,
“Earnings per Share”. Under the provisions of SFAS No. 128, basic net earnings
      (loss) per share is computed by dividing the net earnings (loss) available
      to
      common shareholders for the period by the weighted average number of shares
      of
      common stock outstanding during the period. The calculation of diluted net
      earnings (loss) per share gives effect to common stock equivalents. For the
      three months ended March 31, 2008 and 2007, the Group did not have any potential
      common stock shares.




RECLASSIFICATION




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




**NOTE
      4 - RECENT ACCOUNTING PRONOUNCEMENTS**




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





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





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





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




-11-




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





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


**March 31,**
                **2008**
              
              **December 31,**
                **2007**(Unaudited)Notes
                  and accounts receivable-
                  Third parties
              
              $
              3,419,220
              
              $
              2,757,425-
                  Related parties
              
              
              41,728
              
              
              150,363Total
              
              
              3,460,948
              
              
              2,907,788Allowance
                  for doubtful accounts and sales returns
              
              
              (592,483
              )
              
              (453,920
              )Notes
                  and accounts receivable, net
              
              $
              2,868,465
              
              $
              2,453,868




**NOTE
      6 - INVENTORIES**


**March 31,**
                **2008**
              
              **December 31,**
                **2007**(Unaudited)Work
                  in process
              
              $
              110,667
              
              $
              180,985Finished
                  goods and other merchandises
              
              
              1,797,432
              
              
              2,151,9621,908,099
              
              
              2,332,947Less:
                  Allowance for obsolete inventories anddecline
                  of market value
              
              
              (319,015
              )
              
              (324,208
              )$
              1,589,084
              
              $
              2,008,739




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


**March 31,**
                    **2008**
                  
                  **December 31,**
                    **2007**(Unaudited)Other
                      receivables - third parties:Tax
                      paid on behalf of landlord
                  
                  $
                  
                  
                  $Advances
                      to staff
                  
                  
                  105,469
                  
                  
                  87,188Grants
                      from Market Information CenterOther
                      receivables
                  
                  
                  79,085
                  
                  
                  633Sub-total
                  
                  
                  184,554
                  
                  
                  87,821Other
                      receivables - related parties
                  
                  
                  1,031
                  
                  
                  318$
                  185,585
                  
                  $
                  88,139




-12-




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




**March 31,**
              **2008**
            
            **December 31,**
              **2007**(Unaudited)Prepayments
            
            $
            736,237
            
            $
            523,199Temporary
                payments
            
            
            3,570
            
            
            15,598Prepaid
                interest
            
            
            6,372
            
            
            2,713Others
            
            
            6,220
            
            
            1,284$
            752,399
            
            $
            542,794




**NOTE
      9- INTEREST IN ASSOCIATES**




**March 31,**
                **2008**
              
              **December 31,**
                **2007**(Unaudited)21stCentury Kid Castle Language and Education Center(“Education
                  Center”) (Note (i))Investment
                  cost
              
              $
              106,043
              
              $
              101,787Share
                  of loss
              
              
              (34,432
              )
              
              (39,641
              )$
              71,612
              
              $
              62,146Tianjin
                  Kid Castle Educational Investment Consulting Co., Ltd. (“Tianjin
                  Consulting”) (Note (ii))Investment
                  cost
              
              $
              98,973
              
              $
              95,000Share
                  of loss
              
              
              (111,605
              )
              
              (98,521
              )$
              (12,631
              )
              $
              (3,521
              )Total
              
              $
              58,981
              
              $
              58,625




Note:




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




-13-




For
      the
      three months ended March 31, 2008 and 2007, the Group recognized investment
      income accounted for under the equity method in Education Center of
      $ 6,780
      and
      $ 14,339,
      respectively .




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




For
      the
      three months ended March 31, 2008 and 2007, the Group recognized an investment
      loss of $8,850 and $1,072, respectively, accounted for under the equity method,
      in Tianjin Consulting.




