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**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

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**FORM      10-Q**

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

**SECURITIES      EXCHANGE ACT OF 1934**

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

**SECURITIES      EXCHANGE ACT OF 1934**

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**KID      CASTLE EDUCATIONAL CORPORATION**

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

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

| **011-886-22218                5996**                                                                            |
|------------------------------------------------------------------------------------------------------------------|
| (Registrant’s                telephone number, including area code)                                        |
| **NONE**                                                                                                         |
| (Former                name, former address and former fiscal year, if changed since last                report) |

** **

** **
** **
** **
** **

** o**
** **

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**FORM      10-Q **

**KID      CASTLE EDUCATIONAL CORPORATION **

**TABLE      OF CONTENTS**

|                      |                                                                                                                                                                       |  Page |
|---------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| PART                  I   | FINANCIAL                  INFORMATION                                                                                                                                     |       |
| Item                  1.  | Unaudited                  Condensed Consolidated Financial Statements                                                                                                     |  -2-  |
|                      | a)                  Condensed Consolidated Balance Sheet as of September 30, 2006 and                  December                  31, 2005                                  |  -2-  |
|                      | b)                  Condensed Consolidated Statements of Operations for the three months                  ended                  September 30, 2006 and September 30, 2005 |  -4-  |
|                      | c)                  Condensed Consolidated Statements of Operations for the nine months                  ended                  September 30, 2006 and September 30, 2005  |  -5-  |
|                      | d)                  Condensed Consolidated Statements of Stockholders’ Equity                                                                                        |  -6-  |
|                      | e)                  Condensed Consolidated Statements of Cash Flows for the nine months                  ended                  September 30, 2006 and September 30, 2005  |  -7-  |
|                      | f)                  Notes to Condensed Consolidated Financial Statements                                                                                                   |  -9-  |
| Item                  2.  | Management’s                  Discussion and Analysis of Financial Condition and Results of                  Operations                                              |  -23- |
| Item                  3.  | Quantitative                  and Qualitative Disclosures About Market Risk                                                                                                |  -28- |
| Item                  4.  | Controls                  and Procedures                                                                                                                                   |  -28- |
| PART                  II. | OTHER                  INFORMATION                                                                                                                                         |       |
| Item                  1.  | Legal                  Proceedings                                                                                                                                         |  -30- |
| Item                  1A  | Risk                  Factors                                                                                                                                              |  -30- |
| Item                  2.  | Changes                  in Securities, Use of Proceeds and Issuer Purchases of Equity                  Securities                                                         |  -30- |
| Item                  3.  | Defaults                  upon Senior Securities                                                                                                                           |  -30- |
| Item                  4.  | Submission                  of Matters to a Vote of Security Holders                                                                                                       |  -30- |
| Item                  5.  | Other                  Information                                                                                                                                         |  -30- |
| Item                  6   | Exhibits                  and Reports on Form 8-K                                                                                                                          |  -30- |
| SIGNATURES                |                                                                                                                                                                       |  -31- |

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***PART      I.***
***FINANCIAL INFORMATION***

**ITEM      1. **
**FINANCIAL      STATEMENTS**

**Kid      Castle Educational Corporation**

**Condensed      Consolidated Balance Sheets**

|                                                                                                      |   | September                  30,2006 |       | December                  31,2005 |   |
|------------------------------------------------------------------------------------------------------|--------|------------------------------------|------------|-----------------------------------|--------|
|                                                                                                 |   | (Unaudited)                        |       |                              |   |
| ASSETS                                                                                               |   |                               |       |                              |   |
|                                                                                                 |   |                               |       |                              |   |
| Current                  assets                                                                      |   |                               |       |                              |   |
| Cash                  and bank balances                                                              |   | $                                  | 1,559,780  |                              | $      | 613,391 |   |
| Bank                  fixed deposits - pledged (Note 12)                                             |   |                               | 86,501     |                              |   | 120,813 |   |
| Notes                  and accounts receivable, net (Notes 5)                                        |   |                               | 3,713,951  |                              |   | 2,593,276 |   |
| Inventories,                  net (Note 6)                                                           |   |                               | 1,355,727  |                              |   | 2,069,492 |   |
| Other                  receivables (Notes 7)                                                         |   |                               | 226,999    |                              |   | 223,063 |   |
| Prepayments                  and other current assets (Note 8)                                       |   |                               | 295,350    |                              |   | 411,526 |   |
| Pledged                  notes receivable (Note 12)                                                  |   |                               | 460,048    |                              |   | 849,704 |   |
| Deferred                  income tax assets                                                          |   |                               | 130,578    |                              |   | 72,992 |   |
| Total                  current assets                                                                |   |                               | 7,828,934  |                              |   | 6,954,257 |   |
| Deferred                  income tax assets                                                          |   |                               | 48,364     |                              |   | 46,382 |   |
| Long-term                  investments (Note 9)                                                      |   |                               | 52,405     |                              |   | 71,158 |   |
| Property                  and equipment, net                                                         |   |                               | 1,700,329  |                              |   | 1,808,411 |   |
| Intangible                  assets, net of amortization (Note 11)                                    |   |                               | 571,239    |                              |   | 699,246 |   |
| Long-term                  notes receivable                                                          |   |                               | 731,874    |                              |   | 482,483 |   |
| Pledged                  notes receivable (Note 12)                                                  |   |                               | 55,813     |                              |   | 357,825 |   |
| Other                  assets                                                                        |   |                               | 215,742    |                              |   | 563,175 |   |
| Total                  assets                                                                        |   | $                                  | 11,204,700 |                              | $      | 10,982,937 |   |
| LIABILITIES                  AND STOCKHOLDERS’ EQUITY                                          |   |                               |       |                              |   |   |   |
| Current                  liabilities                                                                 |   |                               |       |                              |   |   |   |
| Bank                  borrowings - short-term and maturing withinone                  year (Note 12) |   | $                                  | 818,589    |                              | $      | 1,516,906 |   |
| Notes                  and accounts payable                                                          |   |                               | 1,269,080  |                              |   | 1,385,478 |   |
| Accrued                  expenses                                                                    |   |                               | 695,185    |                              |   | 560,733 |   |
| Amounts                  due to stockholders/officers (Note 10)                                      |   |                               | 1,250,183  |                              |   | 977,838 |   |
| Other                  payables                                                                      |   |                               | 562,790    |                              |   | 1,057,161 |   |
| Deposits                  received                                                                   |   |                               | 1,192,331  |                              |   | 462,007 |   |
| Receipts                  in advance (Note 13)                                                       |   |                               | 2,583,578  |                              |   | 2,353,680 |   |
| Income                  tax payable                                                                  |   |                               | 244,258    |                              |   | 122,481 |   |
| Other                  current liabilities                                                           |   |                               | 218,875    |                              |   | — |   |
| Total                  current liabilities                                                           |   |                               | 8,834,869  |                              |   | 8,436,284 |   |
| Bank                  borrowings maturing after one year (Note 12)                                   |   |                               | 1,086,239  |                              |   | 1,640,391 |   |
| Receipts                  in advance (Note 13)                                                       |   |                               | 1,427,646  |                              |   | 1,130,207 |   |
| Deposits                  received                                                                   |   |                               | 181,873    |                              |   | 864,196 |   |
| Deferred                  liability                                                                  |   |                               | 36,157     |                              |   | 35,416 |   |
| Accrued                  pension liabilities (Note 14)                                               |   |                               | 181,358    |                              |   | 174,387 |   |
| Total                  liabilities                                                                   |   |                               | 11,748,142 |                              |   | 12,280,881 |   |

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**Kid      Castle Educational Corporation**

