**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**








**FORM
      10-Q**





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


**SECURITIES
      EXCHANGE ACT OF 1934**





For
      the
      quarterly period ended: September 30, 2007


or





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


**SECURITIES
      EXCHANGE ACT OF 1934**





Commission
      File Number: 333-39629




---




**KID
      CASTLE EDUCATIONAL CORPORATION**


(Exact
      name of Registrant as specified in its charter)





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




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


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




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




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




Large
      Accelerated Filer o **** ****   Accelerated
      Filer o **** ****  Non-accelerated
      filer x







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


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




As
      of
      September 30, 2007, there were 25,000,000 shares of the Registrant’s common
      stock outstanding.









**FORM
          10-Q**
  **KID
          CASTLE EDUCATIONAL CORPORATION**
  **TABLE
          OF CONTENTS**
 PagePART
                        I.
                    FINANCIAL
                        INFORMATIONItem
                        1.
                    Unaudited
                        Condensed Consolidated Financial Statements
                    2a)
                        Condensed Consolidated Balance Sheet as of September 30,
                        2007 and December
                        31, 2006
                    2b)
                        Condensed Consolidated Statements of Operations for the three
                        months ended
                        September 30, 2007 and September 30, 2006
                    4c)
                        Condensed Consolidated Statements of Operations for the nine
                        months ended
                        September 30, 2007 and September 30, 2006
                    5d)
                        Condensed Consolidated Statements of Stockholders’ Equity
                    6e)
                        Condensed Consolidated Statements of Cash Flows for the nine
                        months ended
                        September 30, 2007 and September 30, 2006
                    7f)
                        Notes to Condensed Consolidated Financial Statements
                    9Item
                        2.
                    Management’s
                        Discussion and Analysis of Financial Condition and Results
                        of
                        Operations
                    21Item
                        3.
                    Quantitative
                        and Qualitative Disclosures About Market Risk
                    26Item
                        4.
                    Controls
                        and Procedures
                    27PART
                        II.
                    OTHER
                        INFORMATIONItem
                        1.
                    Legal
                        Proceedings
                    29Item
                        1A
                    Risk
                        Factors
                    29Item
                        2.
                    Changes
                        in Securities,
                        Use of Proceedsand
                        Issuer Purchases of Equity Securities
                    29Item
                        3.
                    Defaults
                        upon Senior Securities
                    29Item
                        4.
                    Submission
                        of Matters to a Vote of Security Holders
                    29Item
                        5.
                    Other
                        Information
                    29Item
                        6
                    Exhibits
                        and Reports on Form 8-K
                    29SIGNATURES
                    30
 
 -
            1
            -




***PART
        I. FINANCIAL INFORMATION***
  **ITEM
        1.** **FINANCIAL
        STATEMENTS**
  **Kid
        Castle Educational Corporation**
 **Condensed
        Consolidated Balance Sheets**
 (Unaudited)
 (Expressed
        in US Dollars)
 
 September 30,
                2007
              
              December 31,
                2006ASSETSCurrent
                  assetsCash
                  and bank balances
              
              $
              1,001,231
              
              $
              1,419,873Bank
                  fixed deposits – pledged (Note12)
              
              
              419,895
              
              
              75,210Notes
                  and accounts receivable, net (Note 5)
              
              
              2,898,533
              
              
              2,001,145Inventories,
                  net (Note 6)
              
              
              1,617,951
              
              
              1,636,020Other
                  receivables (Notes 7)
              
              
              620,098
              
              
              127,062Prepayments
                  and other current assets (Note 8)
              
              
              206,826
              
              
              141,620Pledged
                  notes receivable (Note 12)
              
              
              645,660
              
              
              430,415Deferred
                  income tax assets
              
              
              74,052
              
              
              105,426Total
                  current assets
              
              
              7,484,246
              
              
              5,936,771Deferred
                  income tax assets
              
              
              46,464
              
              
              49,909Prepayment
                  of long-term investments
              
              
              287,351
              
              
              —Long-term
                  investments (Note 9)
              
              
              86,409
              
              
              33,295Property
                  and equipment, net
              
              
              2,228,950
              
              
              1,755,992Intangible
                  assets, net of amortization (Note 11)
              