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




**March 31,**
                **2008**
              
              **December 31,**
                **2007**(Unaudited)Gross
                  carrying amountFranchise
              
              $
              1,111,714
              
              $
              1,049,538Copyrights
              
              
              653,509
              
              
              616,960Goodwill
              
              
              227,354
              
              
              218,2271,992,577
              
              
              1,884,725Less:
                  Accumulated amortizationFranchise
              
              
              (889,371
              )
              
              (813,392
              )Copyrights
              
              
              (522,807
              )
              
              (478,144
              )Write-off
                  goodwill
              
              
              (33,437
              )
              
              (21,184
              )(1,445,615
              )
              
              (1,312,720
              )**Net**
              
              $
              546,962
              
              $
              572,005




Amortization
      charged to operations was $55,498 and $41,031 for the three months ended March
      31, 2008 and 2007, respectively.




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




2009
              
              $
              205,6552010
              
              
              89,6022011
              
              
              45,4702012
              
              
              23,403$
              364,130




**NOTE
      11 - BANK BORROWINGS**




Notes
              
              **March 31,**
                **2008**
              
              **December 31,**
                **2007**(Unaudited)Bank
                  term loans
              
              
              (i)
              
              $
              635,120
              
              $
              580,553Short-term
                  unsecured bank loans
              
              
              (ii)
              
              
              476,827
              
              
              1,027,446Mid-term
                  secured bank loan
              
              
              (iii)
              
              
              1,437,721
              
              
              1,357,3112,549,668
              
              
              2,965,310Less:
                  Balances maturing within one year included in current
                  liabilitiesBank
                  term loans
              
              
              
              
              
              ó
              
              
              185,088Short-term
                  unsecured bank loans
              
              
              
              
              
              476,827
              
              
              1,027,446Mid-term
                  secured bank loan
              
              
              
              
              
              196,053
              
              
              —672,880
              
              
              1,212,534Bank
                  borrowings maturing after one year
              
              
              
              
              $
              1,876,788
              
              $
              1,752,776




Note:




(i)
            This
                line item represents bank loans that have been secured by a pledge
                of
                post-dated checks amounting to $849,805 and $753,962 that we have
                received
                from franchisees and the Group’s bank deposits of $20,493 and $22,053 as
                of March 31, 2008 and December 31, 2007, respectively, for the purpose
                of
                financing operations. The repayment dates of the loans coincided
                with the
                maturity dates of the corresponding pledged post-dated checks, which
                were
                extended on October 18, 2007 and will be due on September 30, 2008.
                The
                weighted average interest rates were 5.86% and 5.85% per annum as of
                March 31, 2008 and 2007, respectively.




For
      the
      three months ended March 31, 2008 and 2007, interest expense charged to
      operations in respect of bank loans was $8,257 and $1,094,
      respectively.




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




In
      March
      2005, KCIT obtained an unsecured short-term loan to finance the Group’s
      operations in the amount of $304,553, which was extended on October 18, 2007.
      The loan was guaranteed by two directors and stockholders of the Group. The
      loan
      bears interest at the Taiwan basic borrowing rate plus 1.3% per annum, and
      is
      repayable in 36 equal monthly installments. The loan was fully repaid when
      the
      last installment was due on March 19, 2008.




-14-




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





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





For
      the
      three months ended March 31, 2008 and 2007, interest expense charged to
      operations in respect of the above unsecured short-term loans was $14,666 and
      $6,079 respectively.




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




In
      February 2005, KCIT obtained a new bank loan of $456,830, which bore interest
      at
      6% per annum and was repayable in 36 equal monthly installments. The last
      installment was due on February 2, 2008, was collateralized by notes
      receivables in 30% approximating the loan balance, and guaranteed by two
      directors of the Group. The loan was fully repaid on January 9, 2008.




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




For
      the
      three months ended March 31, 2008 and 2007, interest expense charged to
      operations amounted to $17 and $10,077, respectively.