**Condensed        Consolidated Balance Sheets - Continued**

|                                                                                                                                                                        |   | September                    30,2006 |       | December                    31,2005 |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|-------------------------------------|--------|
|                                                                                                                                                                        |   | (Unaudited)                          |       |                                |   |
| Commitments                    and contingencies (Note 16)                                                                                                                  |   |                                 |       |                                |   |
|                                                                                                                                                                        |   |                                 |       |                                |   |
| Minority                    interest                                                                                                                                        |   |                                 | 85,216     |                                |   | 28,627 |   |
|                                                                                                                                                                        |   |                                 |       |                                |   |   |   |
| Shareholders’                    equity                                                                                                                               |   |                                 |       |                                |   |   |   |
| Common                    stock, no par share:                                                                                                                              |   |                                 |       |                                |   |   |   |
| 25,000,000                    shares authorized; 18,999,703 shares issued and outstanding at                    September                    30, 2006 and December 31, 2005 |   |                                 | 7,669,308  |                                |   | 7,669,308 |   |
| Additional                    paid-in capital                                                                                                                               |   |                                 | 194,021    |                                |   | 194,021 |   |
| Legal                    reserve                                                                                                                                            |   |                                 | 65,320     |                                |   | 65,320 |   |
| Accumulated                    deficit                                                                                                                                      |   |                                 | (8,261,563 | )                                   |   | (9,010,356 | ) |
| Accumulated                    other comprehensive loss                                                                                                                     |   |                                 | (295,744   | )                                   |   | (244,864 | ) |
| Total                    shareholders’ equity                                                                                                                         |   |                                 | (628,658   | )                                   |   | (1,326,571 | ) |
| Total                    liabilities and shareholders’ equity                                                                                                         |   | $                                    | 11,204,700 |                                | $      | 10,982,937 |   |

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**Kid        Castle Educational Corporation**

**Condensed        Consolidated Statements of Operations**

|                                                                                                                        |   | Three                    months ended September 30, |       |
|-----------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|------------|
|                                                                                                                        |   | 2006                                                |       | 2005 |   |
|                                                                                                                        |   | (Unaudited)                                         |       |
| Operating                    Revenue                                                                                        |   |                                                |       |   |   |
| Sales                    of goods                                                                                           |   | $                                                   | 2,573,101  |   | $ | 2,822,830 |   |
| Franchising                    income                                                                                       |   |                                                | 831,805    |   |   | 606,879 |   |
| Other                    operating revenue                                                                                  |   |                                                | 307,698    |   |   | 142,459 |   |
| Total                    net operating revenue                                                                              |   |                                                | 3,712,604  |   |   | 3,572,168 |   |
| Operating                    costs                                                                                          |   |                                                |       |   |   |   |   |
| Cost                    of goods sold                                                                                       |   |                                                | (987,402   | ) |   | (1,194,054 | ) |
| Cost                    of franchising                                                                                      |   |                                                | (83,107    | ) |   | (370,880 | ) |
| Other                    operating costs                                                                                    |   |                                                | (527,095   | ) |   | (129,805 | ) |
| Total                    operating costs                                                                                    |   |                                                | (1,597,604 | ) |   | (1,694,739 | ) |
| Gross                    profit                                                                                             |   |                                                | 2,115,000  |   |   | 1,877,429 |   |
| Advertising                    costs                                                                                        |   |                                                | (2,296     | ) |   | 28,050 |   |
| Other                    operating expenses                                                                                 |   |                                                | (1,379,880 | ) |   | (2,330,509 | ) |
| Income                    (loss) from operations                                                                            |   |                                                | 732,824    |   |   | (425,030 | ) |
| Interest                    expense, net                                                                                    |   |                                                | (31,632    | ) |   | (55,363 | ) |
| Share                    of loss of investments                                                                             |   |                                                | (10,915    | ) |   | (34,116 | ) |
| Other                    non-operating income, net                                                                          |   |                                                | 77,719     |   |   | 138,777 |   |
| Income                    (loss) before income taxes                                                                        |   |                                                | 767,996    |   |   | (375,732 | ) |
| Benefit                    (provision) for taxes                                                                            |   |                                                | (62,552    | ) |   | (90,611 | ) |
| Income                    (loss) after income taxes                                                                         |   |                                                | 705,444    |   |   | (466,343 | ) |
| Minority                    interest income (loss)                                                                          |   |                                                | (41,731    | ) |   | 35,206 |   |
| Net                    income (loss)                                                                                        |   | $                                                   | 663,713    |   | $ | (431,137 | ) |
| Earnings                    (loss) per share - basic and diluted                                                            |   | $                                                   | 0.03       |   | $ | (                    0.02 | ) |
| Weighted-average                    shares used to compute earnings (loss) per share - basic and                    diluted |   |                                                | 18,999,703 |   |   | 18,999,703 |   |

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**Kid        Castle Educational Corporation**

**Condensed        Consolidated Statements of Operations**

|                                                                                                                        |   | Nine                    months ended September 30, |       |
|-----------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|------------|
|                                                                                                                        |   | 2006                                               |       | 2005 |   |
|                                                                                                                        |   | (Unaudited)                                        |       |
| Operating                    Revenue                                                                                        |   |                                               |       |   |   |
| Sales                    of goods                                                                                           |   | $                                                  | 6,102,630  |   | $ | 6,372,162 |   |
| Franchising                    income                                                                                       |   |                                               | 2,026,493  |   |   | 1,914,925 |   |
| Other                    operating revenue                                                                                  |   |                                               | 482,194    |   |   | 448,807 |   |
| Total                    net operating revenue                                                                              |   |                                               | 8,611,317  |   |   | 8,735,894 |   |
| Operating                    costs                                                                                          |   |                                               |       |   |   |   |   |
| Cost                    of goods sold                                                                                       |   |                                               | (2,357,627 | ) |   | (2,701,227 | ) |
| Cost                    of franchising                                                                                      |   |                                               | (254,474   | ) |   | (547,535 | ) |
| Other                    operating costs                                                                                    |   |                                               | (608,672   | ) |   | (307,076 | ) |
| Total                    operating costs                                                                                    |   |                                               | (3,220,773 | ) |   | (3,555,838 | ) |
| Gross                    profit                                                                                             |   |                                               | 5,390,544  |   |   | 5,180,056 |   |
| Advertising                    costs                                                                                        |   |                                               | (19,584    | ) |   | (28,804 | ) |
| Other                    operating expenses                                                                                 |   |                                               | (4,224,520 | ) |   | (5,581,054 | ) |
| Income                    (loss) from operations                                                                            |   |                                               | 1,146,440  |   |   | (429,802 | ) |
| Interest                    expense, net                                                                                    |   |                                               | (151,757   | ) |   | (171,346 | ) |
| Share                    of loss of investments                                                                             |   |                                               | (20,000    | ) |   | (21,633 | ) |
| Other                    non-operating income (loss), net                                                                   |   |                                               | 78,894     |   |   | 192,401 |   |
| Income                    (loss) before income taxes                                                                        |   |                                               | 1,053,577  |   |   | (430,380 | ) |
| Benefit                    (provision) for taxes                                                                            |   |                                               | (249,461   | ) |   | (275,361 | ) |
| Income                    (loss) after income taxes                                                                         |   |                                               | 804,116    |   |   | (705,741 | ) |
| Minority                    interest income (loss)                                                                          |   |                                               | (55,323    | ) |   | 16,147 |   |
| Net                    income (loss)                                                                                        |   | $                                                  | 748,793    |   | $ | (689,594 | ) |
| Earnings                    (loss) per share - basic and diluted                                                            |   | $                                                  | 0.04       |   | $ | (                    0.04 | ) |
| Weighted-average                    shares used to compute earnings (loss) per share - basic and                    diluted |   |                                               | 18,999,703 |   |   | 18,999,703 |   |