              
              409,463
              
              
              538,638Long-term
                  notes receivable
              
              
              294,805
              
              
              812,809Pledged
                  notes receivable (Note 12)
              
              
              227,004
              
              
              13,851Other
                  assets
              
              
              238,032
              
              
              231,958Total
                  assets
              
              $
              11,302,724
              
              $
              9,373,223LIABILITIES
                  AND STOCKHOLDERS’ EQUITYCurrent
                  liabilitiesBank
                  borrowings – short-term and maturing withinone
                  year (Note 12)
              
              $
              1,478,460
              
              $
              808,037Notes
                  and accounts payable
              
              
              600,651
              
              
              925,577Accrued
                  expenses
              
              
              789,285
              
              
              975,396Amounts
                  due to stockholders/officers
              
              
              203,217
              
              
              355,653Other
                  payables
              
              
              865,608
              
              
              381,647Deposits
                  received
              
              
              862,893
              
              
              752,597Receipts
                  in advance (Note 13)
              
              
              2,385,955
              
              
              2,402,624Income
                  tax payable
              
              
              209,818
              
              
              143,771Total
                  current liabilities
              
              
              7,395,887
              
              
              6,745,302Bank
                  borrowings maturing after one year (Note 12)
              
              
              958,842
              
              
              979,323Receipts
                  in advance (Note 13)
              
              
              1,155,162
              
              
              1,275,638Deposits
                  received
              
              
              567,382
              
              
              629,165Deferred
                  liability
              
              
              37,986
              
              
              36,624Accrued
                  pension liabilities (Note 14)
              
              
              272,553
              
              
              287,363Total
                  liabilities
              
              
              10,387,812
              
              
              9,953,415




-
          2
          -




**Kid
        Castle Educational Corporation**
 
 **Condensed
        Consolidated Balance Sheets - Continued**
 (Unaudited)
 (Expressed
        in US Dollars)


September 30,
                2007
              
              December 31,
                2006Commitments
                  and contingencies (Note 16)Minority
                  interest
              
              
              153,155
              
              
              54,561Shareholders’
                  equityCommon
                  stock, no par share:25,000,000
                  shares authorized; issued and outstanding at September 30, 2007
                  and
                  December 31, 2006
              
              
              8,592,138
              
              
              8,592,138Additional
                  paid-in capital
              
              
              194,021
              
              
              194,021Legal
                  reserve
              
              
              65,320
              
              
              65,320Accumulated
                  deficit
              
              
              (7,362,734
              )
              
              (9,056,567
              )Accumulated
                  other comprehensive loss
              
              
              (629,283
              )
              
              (330,713
              )Net
                  loss not recognized as pension cost
              
              
              (97,705
              )
              
              (98,952
              )Total
                  shareholders’ equity
              
              
              761,757
              
              
              (634,753
              )Total
                  liabilities and shareholders’ equity
              
              $
              11,302,724
              
              $
              9,373,223


See
        accompanying notes to Condensed Consolidated Financial Statements.
  -
            3
            -


**Kid
        Castle Educational Corporation**
  **Condensed
        Consolidated Statements of Operations (Unaudited)**
  (Expressed
        in US Dollars)
  Three months ended September 30,2007
              
              2006Operating
                  RevenueSales
                  of goods
              
              $
              2,935,660
              
              $
              2,573,101Franchising
                  income
              
              
              552,254
              
              
              831,805Other
                  operating revenue
              
              
              620,038
              
              
              307,698Total
                  net operating revenue
              
              
              4,107,952
              
              
              3,712,604Operating
                  costsCost
                  of goods sold
              
              
              (1,264,881
              )
              
              (987,402
              )Cost
                  of franchising
              
              
              (232,124
              )
              
              (83,107
              )Other
                  operating costs
              
              
              (238,917
              )
              
              (527,095
              )Total
                  operating costs
              
              
              (1,735,922
              )
              
              (1,597,604
              )Gross
                  profit
              
              
              2,372,030
              
              
              2,115,000Advertising
                  costs
              
              
              (2,842
              )
              
              (2,296
              )Other
                  operating expenses
              
              
              (1,463,233
              )
              
              (1,379,880
              )Income
                  from operations
              
              
              905,955
              
              
              732,824Interest
                  expenses, net
              
              
              (18,161
              )
              