**NOTE
      12 - RECEIPTS IN ADVANCE**




The
      balance comprises:


Notes
              
              **March 31,**
                **2008**
              
              **December 31,**
                **2007**(Unaudited)Current
                  liabilities:Sales
                  deposits received
              
              
              (i)
              
              $
              471,930
              
              $
              303,258Franchising
                  income received
              
              
              (ii)
              
              
              1,370,253
              
              
              1,456,267Subscription
                  fees received
              
              
              (iii)
              
              
              507,575
              
              
              516,136Others
              
              
              
              
              
              79,062
              
              
              96,7422,428,820
              
              
              2,372,403Long-term
                  liabilities:Franchising
                  income received
              
              
              (ii)
              
              
              1,027,558
              
              
              1,034,260$
              3,456,378
              
              $
              3,406,663




-15-




Note:




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




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




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




**NOTE
      13 - RETIREMENT PLANS**





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





The
      net periodic pension cost is as follows:


**Three months ended March 31,****2008**
              
              **2007**(Unaudited)Service
                  cost
              
              
              
              
              $
              $Interest
                  cost
              
              
              3,228
              
              
              3,054Expected
                  return on assets
              
              
              (523
              )
              
              (606
              )Amortization
                  of unrecognized loss
              
              
              808
              
              
              739Net
                  periodic pension cost
              
              $
              3,513
              
              $
              3,187




-16-




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




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


Taiwan
              
              The
                  PRC
              
              Total
              
              Corporate
              
              Eliminations
              
              ConsolidatedThree months
                ended
                March 31,
                2008
              
              Three months
                ended
                March 31,
                2007
              
              Three months
                ended
                March 31,
                2008
              
              Three months
                ended
                March 31,
                2007
              
              Three months
                ended
                March 31,
                2008
              
              Three months
                ended
                March 31,
                2007
              
              Three months
                ended
                March 31,
                2008
              
              Three months
                ended
                March 31,
                2007
              
              Three months
                ended
                March 31,
                2008
              
              Three months
                ended
                March 31,
                2007
              
              Three months
                ended
                March 31,
                2008
              
              Three months
                ended
                March 31,
                2007RevenueExternal
                  revenue
              
              $
              1,667,695
              
              $
              2,058,567
              
              $
              1,731,829
              
              $
              1,182,393
              
              $
              3,399,524
              
              $
              3,240,960
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              3,399,524
              
              $
              3,240,960Inter-segment
                  revenue
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —$
              1,667,695
              
              $
              2,058,567
              
              $
              1,731,829
              
              $
              1,182,393
              
              $
              3,399,524
              
              $
              3,240,960
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              3,399,524
              
              $
              3,240,960Profit
                  from
                Operations
              
              $
              176,323
              
              $
              552,648
              
              $
              549,377
              
              $
              383,403
              
              $
              725,700
              
              $
              936,051
              
              $
              (36,862
              )
              $
              (62,287
              )
              $
              —
              
              $
              —
              
              $
              688,838
              
              $
              873,764Capital
                  expenditures
              
              $
              57,643
              
              $
              5,083
              
              $
              265,760
              
              $
              38,325
              
              $
              323,403
              
              $
              43,408
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              323,403
              
              $
              43,408March 31,
                2008
              
              
              December 31,
                2007
              
              
              March 31,
                2008
              
              
              December 31,
                2007
              
              
              March 31,
                2008
              
              
              December 31,
                2007
              
              
              March 31,
                2008
              
              
              December 31,
                2007
              
              
              March 31,
                2008
              
              
              December 31,
                2007
              
              
              March 31,
                2008
              
              
              December 31,
                2007Total
                  assets
              
              $
              7,770,317
              
              $
              7,495,418
              
              $
              4,459,044
              
              $
              4,063,399
              
              $
              12,229,361
              
              $
              11,558,817
              
              $
              2,950
              
              $
              2,597
              
              $
              (434,919
              )
              $
              (400,129
              )
              $
              11,797,392
              
              $
              11,161,285


**NOTE
          15 - COMMITMENT AND CONTINGENCIES**





**A.
      Lease Commitment**





As
      of March 31, 2008, the Company’s future minimum lease payments under a
      non-cancelable operating lease expiring in excess of one year are as follows:




Years
                ending December 31,2009
            
            $
            173,3172010
            
            
            124,3512011
            
            
            205,2142012
            
            
            568,930Years
                2013 to 2017
            
            
            776,092$
            1,847,904





**B.
      Going concern**





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





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





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




-17-




**OVERVIEW**




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





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




**CRITICAL
      ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES**





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





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


If
      market
      conditions were to decline, we may take actions to increase sales discounts,
      possibly resulting in an incremental reduction of revenue at the time when
      revenues are recognized.