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

**Condensed        Consolidated Statements of Stockholders’ Equity**

|                                                                                                      |   | Common                    Stock     |         |   |   |
|-----------------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------------|--------|--------|
|                                                                                                      |   | Number                    of shares |         | Amount |   | Additional                    paid-incapital |   | Legalreserve |   | Accumulateddeficit |   | Accumulated                    other comprehensive loss |   | Total |   |
|                                                                                                      |   |                                |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance,                    December 31, 2004                                                             |   |                                | 18,999,703   |   | $      | 7,669,308 |   | $ | 194,021 |   | $ | 65,320 |   | $ | (7,312,074 | ) | $ | (222,650 | ) | $ | 393,925 |   |
| Net                    loss for 2005                                                                      |   |                                | -            |   |   | - |   |   | - |   |   | - |   |   | (1,698,282 | ) |   | - |   |   | (1,698,282 | ) |
| Cumulative                    translation adjustment                                                      |   |                                | -            |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (22,214 | ) |   | (22,214 | ) |
| Comprehensive                    loss                                                                     |   |                                |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,720,496 | ) |
|                                                                                                      |   |                                |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance,                    December 31, 2005                                                             |   |                                | 18,999,703   |   | $      | 7,669,308 |   | $ | 194,021 |   | $ | 65,320 |   | $ | (9,010,356 | ) | $ | (244,864 | ) | $ | (1,326,571 | ) |
| Net                    income for the nine months ended September 30, 2006                    (Unaudited) |   |                                | -            |   |   | - |   |   | - |   |   | - |   |   | 748,793 |   |   | - |   |   | 748,793 |   |
| Cumulative                    translation adjustment (Unaudited)                                          |   |                                | -            |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (50,880 | ) |   | (50,880 | ) |
| Comprehensive                    loss (Unaudited)                                                         |   |                                |    |   |   |    |   |   |    |   |   |    |   |   |    |   |   |    |   |   | 697,913 |   |
|                                                                                                      |   |                                |    |   |   |    |   |   |    |   |   |    |   |   |    |   |   |    |   |   |    |   |
| Balance,                    September 30, 2006 (Unaudited)                                                |   |                                | 18,999,703   |   | $      | 7,669,308 |   | $ | 194,021 |   | $ | 65,320 |   | $ | (8,261,563 | ) | $ | (295,744 | ) | $ | (628,658 | ) |

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

**Condensed        Consolidated Statements of Cash Flows**

|                                                                                                                                          |   | Nine                  months ended September 30, |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|------------|
|                                                                                                                                          |   | 2006                                             |       | 2005 |   |
|                                                                                                                                          |   | (Unaudited)                                      |       |
|                                                                                                                                          |   |                                             |       |   |   |
| Cash                  flows from operating activities                                                                                         |   |                                             |       |   |   |
| Net                  income (loss)                                                                                                            |   | $                                                | 748,793    |   | $ | (689,594 | ) |
| Adjustments                  to reconcile net income (loss) tonet                  cash provided by (used in) operating activities            |   |                                             |       |   |   |   |   |
| Depreciation                  and amortization                                                                                                |   |                                             | 270,333    |   |   | 333,388 |   |
| Allowance                  for doubtful debts and sales returns                                                                               |   |                                             | 801,323    |   |   | 1,231,289 |   |
| Provision                  (reversal) of allowance for loss on inventory obsolescence and                  slow-moving                  items |   |                                             | 57,204     |   |   | 58,325 |   |
| Loss                  (gain) on disposal of property and equipment                                                                            |   |                                             | —    |   |   | (30,333 | ) |
| Minority                  interests                                                                                                           |   |                                             | 55,323     |   |   | (16,017 | ) |
| Share                  of loss (gain) of investments                                                                                          |   |                                             | 20,000     |   |   | 21,157 |   |
| (Increase)/decrease                  in:                                                                                                      |   |                                             |       |   |   |   |   |
| Notes                  and accounts receivable                                                                                                |   |                                             | (2,255,781 | ) |   | (2,124,415 | ) |
| Inventories                                                                                                                                   |   |                                             | 654,177    |   |   | 240,064 |   |
| Other                  receivables                                                                                                            |   |                                             | 244,535    |   |   | 159,779 |   |
| Prepayments                  and other current assets                                                                                         |   |                                             | 115,420    |   |   | (259,470 | ) |
| Deferred                  income tax assets                                                                                                   |   |                                             | (61,755    | ) |   | 11,313 |   |
| Other                  assets                                                                                                                 |   |                                             | 349,901    |   |   | (63,276 | ) |
| Increase/(decrease)                  in:                                                                                                      |   |                                             |       |   |   |   |   |
| Notes                  and accounts payable                                                                                                   |   |                                             | (107,449   | ) |   | 574,013 |   |
| Accrued                  expenses                                                                                                             |   |                                             | 153,224    |   |   | 406,985 |   |
| Other                  payables                                                                                                               |   |                                             | (135,059   | ) |   | 36,015 |   |
| Receipts                  in advance                                                                                                          |   |                                             | 566,707    |   |   | (178,961 | ) |
| Income                  taxes payable                                                                                                         |   |                                             | 125,255    |   |   | 111,039 |   |
| Deposits                  received                                                                                                            |   |                                             | 528,489    |   |   | 63,187 |   |
| Accrued                  pension liabilities                                                                                                  |   |                                             | (3,793     | ) |   | 85,088 |   |
|                                                                                                                                          |   |                                             |       |   |   |   |   |
| Net                  cash provided by (used in) operating activities                                                                          |   |                                             | 2,126,847  |   |   | (30,424 | ) |
|                                                                                                                                          |   |                                             |       |   |   |   |   |
| Cash                  flows from investing activities                                                                                         |   |                                             |       |   |   |   |   |
| Purchase                  of property and equipment                                                                                           |   |                                             | (49,928    | ) |   | (111,270 | ) |
| Proceeds                  from disposal of property and equipment                                                                             |   |                                             | —    |   |   | 78,661 |   |
| Amount                  due from stockholder/director                                                                                         |   |                                             | —    |   |   | — |   |
| Prepayment                  of long-term investments                                                                                          |   |                                             | —    |   |   | — |   |
| Acquisition                  of long-term investments                                                                                         |   |                                             | —    |   |   | — |   |
| Collection                  of long term notes                                                                                                |   |                                             | —    |   |   | (46,043 | ) |
| Increase                  in interest in associates                                                                                           |   |                                             | —    |   |   | — |   |
| Bank                  fixed deposits - pledged                                                                                                |   |                                             | 34,023     |   |   | — |   |
| Pledged                  notes receivable                                                                                                     |   |                                             | 695,875    |   |   | — |   |
| Advances                  to shareholder                                                                                                      |   |                                             | —    |   |   | (2,267,424 | ) |
| Repayments                  of advances to shareholder                                                                                        |   |                                             | —    |   |   | 2,267,424 |   |
|                                                                                                                                          |   |                                             |       |   |   |   |   |
| Net                  cash provided by (used in) investing activities                                                                          |   |                                             | 679,970    |   |   | (78,652 | ) |

----

|                                                                                              |   | Nine                    months ended September 30, |       |
|---------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|------------|
|                                                                                              |   | 2006                                               |       | 2005 |   |
|                                                                                              |   | (Unaudited)                                        |       |
| Cash                    flows from financing activities                                           |   |                                               |       |   |   |
| Proceeds                    from bank borrowings                                                  |   | $                                                  | 213,903    |   | $ | 791,450 |   |
| Proceeds                    from loan from a stockholder                                          |   |                                               | —    |   |   | — |   |
| Repayment                    of bank borrowings                                                   |   |                                               | (1,466,062 | ) |   | (994,388 | ) |
| Proceeds                    from capital leases                                                   |   |                                               | —    |   |   | — |   |
| Repayment                    of capital leases                                                    |   |                                               | —    |   |   | (18,365 | ) |
| Repayment                    of loan from officers/stockholders                                   |   |                                               | (562,806   | ) |   | — |   |
|                                                                                              |   |                                               |       |   |   |   |   |
| Net                    cash used in financing activities                                          |   |                                               | (1,814,965 | ) |   | (221,303 | ) |
|                                                                                              |   |                                               |       |   |   |   |   |
| Net                    increase (decrease) in cash and cash equivalents                           |   |                                               | 991,852    |   |   | (330,379 | ) |
|                                                                                              |   |                                               |       |   |   |   |   |
| Effect                    of exchange rate changes on cash andcash                    equivalents |   |                                               | (45,463    | ) |   | 96,409 |   |
|                                                                                              |   |                                               |       |   |   |   |   |
| Cash                    and cash equivalents at beginning of period                               |   |                                               | 613,391    |   |   | 507,895 |   |
|                                                                                              |   |                                               |       |   |   |   |   |
| Cash                    and cash equivalents at end of period                                     |   | $                                                  | 1,559,780  |   | $ | 273,925 |   |