              (31,632
              )Share
                  of income (loss) of investments
              
              
              39,253
              
              
              (10,915
              )Other
                  non-operating income (expenses), net
              
              
              (24,151
              )
              
              77,719Income
                  before income taxes
              
              
              902,896
              
              
              767,996Provision
                  for taxes
              
              
              (150,545
              )
              
              (62,552
              )Income
                  after income taxes
              
              
              752,351
              
              
              705,444Minority
                  interest income
              
              
              (45,847
              )
              
              (41,731
              )Net
                  income
              
              $
              706,504
              
              $
              663,713Earnings
                  per share – basic and diluted
              
              $
              0.03
              
              $
              0.03Weighted-average
                  shares used to compute earnings (loss) per share – basic and
                  diluted
              
              
              25,000,000
              
              
              18,999,703
  See
        accompanying notes to Condensed Consolidated Financial
        Statements.




-
          4
          -


**Kid
        Castle Educational Corporation**
  **Condensed
        Consolidated Statements of Operations (Unaudited)**
  (Expressed
        in US Dollars)
  Nine months ended September 30,2007
              
              2006Operating
                  RevenueSales of goods
              
              $
              6,632,008
              
              $
              6,102,630Franchising
                  income
              
              
              1,642,432
              
              
              2,026,493Other
                  operating revenue
              
              
              957,625
              
              
              482,194Total
                  net operating revenue
              
              
              9,232,065
              
              
              8,611,317Operating
                  costsCost
                  of goods sold
              
              
              (2,795,509
              )
              
              (2,357,627
              )Cost
                  of franchising
              
              
              (343,909
              )
              
              (254,474
              )Other
                  operating costs
              
              
              (435,283
              )
              
              (608,672
              )Total
                  operating costs
              
              
              (3,574,701
              )
              
              (3,220,773
              )Gross
                  profit
              
              
              5,657,364
              
              
              5,390,544Advertising
                  costs
              
              
              (21,015
              )
              
              (19,584
              )Other
                  operating expenses
              
              
              (3,845,751
              )
              
              (4,224,520
              )Income
                  from operations
              
              
              1,790,598
              
              
              1,146,440Interest
                  expenses, net
              
              
              (60,778
              )
              
              (151,757
              )Share
                  of income (loss) of investments
              
              
              55,242
              
              
              (20,000
              )Other
                  non-operating income, net
              
              
              347,078
              
              
              78,894Income
                  before income taxes
              
              
              2,132,140
              
              
              1,053,377Provision
                  for taxes
              
              
              (343,556
              )
              
              (
                  249,461
              )Income
                  after income taxes
              
              
              1,788,584
              
              
              804,116Minority
                  interest income
              
              
              (94,751
              )
              
              (55,323
              )Net
                  income
              
              $
              1,693,833
              
              $
              748,793Earnings
                  per share – basic and diluted
              
              $
              0.07
              
              $
              0.04Weighted-average
                  shares used to compute earnings per share - basic and diluted
              
              
              25,000,000
              
              
              18,999,703
  See
        accompanying notes to Condensed Consolidated Financial
        Statements.
  -
            5
            -
  **K** **id
        Castle Educational Corporation**
  **Condensed
        Consolidated Statements of Stockholders’ Equity**
 (Unaudited)
 (Expressed
        in US Dollars)
 Common StockNumberof
                    shares
                  
                  Amount
                  
                  Additional
                    paid-in
                    capital
                  
                  Legal
                    reserve
                  
                  Accumulated
                    deficit
                  
                  Accumulated
                    other
                    comprehensive
                    loss
                  
                  Net loss
                    not
                    recognized
                    as pension
                    cost
                  
                  TotalBalance,
                      December 31, 2005
                  
                  
                  18,999,703
                  
                  $
                  7,669,308
                  
                  $
                  194,021
                  
                  $
                  65,320
                  
                  $
                  (9,010,356
                  )
                  $
                  (244,864
                  )
                  
                  —
                  
                  $
                  (1,326,571
                  )Net
                      loss for 2006
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (46,211
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (46,211
                  )Cumulative
                      translation adjustment
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (85,849
                  )
                  