**Allowance
        for Doubtful Accounts.** We
        maintain allowances for doubtful accounts for estimated losses resulting
        from
        the inability of our customers to make required payments. If the financial
        condition of our customers were to deteriorate, resulting in an impairment
        of
        their ability to make payments, additional allowances may be required.
  -18-





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





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





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





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





As
      of March 31, 2008, the balance of our amortizable intangible assets was
      $546,962, including franchise-related intangible assets of $222,343 and
      copyrights of $130,702. The amortizable intangible assets are amortized on
      a
      straight-line basis over estimated useful lives of 10 years, and the
      balance of goodwill was $193,917, which is amortized on a straight-line basis
      over estimated useful lives of five years. In determining the useful lives
      and
      recoverability of the intangibles, assumptions must be made regarding estimated
      future cash flows and other factors to determine the fair value of the assets,
      which may not represent the true fair value. If these estimates or their related
      assumptions change in the future, there may be significant impact on our results
      of operations in the period of the change incurred.





**Income
      Taxes.** We
      account for income taxes under the asset and liability method. Deferred tax
      assets and liabilities are recognized for the future tax consequences
      attributable to differences between the financial statement carrying amounts
      of
      existing assets and liabilities and their respective tax bases, and tax loss
      carry-forwards. Deferred tax assets and liabilities are measured using enacted
      tax rates expected to apply to taxable income in the years in which those
      temporary differences are expected to be recovered or settled. The effect on
      deferred tax assets and liabilities of a change in tax rates is recognized
      in
      income in the period that includes the enactment date. Deferred tax assets
      are
      subject to valuation allowances based upon management’s estimates of
      realizability. Actual results may differ significantly from management’s
      estimate.





**RESULTS
      OF OPERATIONS**





**Three
      Months Ended March 31, 2008 compared to Three Months Ended March 31,
      2007**


-19-





**Total
      Net Operating Revenue.** Total
      net
      operating revenue consists of sales of goods, franchising income and other
      operating revenue. Total net operating revenues increased by $158,564, or 5%,
      to
      $3,399,524 for the three months ended March 31, 2008 from $3,240,960 for
      the three months ended March 31, 2007. This was mainly due to the decrease
      in sales of goods of $70,049, increase in franchising income of $2,737, and
      increase in other operating revenues of $225,876.





**Sales
      of goods.** The
      decrease in sales of goods, from $2,434,158 for the three months ended
      March 31, 2007 to $2,364,109, or 3%, for the three months ended
      March 31, 2008, was mainly due to the decrease in net sales of goods from
      our Taiwan operations of $319,104, or 20%, to $1,249,561 for the three months
      ended March 31, 2008 from $1,568,665 for the three months ended March 31,
      2007 and in the increase in our Shanghai operations of $249,626, or 29%, to
      $1,115,119 for the three months ended March 31, 2008 from $865,493 for the
      three
      months ended March 31, 2007.





**Franchising
      income.** The
      0.5%
      increase in franchising income, from $553,492 for the three months ended
      March 31, 2007 to $556,229, for the three months ended March 31, 2008,
      was mainly due to the increase in franchising income from Shanghai
      operations.





**Other
      operating revenue.** Our
      other
      operating revenues represent revenues from other activities and services such
      as
      training of teachers, arranging for personal English language tutors, organizing
      field trips and educational fairs, fees for designing the school layout of
      our
      franchised schools, and the tuition from schools. Other operating revenue
      increased by $225,876, or 89%, to $479,186 for the three months ended
      March 31, 2008 from $253,310 for the three months ended March 31,
      2007. The increase was mainly due to operate schools controlled by us in the
      PRC.





**Gross
      Profit.** Gross
      profit increased by $49,441, or 2%, to $2,224,022 for the three months ended
      March 31, 2008 from $2,174,581 for the three months ended March 31,
      2007. The increase in Gross Profit was mainly due to the increase in franchising
      income and in other operating revenue.