----

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

**Notes        to Condensed Consolidated Financial Statements**

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

**NOTE        2 - BASIS OF PRESENTATION**

----

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

----

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

----

**NOTE        4 - RECENT ACCOUNTING PRONOUNCEMENTS**

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

|                                                                 |   | **September                    30,****2006** |       | **December                    31,****2005** |   |
|----------------------------------------------------------------------|--------|----------------------------------------------|------------|---------------------------------------------|--------|
|                                                                 |   | (Unaudited)                                  |       |                                        |   |
|                                                                 |   |                                         |       |                                        |   |
| Notes                    and accounts receivable                     |   |                                         |       |                                        |   |
| -                    Third parties                                   |   | $                                            | 4,878,707  |                                        | $      | 2,944,574 |   |
| -                    Related parties (NOTE 10)                       |   |                                         | 367,048    |                                        |   | 401,184 |   |
|                                                                 |   |                                         |       |                                        |   |   |   |
| Total                                                                |   |                                         | 5,245,755  |                                        |   | 3,345,758 |   |
| Allowance                    for doubtful accounts and sales returns |   |                                         | (1,531,804 | )                                           |   | (752,482 | ) |
|                                                                 |   |                                         |       |                                        |   |   |   |
| Notes                    and accounts receivable, net                |   | $                                            | 3,713,951  |                                        | $      | 2,593,276 |   |

**NOTE        6 - INVENTORIES**

|                                                                                                       |   | **September                    30,****2006** |      | **December                    31,****2005** |   |
|------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|-----------|---------------------------------------------|--------|
|                                                                                                       |   | (Unaudited)                                  |      |                                        |   |
|                                                                                                       |   |                                         |      |                                        |   |
| Work                    in process                                                                         |   | $                                            | 120,160   |                                        | $      | 127,001 |   |
| Finished                    goods and other merchandises                                                   |   |                                         | 2,040,040 |                                        |   | 2,696,942 |   |
|                                                                                                       |   |                                         |      |                                        |   |   |   |
|                                                                                                       |   |                                         | 2,160,200 |                                        |   | 2,823,943 |   |
| Less:                    Allowance for obsolete inventories and decline                    of market value |   |                                         | (804,473  | )                                           |   | (754,451 | ) |
|                                                                                                       |   |                                         |      |                                        |   |   |   |
|                                                                                                       |   | $                                            | 1,355,727 |                                        | $      | 2,069,492 |   |

----

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

|                                                                                                                                                     |   | **September                    30,****2006** |     | **December                    31,****2005** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|----------|---------------------------------------------|--------|
|                                                                                                                                                     |   | (Unaudited)                                  |     |                                        |   |
| Other                    receivables - third parties:                                                                                                    |   |                                         |     |                                        |   |
| Tax                    paid on behalf of landlord                                                                                                        |   | $                                            | —  |                                        | $      | 2,013 |   |
| Advances                    to staff                                                                                                                     |   |                                         | —  |                                        |   | 125,590 |   |
| Grants                    from Market Information Center                                                                                                 |   |                                         | —  |                                        |   | — |   |
| Receivables                    from Shanghai Wonderland EducationalResources                    Co., Ltd. (“Shanghai Wonderland”) (Note (i)) |   |                                         | 376,233  |                                        |   | 368,528 |   |
| Other                    receivables                                                                                                                     |   |                                         | 198,227  |                                        |   | 86,141 |   |
| Less                    : Allow for doubtful accounts                                                                                                    |   |                                         | (376,233 | )                                           |   | (368,528 | ) |
|                                                                                                                                                     |   |                                         |     |                                        |   |   |   |
| Sub-total                                                                                                                                                |   |                                         | 198,227  |                                        |   | 213,744 |   |
| Other                    receivables - related parties (NOTE 10)                                                                                         |   |                                         | 28,772   |                                        |   | 9,319 |   |
|                                                                                                                                                     |   | $                                            | 226,999  |                                        | $      | 223,063 |   |

| (i)                    | Shanghai                Wonderland was a distributor of the Group. The Group loaned Shanghai                Wonderland RMB$450,000 (approximately $54,000), RMB$500,000 (approximately                $60,000) and RMB$2,500,000 (approximately $310,000) for operations                in                December 2003, July 2005 and August 2005, respectively. The identified                loans were unsecured and bore no interest. Shanghai Wonderland has                fully                repaid the loan of RMB$450,000 in December 2004 and January 2005.                As of                September 30, 2006, Shanghai Wonderland still owes the Group a balance                of                RMB$3,000,000 (approximately $376,233). Such sum has now been itemized                and                recorded as "allowance for doubtful accounts" compared to its prior                recognition as "Other receivables". |
|-------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|                                |   | **September                  30,****2006** |    | **December 31,****2005** |   |
|-------------------------------------|--------|--------------------------------------------|---------|-------------------------------|--------|
|                                |   |                                       |    |                          |   |
| Prepayments                         |   | $                                          | 268,576 |                          | $      | 399,659 |   |
| Temporary                  payments |   |                                       | 1,172   |                          |   | 11,038 |   |
| Tax                  recoverable    |   |                                       | — |                          |   | — |   |
| Prepaid                  interest   |   |                                       | 51      |                          |   | — |   |
| Others                              |   |                                       | 25,551  |                          |   | 829 |   |
|                                |   |                                       |    |                          |   |   |   |
|                                |   | $                                          | 295,350 |                          | $      | 411,526 |   |

**NOTE        9 - INTEREST IN ASSOCIATES**

|                                                                                                                                                |   | **September                    30,****2006** |    | **December                    31,****2005** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|---------|---------------------------------------------|--------|
|                                                                                                                                                |   | (Unaudited)                                  |    |                                        |   |
|                                                                                                                                                |   |                                         |    |                                        |   |
| 21st                    Century Kid Castle Language and Education Center (“Education                    Center”) (Note (i))             |   |                                         |    |                                        |   |
| Investment                    cost                                                                                                                  |   | $                                            | 94,885  |                                        | $      | 92,942 |   |
| Share                    of loss                                                                                                                    |   |                                         | (39,636 | )                                           |   | (40,803 | ) |
|                                                                                                                                                |   |                                         |    |                                        |   |   |   |
|                                                                                                                                                |   | $                                            | 55,249  |                                        | $      | 52,139 |   |
|                                                                                                                                                |   |                                         |    |                                        |   |   |   |
| Tianjin                    Kid Castle Educational Investment Consulting Co., Ltd. (“Tianjin                    Consulting”) (Note (ii)) |   |                                         |    |                                        |   |   |   |
| Investment                    cost                                                                                                                  |   | $                                            | 88,560  |                                        | $      | 86,746 |   |
| Share                    of loss                                                                                                                    |   |                                         | (96,923 | )                                           |   | (80,360 | ) |
|                                                                                                                                                |   |                                         |    |                                        |   |   |   |
|                                                                                                                                                |   | $                                            | (8,363  | )                                           | $      | 6,386 |   |
|                                                                                                                                                |   |                                         |    |                                        |   |   |   |
| Lanbeisi                    Education & Culture Industrial Co., Ltd (“Lanbeisi”) (Note                    (iii))                    |   |                                         |    |                                        |   |   |   |
| Investment                    cost                                                                                                                  |   | $                                            | 45,545  |                                        | $      | 44,612 |   |
| Share                    of loss                                                                                                                    |   |                                         | (40,026 | )                                           |   | (31,979 | ) |
|                                                                                                                                                |   |                                         |    |                                        |   |   |   |
|                                                                                                                                                |   | $                                            | 5,519   |                                        | $      | 12,633 |   |
|                                                                                                                                                |   |                                         |    |                                        |   |   |   |
| Total                                                                                                                                               |   | $                                            | 52,405  |                                        | $      | 71,158 |   |