                  —
                  
                  
                  (85,849
                  )Comprehensive
                      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (132,060
                  )Repayment
                      of a liability by issuance of common stock
                  
                  
                  6,000,297
                  
                  
                  922,830
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  922,830Net
                      loss not recognized as pension cost
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  (98,952
                  )
                  
                  (98,952
                  )Balance,
                      December 31, 2006
                  
                  
                  25,000,000
                  
                  $
                  8,592,138
                  
                  $
                  194,021
                  
                  $
                  65,320
                  
                  $
                  (9,056,567
                  )
                  $
                  (330,713
                  )
                  $
                  (98,952
                  )
                  $
                  (634,753
                  )Net
                      income for the nine months ended September 30, 2007
                      (Unaudited)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  1,693,833
                  
                  
                  —
                  
                  
                  —
                  
                  
                  1,693,833Cumulative
                      translation adjustment (Unaudited)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (298,570
                  )
                  
                  —
                  
                  
                  (298,570
                  )Comprehensive
                      income (Unaudited)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,395,263Net
                      income not recognized as pension cost
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  1,247
                  
                  
                  1,247Balance,
                      September 30, 2007 (Unaudited)
                  
                  
                  25,000,000
                  
                  $
                  8,592,138
                  
                  $
                  194,021
                  
                  $
                  65,320
                  
                  $
                  (7,362,734
                  )
                  $
                  (629,283
                  )
                  $
                  (97,705
                  )
                  $
                  761,757
  See
        accompanying notes to Condensed Consolidated Financial
        Statements.




-
          6
          -


**K** **id
        Castle Educational Corporation**
  **Condensed
        Consolidated Statements of Cash Flows**
 **(Unaudited)**
 (Expressed
        in US Dollars)
  Nine months ended September 30,2007
              
              2006Cash
                  flows from operating activitiesNet
                  income
              
              $
              1,693,833
              
              $
              748,793Adjustments
                  to reconcile net income tonet
                  cash provided by operating activitiesDepreciation
                  of property and equipment
              
              
              157,175
              
              
              145,434Amortization
                  of intangible assets
              
              
              122,857
              
              
              124,899Allowance
                  for sales returns
              
              
              64,379
              
              
              82,415Allowance
                  for doubtful debts
              
              
              139,716
              
              
              718,908Provision
                  (reversal) of allowance for loss on inventory obsolescence and
                  slow-moving
                  items
              
              
              (360,118
              )
              
              57,204Loss
                  on disposal of assets
              
              
              2,666
              
              
              —Minority
                  interests
              
              
              94,751
              
              
              55,323Share
                  of loss (gain) of investments
              
              
              (55,242
              )
              
              20,000(Increase)/decrease
                  in:Notes
                  and accounts receivable
              
              
              (662,701
              )
              
              (2,255,781
              )Inventories
              
              
              372,793
              
              
              654,177Other
                  receivables
              
              
              108,330
              
              
              244,535Prepayments
                  and other current assets
              
              
              (45,000
              )
              
              115,420Deferred
                  income tax assets
              
              
              32,997
              
              
              (61,755
              )Other
                  assets
              
              
              76,081
              
              
              349,901Increase/(decrease)
                  in:Notes
                  and accounts payable
              
              
              (191,414
              )
              
              (107,449
              )Accrued
                  expenses
              
              
              (197,992
              )
              
              153,224Other
                  payables
              
              
              426,753
              
              
              (135,059
              )Receipts
                  in advance
              
              
              (125,205
              )
              
              566,707Income
                  taxes payable
              
              
              67,748
              
              
              125,255Deposits
                  received
              
              
              64,777
              
              
              528,489Accrued
                  pension liabilities
              
              
              (11,431
              )
              
              (3,793
              )Net
                  cash provided by operating activities
              
              
              1,775,753
              
              
              2,126,847Cash
                  flows from investing activitiesPurchase
                  of property and equipment
              
              
              (190,691
              )
              
              (49,928
              )Change
                  in investments in associated company
              
              
              (222,872
              )
              
              —Acquisition,
                  net of cash acquired
              
              
              58,365
              
              
              —Proceeds
                  from disposal of property and equipment
              
              
              118
              
              
              —Amount
                  due from stockholder/director
              
              
              —
              
              
              —Prepayment
                  of long-term investments
              
              
              —
              
              
              —Acquisition
                  of long-term investments
              
              
              (854,123
              )
              