**Total
      Operating Expenses.** Total
      operating expenses increased by $234,367, or 18%, to $1,535,184 for the three
      months ended March 31, 2008, from $1,300,817 for the three months ended
      March 31, 2007. The increase in total operating expenses was mainly due to
      increases in expenditures to fund daily operations in our Shanghai operations.





**Other
      Operating Expenses.** Other
      operating expenses increased by $230,939, or 18%, to $1,513,671 for the three
      months ended March 31, 2008, from $1,282,732 for the three months ended
      March 31, 2007.The increase in operating expenses was mainly due to
      increases in expenditures to fund daily operations in our Shanghai operations.





**Interest
      Expenses, Net.** Net
      interest expenses increased by $1,432, or 7%, to $23,101 for the three months
      ended March 31, 2008 from $21,669 for the three months ended March 31,
      2007. The increase in net interest expenses was mainly due to the increase
      of
      the borrowings during the three months ended March 31, 2008, compared to
      the three months ended March 31, 2007. (See Note 11 to our Condensed
      Consolidated Financial Statements for more information.)





**Other
      Non-operating Income, Net.** Net
      other non-operating income decreased by $443, or 0.3%, to $132,158 for the
      three
      months ended March 31, 2008, from $132,601 for the three months ended March
      31,
      2007. The decrease in net other non-operating income was mainly due to the
      difference in exchange rates between the two periods.


-20-


**Provision
      for Taxes.** Provision
      for taxes for the three months ended March 31, 2008 and 2007 were $36,897
      and $172,942, respectively. These provisions for income taxes relate to income
      taxes resulting from our operations in Taiwan.





**LIQUIDITY
      AND CAPITAL RESOURCES**





As
      of March 31, 2008, our principal sources of liquidity included cash and
      bank balances of $1,337,647, which increased $99,435 from the balance of
      $1,238,212 at December 31, 2007. The increase was mainly due to the
      increase in our net income.





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





Net
      cash provided by operating activities was $1,129,858 and $177,083 during the
      three months ended March 31, 2008 and 2007, respectively. The $952,775
      difference was primarily attributed to (i) an increase in notes and accounts
      receivable of $531,916 during the three months ended March 31, 2008, compared
      to
      an increase of notes and accounts receivable of $1,074,483 during the three
      months ended March 31, 2007, and (ii) an increase of notes and accounts payable
      in the amount of $450,301 during the three months ended March 31, 2008, compared
      to a decrease of notes and accounts payable in the amount of $148,526 during
      the
      three months ended March 31, 2007.





Net
      cash used in investing activities was $96,558 during the three months ended
      March 31, 2008 and net cash provided by investing activities was $21,117 during
      the three months ended March 31, 2007. The $117,675 difference was
      primarily attributable to (i) more cash used in the purchase of property and
      equipment which constituted a decrease in the amount of $64,757 during the
      three
      months ended March 31, 2008, compared to a decrease in the amount of
      $50,716 during the three months ended March 31, 2007, (ii) cash used in pledged
      notes receivable of $26,536 during the three months ended March 31, 2008,
      compared to cash provided by pledged notes receivable of $71,831 during the
      three months ended March 31, 2007, for a net positive difference in cash of
      $98,370.





Net
      cash used in financing activities during the three months ended March 31,
      2008 was $605,076, as compared to $375,978 during the three months ended
      March 31, 2007. The $229,098 difference was primarily attributable to
      $573,968 in cash used in repayment of bank borrowings during the three months
      ended March 31, 2008, compared to $113,635 used for the same purpose during
      the
      three months ended March 31, 2007.





**Off-Balance
      Sheet Arrangements**





As
      of March 31, 2008, we did not engage in any off-balance sheet arrangements
      as defined in Item 303(a)(4) of Regulation S-K promulgated by the SEC
      under the Securities Exchange Act of 1934.


-21-





**Bank
      Borrowing**





One
      of our financing sources is from bank borrowings. As of March 31, 2008 and
      2007, the balances of bank borrowings, including current and non-current
      portions, were $2,549,668 and $2,700,885, respectively.