----

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

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

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

----

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

| **Names                  of related parties**                                                                               |   | **Relationship                  with the Company**                                                                                                                                                                                                                             |
|-----------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Mr. Kuo-An                  Wang                                                                                       |   | In                  October 2005 resigned as chairman of the board of directors, president                  and                  chief executive officer of the Company. On October 18, 2006 resigned                  as                  director of the board of directors. |
|                                                                                                                        |   |                                                                                                                                                                                                                                                                           |
| Mr. Yu-En                  Chiu                                                                                        |   | On                  June 1, 2006 resigned as chief financial officer and director of                  the board                  of directors. Mr. Chiu remained the Chairman of PRC operation until                  February 28, 2007.                                       |
|                                                                                                                        |   |                                                                                                                                                                                                                                                                           |
| Mr. Min-Tan                  Yang                                                                                      |   | Director                  and chief executive officer of the Company since November 2,                  2005.                                                                                                                                                                  |
|                                                                                                                        |   |                                                                                                                                                                                                                                                                           |
| Mr. Suang-Yi                  Pai                                                                                      |   | Director                  and chairman of the board of directors since November 2, 2005.                                                                                                                                                                                       |
|                                                                                                                        |   |                                                                                                                                                                                                                                                                           |
| Chevady                  Culture Enterprise Limited (“CCE”)                                                     |   | Its                  chairman of the board of directors is Mr. Kuo-An                  Wang.                                                                                                                                                                              |
|                                                                                                                        |   |                                                                                                                                                                                                                                                                           |
| Private                  Kid Castle Short Term Language Cram School (“PKC                  Language”)           |   | Its                  chairman of the board of directors is Mr. Yu-En                  Chiu.                                                                                                                                                                               |
|                                                                                                                        |   |                                                                                                                                                                                                                                                                           |
| Taipei                  Country Private Kid Castle Short Term Language Cram School (“TCP                  PKC”) |   | Its                  chairman of the board of directors is Mr. Yu-En                  Chiu.                                                                                                                                                                               |
|                                                                                                                        |   |                                                                                                                                                                                                                                                                           |
| Taipei                  Country Private Chevady Preschool (“TCP Chevady”)                                       |   | Its                  chairman of the board of directors is Mr. Yu-En                  Chiu.                                                                                                                                                                               |
|                                                                                                                        |   |                                                                                                                                                                                                                                                                           |
| Taipei                  Country Private Chung-hua Preschool (“TCP Chung-hua”)                                   |   | Its                  chairman of the board of directors is Mr. Yu-En                  Chiu.                                                                                                                                                                               |
|                                                                                                                        |   |                                                                                                                                                                                                                                                                           |
| Taipei                  Country Private Wonderland Preschool (“TCP Wonderland”)                                 |   | Its                  chairman of the board of directors is Mr. Yu-En                  Chiu.                                                                                                                                                                               |
|                                                                                                                        |   |                                                                                                                                                                                                                                                                           |
| Taipei                  City Private Kid Castle Preschool (“TCP Kid Castle”)                                    |   | Its                  chairman of the board of directors is Mr. Yu-En                  Chiu.                                                                                                                                                                               |
|                                                                                                                        |   |                                                                                                                                                                                                                                                                           |
| Taipei                  Country Private Kid’s Castle Yin Cyun Preschool(“TCP Yin                  Cyun”)  |   | Its                  chairman of the board of directors is Mr. Min-Tan                  Yang.                                                                                                                                                                             |
|                                                                                                                        |   |                                                                                                                                                                                                                                                                           |
| Taipei                  Country Private Yin Tzu Preschool (“TCP Yin Tzu”)                                       |   | Its                  chairman of the board of directors is Mr. Min-Tan                  Yang.                                                                                                                                                                             |
|                                                                                                                        |   |                                                                                                                                                                                                                                                                           |
| Private                  Kuan Lung Short Term Language Cram School (“Kuan Lung                  Language”)      |   | Its                  chairman of the board of directors is Mr. Min-Tan                  Yang.                                                                                                                                                                             |
|                                                                                                                        |   |                                                                                                                                                                                                                                                                           |
| Taipei                  City Private Chu Sheng Preschool (“TCP Chu Sheng”)                                      |   | Its                  chairman of the board of directors is Mr. Min-Tan                  Yang.                                                                                                                                                                             |
|                                                                                                                        |   |                                                                                                                                                                                                                                                                           |
| Taipei                  Country Private Chu Yao Preschool (“TCP Chu Yao”)                                       |   | Its                  chairman of the board of directors is Mr. Min-Tan                  Yang.                                                                                                                                                                             |
|                                                                                                                        |   |                                                                                                                                                                                                                                                                           |
| Private                  Liang Yu Language & Computer School ("Liang Yu                  Language")                     |   | Its                  chairman of the board of directors is Mr. Min-Tan                  Yang.                                                                                                                                                                             |
|                                                                                                                        |   |                                                                                                                                                                                                                                                                           |
| 21st                  Century Publishing House (“Publishing House”)                                             |   | A                  joint venture partner (third-party after July 2004).                                                                                                                                                                                                        |
|                                                                                                                        |   |                                                                                                                                                                                                                                                                           |

----

| Jiangxi                  21st Century Kid Castle Culture Media Co., Ltd (“Culture                  Media”)              |   | An                  investment accounted for under the equity method before July 2,                  2004. It                  has become a consolidated entity after July 2, 2004. |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                |   |                                                                                                                                                                                |
| 21st                  Century Kid Castle Language and Education Center (“Education                  Center”)            |   | An                  investment accounted for under the equity method.                                                                                                               |
|                                                                                                                                |   |                                                                                                                                                                                |
| Tianjin                  Kid Castle Educational Investment Consulting Co., Ltd. (“Tianjin                  Consulting”) |   | An                  investment accounted for under the equity method.                                                                                                               |
|                                                                                                                                |   |                                                                                                                                                                                |
| Sichuan                  Lanbeisi Kid Castle Education Development Co., Ltd.                  (“Lanbeisi”)              |   | An                  investment accounted for under the equity                  method.                                                                                              |

|                                                                                     |   | **Nine                    months ended September 30,** |    |
|------------------------------------------------------------------------------------------|--------|--------------------------------------------------------|---------|
|                                                                                     |   | **2006**                                               |    | **2005** |   |
|                                                                                     |   | (Unaudited)                                            |    |
| (i)                           Sales                    to: |   |                                                   |    |   |   |
| -                    PKC Language                                                        |   | $                                                      | — |   | $ | 7,892 |   |
| -                    TCP PKC                                                             |   |                                                   | — |   |   | 7,892 |   |
| -                    TCP Chung-hua                                                       |   |                                                   | 3,443   |   |   | 16,139 |   |
| -                    TCP Chevady                                                         |   |                                                   | — |   |   | 10,838 |   |
| -                    TCP Wonderland                                                      |   |                                                   | — |   |   | 10,838 |   |
| -                    TCP Kid Castle                                                      |   |                                                   | — |   |   | 11,570 |   |
| -                    Kuan Lung Language                                                  |   |                                                   | 15,150  |   |   | — |   |
| -                    TCP Chu Yao                                                         |   |                                                   | 23,292  |   |   | — |   |
| -                    TCP                    Chu Sheng                                    |   |                                                   | 8,077   |   |   | — |   |
| -                    TCP Yin Cyun                                                        |   |                                                   | 55,395  |   |   | — |   |
| -                    TCP Yin Tzu                                                         |   |                                                   | 25,114  |   |   | — |   |
| -                    Liang Yu Language                                                   |   |                                                   | 38,479  |   |   | — |   |
| -                    English School                                                      |   |                                                   | 24,013  |   |   | 17,475 |   |
| -                    Tianjin Consulting                                                  |   |                                                   | 17,964  |   |   | 17,616 |   |
| -                    Lanbeisi                                                            |   |                                                   | 27,148  |   |   | 42,111 |   |
|                                                                                     |   |                                                   |    |   |   |   |   |
|                                                                                     |   | $                                                      | 238,075 |   | $ | 142,371 |   |

|                                                                                              |   |    |    |   |   |
|---------------------------------------------------------------------------------------------------|--------|--------------|---------|--------|--------|
| (ii)                           Rental                      income from:  |   |         |    |   |   |   |   |
| -                      CCE                                                                        |   | $            | — |   | $      | 1,419 |   |
|                                                                                              |   | $            | — |   | $      | 1,419 |   |
|                                                                                              |   |         |    |   |   |   |   |
| (iii)                           Franchising                      income from: |   |         |    |   |   |   |   |
| -                      PKC Language                                                               |   | $            | — |   | $      | 136 |   |
| -                      TCP PKC                                                                    |   |         | — |   |   | 136 |   |
| -                      TCP Kid Castle                                                             |   |         | — |   |   | 5,541 |   |
| -                      TCP Chung-Hua                                                              |   |         | — |   |   | — |   |
| -                      TCP Wonderland                                                             |   |         | — |   |   | 5,542 |   |
| -                      TCP Chu Sheng                                                              |   |         | 9,228   |   |   | — |   |
| -                      TCP Yin Cyun                                                               |   |         | 4,441   |   |   | — |   |
| -                      Yin Chyn Language                                                          |   |         | 8,305   |   |   |   |   |
|                                                                                              |   |         | 1,849   |   |   | — |   |
|                                                                                              |   | $            | 23,823  |   | $      | 11,355 |   |

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

----

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

|                                                   |   | **September                  30,** |    | **December                  31,** |   |
|--------------------------------------------------------|--------|------------------------------------|---------|-----------------------------------|--------|
|  Name                of related parties           |   | **2006**                           |    | **2005**                          |   |
|                                                   |   | (Unaudited)                        |    |                              |   |
|                                                   |   |                               |    |                              |   |
| -                  PKC Language                        |   |                               | 38,184  |                              |   | 26,147 |   |
| -                  TCP PKC                             |   |                               | 38,184  |                              |   | 52,294 |   |
| -                  TCP Chung-hua                       |   |                               | 50,021  |                              |   | 53,665 |   |
| -                  TCP Chevady                         |   |                               | 47,270  |                              |   | 48,685 |   |
| -                  TCP Wonderland                      |   |                               | 47,270  |                              |   | 48,685 |   |
| -                  TCP Kid Castle                      |   |                               | 55,337  |                              |   | 58,172 |   |
| -                  Kuan Lung Language                  |   |                               | 3,342   |                              |   | ─ |   |
| -                  TCP Chu Yao                         |   |                               | 10,100  |                              |   | ─ |   |
| -                  TCP Chu Sheng                       |   |                               | 9,160   |                              |   | ─ |   |
| -                  TCP Yin Cyun                        |   |                               | 14,976  |                              |   | 33,585 |   |
| -                  TCP Yin Tzu                         |   |                               | 493     |                              |   | 29,062 |   |
| -                  Liang Yu Language                   |   |                               | 5,508   |                              |   | 12,071 |   |
| -                  Education Center                    |   |                               | ─ |                              |   | ─ |   |
| -                  Tianjin                  Consulting |   |                               | 28,637  |                              |   | 20,826 |   |
| -                  Lanbeisi                            |   |                               | 18,566  |                              |   | 17,992 |   |
|                                                   |   |                               |    |                              |   |   |   |
|                                                   |   | $                                  | 367,048 |                              | $      | 401,184 |   |

|                                                         |   | **September                  30,** |    | **December                  31,** |   |
|--------------------------------------------------------------|--------|------------------------------------|---------|-----------------------------------|--------|
|  Name                of related parties                 |   | **2006**                           |    | **2005**                          |   |
|                                                         |   | (Unaudited)                        |    |                              |   |
|                                                         |   |                               |    |                              |   |
| Amount                  due from Publishing House (Note 1)   |   | $                                  | ─ |                              | $      | ─ |   |
| Amount                  due from Education Center (Note 2)   |   |                               | 19,258  |                              |   | ─ |   |
| Amount                  due from Tianjin Consulting (Note 3) |   |                               | 16      |                              |   | 15 |   |
| Amount                  due from Lanbeisi (Note 4)           |   |                               | 9,498   |                              |   | 9,304 |   |
|                                                         |   |                               |    |                              |   |   |   |
|                                                         |   | $                                  | 28,772  |                              | $      | 9,319 |   |

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

----

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

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

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

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

|  **Name                  of Related Parties** |   | **September 30,****2006** |      | **December 31,****2005** |   |
|----------------------------------------------------|--------|--------------------------------|-----------|-------------------------------|--------|
|                                               |   |                           |      |                          |   |
| Mr. Kuo-An                  Wang              |   | $                              | ─   |                          | $      | 60,911 |   |
|                                               |   |                           |      |                          |   |   |   |
| Mr. Min-Tan                  Yang (Note 1)    |   | $                              | 840,789   |                          | $      | 840,789 |   |
|                                               |   |                           |      |                          |   |   |   |
| Mr. Suang-Yi                  Pai (Note 1)    |   | $                              | 407,725   |                          | $      | 76,138 |   |
|                                               |   |                           |      |                          |   |   |   |
| Education                  Center                  |   | $                              | 1,539     |                          | $      | ─ |   |
|                                               |   |                           |      |                          |   |   |   |
| Lanbeisi                                           |   | $                              | 130       |                          | $      | ─ |   |
|                                               |   |                           |      |                          |   |   |   |
|                                               |   | $                              | 1,250,183 |                          | $      | 977,838 |   |

| Note                1. | In                  the fourth quarter of 2005, Mr. Yang loaned $1,050,000 to the Company,                  and                  third parties, Olympic Well International Ltd.(“Olympic”) and Chen-Chen                  Shih (“Shih”), procured by Mr. Pai loaned $690,000 and $60,089,                  respectively. The loans were treated as short-term loans, due in                  three                  months, with a per annum interest rate of 7%. A portion of the                  loan made                  by Olympic in the amount of US$342,364 was assigned to Mr. Pai                  on or about                  December 30, 2005. That amount, along with $209,211 which was owed                  Mr.                  Yang were forgiven in exchange for the Company’s forgiveness of Mr. Chiu’s                  debt to the Company of the amount of $551,575 (NT$18,500,000, the                  currency                  has been translated at the exchange rates at the time of the loans).                  As of                  July 31, 2006 the remaining debt owed by the Company to Olympic                  and Shih                  was assigned to Mr. Pai pursuant to Assignment Agreements dated                  as of                  August 1, 2006. |
|------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|                                                |   | **September                      30,****2006** |       | **December                      31,****2005** |   |
|-----------------------------------------------------|--------|------------------------------------------------|------------|-----------------------------------------------|--------|
|                                                |   | (Unaudited)                                    |       |                                          |   |
| Gross                      carrying amount          |   |                                           |       |                                          |   |
| Franchise                                           |   | $                                              | 1,027,882  |                                          | $      | 1,036,178 |   |
| Copyrights                                          |   |                                           | 604,230    |                                          |   | 609,106 |   |
|                                                |   |                                           |       |                                          |   |   |   |
|                                                |   |                                           | 1,632,112  |                                          |   | 1,645,284 |   |
| Less:                      Accumulated amortization |   |                                           |       |                                          |   |   |   |
| Franchise                                           |   |                                           | (668,123   | )                                             |   | (595,802 | ) |
| Copyrights                                          |   |                                           | (392,750   | )                                             |   | (350,236 | ) |
|                                                |   |                                           |       |                                          |   |   |   |
|                                                |   |                                           | (1,060,873 | )                                             |   | (946,038 | ) |
|                                                |   |                                           |       |                                          |   |   |   |
| **Net**                                             |   | $                                              | 571,239    |                                          | $      | 699,246 |   |