**Pension
      Benefit**





As
      of July 1, 2005, the Group maintains two different retirement plans, according
      to the ROC Labor Standard Law, a non-contributory and funded defined
      contribution retirement plan (the “New Plan”) covering all regular employees of
      KCIT, our subsidiary in Taiwan, and the benefit retirement plan (the “Old Plan”)
      which commenced in September 2003, and only applies to the regular employees
      of
      KCIT who were employed prior to June 2005, as described in Note14 to our
      Condensed Consolidated Financial Statements. The benefits expected to be paid
      in
      each of the next five fiscal years, and in the aggregate for the five fiscal
      years thereafter are $0 and $16,735, respectively. We also make defined
      contributions to a retirement benefits plan for our employees in the PRC in
      accordance with local regulations. The contributions made by us for the three
      months ended March 31, 2008 and 2007 amounted to $13,755, and $22,085,
      respectively.





**New
      Accounting Pronouncements**





See
      Note
      4 to the Consolidated Financial Statements





**Non-GAAP
      Financial Measures**





None.





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





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





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





***Interest
      rate exposure***





We
      are
      exposed to fluctuating interest rates related to variable rate bank borrowings.
      In analyzing the effect of interest rate fluctuations based on the average
      balances of our outstanding bank borrowings for fiscal year 2008, we have
      projected that, if interest rates were to increase by one percent, the result
      would be an annual increase in our interest expense of $24,749. This analysis
      does not take into consideration the effect of changes in the level of overall
      economic activity on interest rate fluctuations.





***Foreign
      currency exposure***





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


-22-


**ITEM
      4. CONTROLS AND PROCEDURES**





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





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





Based
      on
      deficiencies noted by our auditors, problems discovered relating to misuse
      of
      company funds by a company officer, and other issues noted in our management’s
      evaluation our conclusion is that as of March 31, 2008 our disclosure controls
      and procedures were ineffective. We
      are
      taking measures to improve our disclosure controls and procedures, including
      instituting a new Enterprise Resource Planning (“ERP”) system and engaging an
      outside accounting firm to advise the Company with respect to setting up
      internal auditing and other controls and procedures. The ERP system is expected
      to complete its trial run period by the third fiscal quarter 2008 and become
      fully operational thereafter. The operation of the old system is scheduled
      to be
      terminated by August 31, 2008.





***Internal
      Control Over Financial Reporting*** **




Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting, as such term is defined in the rules
      promulgated under the Securities Exchange Act of 1934. Under the supervision
      and
      with the participation of our management, including our principal executive
      and
      financial accounting officer, we have conducted an evaluation of the
      effectiveness of our internal control over financial reporting.





We
      recognize that the internal controls and procedures adopted by the Company
      were
      inadequate and gave rise to misappropriation of funds as disclosed in our Current
      Report on Form
      8-K
      filed with the SEC on June 23, 2006. Among
      other improvements, we began implementing a comprehensive ERP system that will
      improve the Company’s internal controls. The ERP system has been fully installed
      and the system has been running in parallel with the old system since 2007.
      Since the trial-run in January 2007 to the filing date of this current report
      Form 10-Q, we have encountered various obstacles that prevented the ERP system
      from independently operating on its own. The obstacles, included the proper
      training and familiarization of personnel with the ERP system and detecting
      enhancements that needed to be made in the ERP system and to resolve such
      enhancements and issues that are identified during the course of training and
      system trial-runs. As a result, Management now expects the ERP system to be
      fully operational in the third fiscal quarter of 2008. The Company believes
      that
      full implementation of its new ERP System will prevent misappropriation of
      funds
      by Company employees because the ERP system will perform the following
      functions:


-23-





·
            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.




In
                  addition to implementing a new ERP system, the following additional
                  procedures have been
                  implemented:





·
            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 prior to 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 prior to any release of funds.





·
            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.





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





**PART
      II OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**





We
      have
      no material pending legal proceedings.





**ITEM
      1A. RISK FACTORS**





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


-24-


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





None.





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





None.





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





None.





**ITEM
      5. OTHER INFORMATION**





None.





**ITEM
      6. EXHIBITS**





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


-25-





**SIGNATURES**


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


Dated:
      May 13, 2008





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




-26-