----

| 2007   |   | $      | 166,514 |   |
|--------|--------|--------|---------|--------|
| 2008   |   |   | 166,514 |   |
| 2009   |   |   | 166,514 |   |
| 2010   |   |   | 33,190  |   |
|   |   | $      | 532,732 |   |

**NOTE        12 - BANK BORROWINGS**

|                                                                                                          |   | Notes  |   | **September                    30,****2006** |   | **December                    31,****2005** |   |
|---------------------------------------------------------------------------------------------------------------|--------|--------|--------|----------------------------------------------|--------|---------------------------------------------|--------|
|                                                                                                          |   |   |   | (Unaudited)                                  |   |                                        |   |
|                                                                                                          |   |   |   |                                         |   |                                        |   |
| Bank                    term loans                                                                            |   |   | (i)    |                                         | $      | 166,268                                     |   | $ | 564,704 |   |
| Short-term                    unsecured bank loans                                                            |   |   | (ii)   |                                         |   | 463,814                                     |   |   | 539,583 |   |
| Mid-term                    loan                                                                              |   |   | (iii)  |                                         |   | ─                                     |   |   | 586,436 |   |
| Mid-term                    secured bank loan                                                                 |   |   | (iv)   |                                         |   | 1,274,746                                   |   |   | 1,466,574 |   |
|                                                                                                          |   |   |   |                                         |   |                                        |   |   |   |   |
|                                                                                                          |   |   |   |                                         |   | 1,904,828                                   |   |   | 3,157,297 |   |
| Less:                    Balances maturing within one year included in current                    liabilities |   |   |   |                                         |   |                                        |   |   |   |   |
| Bank                    term loans                                                                            |   |   |   |                                         |   | 103,397                                     |   |   | 145,042 |   |
| Short-term                    unsecured bank loans                                                            |   |   |   |                                         |   | 463,814                                     |   |   | 539,583 |   |
| Mid-term                    loan                                                                              |   |   |   |                                         |   | ─                                     |   |   | 586,436 |   |
| Mid-term                    secured bank loan                                                                 |   |   |   |                                         |   | 251,378                                     |   |   | 245,845 |   |
|                                                                                                          |   |   |   |                                         |   |                                        |   |   |   |   |
|                                                                                                          |   |   |   |                                         |   | 818,589                                     |   |   | 1,516,906 |   |
|                                                                                                          |   |   |   |                                         |   |                                        |   |   |   |   |
| Bank                    borrowings maturing after one year                                                    |   |   |   |                                         | $      | 1,086,239                                   |   | $ | 1,640,391 |   |

| (i) | This                  line item represents bank loans that have been secured by a pledge                  of                  post-dated checks amounting to $453,200 and $873,215 that we have                  received                  from franchisees and the Group’s bank deposits of $16,563 and $46,456 as                  of September 30, 2006 and December 31, 2005, respectively, for                  the purpose                  of financing operations. The repayment dates of the loans coincided                  with                  the maturity dates of the corresponding pledged post-dated checks.                  The                  weighted average interest rates were 6.055% and 5.88% per annum as of                  September 30, 2006 and 2005, respectively. For the nine months                  ended                  September 30, 2006 and 2005, the interest expense charged to operations                  amounted to $16,092 and $31,626,                  respectively. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| (ii) | In                  August 2005, KCIT obtained an unsecured short-term loan in the                  amount of                  $304,553 and was extended on August 2006, which was collateralized                  by                  notes receivables in the amount approximately the loan balance,                  the KCIT’s                  refundable deposits of $60,911 and notes receivables approximating                  30% of                  loan balance, and guaranteed by two directors and stockholders                  of the                  Group, to finance the Group’s operations. The loan bears interest at the                  lending bank’s basic borrowing rate plus 3.29% per annum and is due and                  payable in February 2007. The applicable interest rate is approximately                  5%                  per annum as of September 30, 2006. |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (iii) | In                  June 2005, KCIT obtained a loan of $609,106 from a financial institution,                  which bore interest at 5% per annum and was repayable in 18 equal                  monthly                  installments, to finance the Group’s operations. We have rescinded the                  contract and fully repaid on July 17,                  2006. |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (iv) | In                  August 2005, KCIT obtained a bank loan in the principal amount                  of $944,115                  to repay its mortgage loan that was originally granted by a bank                  on August                  10, 2005 and to finance its operations. The loan is secured by                  the Group’s                  land and buildings and personal guarantees provide by two directors                  of the                  Group. The loan bears interest at the lending bank’s basic fixed deposit                  rate plus 0.69% between annum for the year 2005 to 2007, and plus                  1.69%                  from the annum for the year 2008.  On August 10, 2005, the bank                  extended the term of the loan and the Group repays the loan, which                  is now                  repayable in 84 equal monthly installments starting August 10, 2012.                  As of September 30, 2006, the applicable interest rate is approximately                  2.4%, the Group repaid $43,092 |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**NOTE      13 - RECEIPTS IN ADVANCE**

|                                       |   | Notes  |   | **September                30,****2006** |   | **December                31,****2005** |   |
|--------------------------------------------|--------|--------|--------|------------------------------------------|--------|-----------------------------------------|--------|
|                                       |   |   |   | (Unaudited)                              |   |                                    |   |
|                                       |   |   |   |                                     |   |                                    |   |
| Current                liabilities:        |   |   |   |                                     |   |                                    |   |
| Sales                deposits received     |   |   | (i     | )                                        | $      | 709,482                                 |   | $ | 682,553 |   |
| Franchising                income received |   |   | (ii    | )                                        |   | 1,656,966                               |   |   | 1,391,625 |   |
| Subscription                fees received  |   |   | (iii   | )                                        |   | 199,040                                 |   |   | 234,342 |   |
| Others                                     |   |   |   |                                     |   | 18,090                                  |   |   | 45,160 |   |
|                                       |   |   |   |                                     |   | 2,583,578                               |   |   | 2,353,680 |   |
|                                       |   |   |   |                                     |   |                                    |   |   |   |   |
| Long-term                liabilities:      |   |   |   |                                     |   |                                    |   |   |   |   |
| Franchising                income received |   |   | (ii    | )                                        |   | 1,427,646                               |   |   | 1,130,207 |   |
|                                       |   |   |   |                                     |   |                                    |   |   |   |   |
|                                       |   |   |   |                                     | $      | 4,011,224                               |   | $ | 3,483,887 |   |

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

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

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

**NOTE      14 - RETIREMENT PLANS**

|                                             |   | **Nine                months ended September 30,** |    |
|--------------------------------------------------|--------|----------------------------------------------------|---------|
|                                             |   | **2006**                                           |    | **2005** |   |
|                                             |   | (Unaudited)                              |    |
| Service                cost                      |   | $                                                  | — |   | $ | 25,500 |   |
| Interest                cost                     |   |                                               | 9,204   |   |   | 9,713 |   |
| Expected                return on assets         |   |                                               | (1,827  | ) |   | (3,343 | ) |
| Amortization                of unrecognized loss |   |                                               | 2,227   |   |   | 883 |   |
|                                             |   |                                               |    |   |   |  |   |
| Net                periodic pension cost         |   | $                                                  | 9,604   |   | $ | 32,753 |   |

----

**NOTE      15 - GEOGRAPHICAL SEGMENTS**

|                                        |   | Taiwan                                                           |      | The                PRC                                           |   | Total                                                            |   | Corporate                                                       |      | Eliminations                                                    |   | Consolidated                                                    |   |
|---------------------------------------------|--------|------------------------------------------------------------------|-----------|------------------------------------------------------------------|--------|------------------------------------------------------------------|--------|-----------------------------------------------------------------|-----------|-----------------------------------------------------------------|--------|-----------------------------------------------------------------|--------|
|                                        |   | Nine                months endedSeptember                30,2006 |      | Nine                months endedSeptember                30,2005 |   | Nine                months endedSeptember                30,2006 |   | Ninemonths                endedSeptember                30,2005 |      | Ninemonths                endedSeptember                30,2006 |   | Ninemonths                endedSeptember                30,2005 |   | Nine                months endedSeptember                30,2006 |   | Nine                months endedSeptember                30,2005 |   | Nine                months endedSeptember                30,2006 |   | Nine                months endedSeptember                30,2005 |   | Ninemonths                endedSeptember                30,2006 |   | Ninemonths                endedSeptember                30,2005 |   |
|                                        |   |                                                             |      |                                                             |   |                                                             |   |                                                            |      |                                                            |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                     |   |                                                             |      |                                                             |   |                                                             |   |                                                            |      |                                                            |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                revenue             |   | $                                                                | 5,716,524 |                                                             | $      | 6,160,236                                                        |   | $                                                               | 2,895,355 |                                                            | $      | 2,571,495                                                       |   | $ | 8,611,879 |   | $ | 8,731,731 |   | $ | — |   | $ | 4,163 |   | $ | — |   | $ | — |   | $ | 8,611,879 |   | $ | 8,735,894 |   |
| Inter-segmentrevenue                        |   |                                                             | (562      | )                                                                |   | 522                                                              |   |                                                            | —   |                                                            |   | —                                                         |   |   | (562 | ) |   | 522 |   |   | — |   |   | — |   |   | — |   |   | (522 | ) |   | (562 | ) |   | — |   |
|                                        |   |                                                             |      |                                                             |   |                                                             |   |                                                            |      |                                                            |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                        |   | $                                                                | 5,715,962 |                                                             | $      | 6,160,758                                                        |   | $                                                               | 2,895,355 |                                                            | $      | 2,571,495                                                       |   | $ | 8,611,317 |   | $ | 8,732,253 |   | $ | — |   | $ | 4163 |   | $ | — |   | $ | (522 | ) | $ | 8,611,317 |   | $ | 8,735,894 |   |
|                                        |   |                                                             |      |                                                             |   |                                                             |   |                                                            |      |                                                            |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Profit                (loss) fromOperations |   | $                                                                | 666,032   |                                                             | $      | 786,334                                                          |   | $                                                               | 682,815   |                                                            | $      | (1,033,972                                                      | )      | $ | 1,348,847 |   | $ | (247,638 | ) | $ | (202,407 | ) | $ | (182,164 | ) | $ | — |   | $ | — |   | $ | 1,146,440 |   | $ | (429,802 | ) |
|                                        |   |                                                             |      |                                                             |   |                                                             |   |                                                            |      |                                                            |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital                expenditures         |   | $                                                                | 32,863    |                                                             | $      | 8,460                                                            |   | $                                                               | 16,077    |                                                            | $      | 14,073                                                          |   | $ | 48,940 |   | $ | 22,533 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 48,940 |   | $ | 22,533 |   |
|                                        |   |                                                             |      |                                                             |   |                                                             |   |                                                            |      |                                                            |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                        |   |  September                30, 2006                          |      |  December                31, 2005                           |   |  September                30, 2006                          |   |  December                31, 2005                          |      |  September                30, 2006                         |   |  December                31, 2005                          |   |  September                30, 2006 |   |  December                31, 2005 |   |  September                30, 2006 |   |  December                31, 2005 |   |  September                30, 2006 |   |  December                31, 2005 |   |
|                                        |   |                                                             |      |                                                             |   |                                                             |   |                                                            |      |                                                            |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                assets                 |   | $                                                                | 8,580,973 |                                                             | $      | 8,503,513                                                        |   | $                                                               | 2,686,520 |                                                            | $      | 2,311,798                                                       |   | $ | 11,267,493 |   | $ | 10,815,311 |   | $ | 29,465 |   | $ | 299,141 |   | $ | (92,258 | ) | $ | (131,515 | ) | $ | 11,204,700 |   | $ | 10,982,937 |   |

**NOTE      16 - COMMITMENT AND CONTINGENCIES**

**A.      Lease Commitment**

| Years                ending December 31, |   |   |    |
|------------------------------------------|--------|--------|---------|
| 2007                                     |   | $      | 238,385 |   |
| 2008                                     |   |   | 59,859  |   |
| 2009                                     |   |   | 19,953  |   |
| 2010                                     |   |   | — |   |
| 2011                                     |   |   | — |   |
|                                     |   | $      | 318,197 |   |

**B.      Going concern**

----

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

**OPERATION**

**FORWARD-LOOKING      STATEMENTS**

**GENERAL**

**CRITICAL      ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES**

----

**Revenue      Recognition. **

**Allowance      for Doubtful Accounts. **

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

**Investment      Impairments. **

**Fixed      Assets and Depreciation. **

**Impairment      of Long-Lived Assets. **

**Income      Taxes. **

----

**RESULTS      OF OPERATIONS**

**Comparison      of the Three Months Ended September 30, 2006 and 2005**

**Total      Net Operating Revenue. **

**Sales      of goods. **

**Franchising      income. **

**Other      operating revenue. **

**Gross      Profit. **

**Total      Operating Costs.**

**Total      Operating Expenses. **

**      Other Operating Expenses. **

**Interest      Expense, Net. **

**Provision      for Taxes. **

----

**Comparison of the Nine Months Ended September        30, 2006        and 2005**

**Total      Net Operating Revenue. **

**Sales      of goods. **

**Franchising      income. **

**Other      operating revenue. **

**Gross      Profit. **

**Total      Operating Costs.**

**Total      Operating Expenses**

**Other      Operating Expenses. **

**Interest      Expense, Net. **

**Provision      for Taxes. **

**LIQUIDITY      AND CAPITAL RESOURCES**

**Comparison      of Fiscal Years 2006 and 2005**

----

**Off-Balance      Sheet Arrangements**

**Bank      Borrowing**

**Pension      Benefit**

**Going      Concern**

**NEW      ACCOUNTING PRONOUNCEMENTS**

----

**Non-GAAP      Financial Measures**

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

**Interest      rate exposure**

**Foreign      currency exposure **

**ITEM      4. CONTROLS AND PROCEDURES** 

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

----

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

| ·   | Maintain                detailed records and produce comprehensive financial statements on                a                periodic basis allowing management to review and detect irregular                financial activities. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Place                different check-points on the progression of ordinary monetary activities                of the business. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------|

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

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

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

|   |   |
|--------|--------|

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

----

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

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

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

***PART      II.***
***OTHER      INFORMATION***

**ITEM      1.** **LEGAL      PROCEEDINGS** 

**ITEM      1A.** **RISK      FACTORS**

**ITEM      2. **
**CHANGES      IN SECURITIES**

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

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

**ITEM      5.** **OTHER      INFORMATION** 

**ITEM      6.** **EXHIBITS**

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

----

**SIGNATURES** 

|                            |                                 |                            |
|---------------------------------|--------------------------------------|---------------------------------|
| Dated              May 21, 2007 | BY:                        | */s/              SUANG-YI PAI* |
|                            | SUANG-YI              PAI            |
|                            | CHIEF              FINANCIAL OFFICER |

----