              —Bank
                  fixed deposits – pledged
              
              
              (345,622
              )
              
              34,023Pledged
                  notes receivable
              
              
              (433,690
              )
              
              695,875Net
                  cash provided by (used in ) investing activities
              
              
              (1,988,515
              )
              
              679,970
  -
            7
            -
 
 **K** **id
        Castle Educational Corporation**
 
 **Condensed
        Consolidated Statements of Cash Flows – Continued**
 (Unaudited)
 (Expressed
        in US Dollars)
 
 Nine months ended September 30,2007
              
              2006Cash
                  flows from financing activitiesProceeds
                  from bank borrowings
              
              $
              1,114,717
              
              $
              213,903Proceeds
                  from loan from a stockholder
              
              
              4,748
              
              
              —Proceeds
                  from capital leases
              
              
              —
              
              
              —Repayment
                  of bank borrowings
              
              
              (443,648
              )
              
              (1,466,062
              )Repayment
                  of capital leases
              
              
              —
              
              
              —Repayment
                  of loan from stockholders and transactions of related parties
              
              
              (601,004
              )
              
              (562,806
              )Net
                  cash provided by (used in) financing activities
              
              
              74,813
              
              
              (1,814,965
              )Net
                  increase (decrease) in cash and cash equivalents
              
              
              (137,949
              )
              
              991,852Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              (280,693
              )
              
              (45,463
              )Cash
                  and cash equivalents at beginning of period
              
              
              1,419,873
              
              
              613,391Cash
                  and cash equivalents at end of period
              
              $
              1,001,231
              
              $
              1,559,780
 
 See
        accompanying notes to Condensed Consolidated Financial
        Statements.




-
          8
          -




**K** **id
        Castle Educational Corporation**
  **Notes
        to Condensed Consolidated Financial Statements**
  (Expressed
        in US Dollars)
  **NOTE
        1 – ORGANIZATION AND DESCRIPTION OF BUSINESS**
  Kid
        Castle Internet Technologies Limited (“KCIT”) was incorporated on December 17,
        1999 under the provisions of the Company Law of the Republic of China (“ROC” or
“Taiwan”) as a limited liability company. KCIT is engaged in the business of
        children’s education focusing on the English language. The business comprises
        publication, sales and distribution of related books, magazines, audio and
        videotapes and compact disc, franchising and sales of merchandises complementary
        to the business. KCIT commenced operations in April 2000 when it acquired
        the
        above business from Kid Castle Enterprises Limited which was formerly owned
        by
        Mr. Kuo-An Wang and Mr. Yu-En Chiu. Kid Castle Enterprises Limited ceased
        operation on December 25, 2003.
  On
        March
        9, 2001, KCIT formed a wholly-owned subsidiary, Premier Holding Investment
        Property Limited incorporated in the British Virgin Islands, which held the
        entire common stock of Higoal Developments Limited (“Higoal”) incorporated in
        the Cayman Islands on March 8, 2001. On September 10, 2001, Higoal
        established a wholly owned subsidiary, Kid Castle Educational Software
        Development Company Limited (“KCES”) in the People’s Republic of China (the
“PRC”). The existing operations of Higoal are principally located in Taiwan and
        are being expanded in the PRC. In June 2002, after KCIT undertook a series
        of
        group restructurings, KCIT became the direct owner of the outstanding shares
        of
        Higoal. Premier Holding Investment Property Limited was then liquidated in
        June
        2003.
  On
        September 18, 2002, Higoal issued 11,880,000 shares of common stock to the
        stockholders of KCIT in exchange for 100% of the outstanding common stock
        of
        KCIT. As a result of this reorganization, KCIT became a wholly owned subsidiary
        of Higoal. On October 1, 2002, Kid Castle Educational Corporation (the
“Company”), formerly King Ball International Technology Limited Corporation,
        entered into an exchange agreement with Higoal whereby the Company issued
        to the
        stockholders of Higoal 11,880,000 shares of common stock of the Company in
        exchange for 100% of the issued and fully paid up capital of Higoal.
  As
        a
        result of the share exchange, the former stockholders of Higoal hold a majority
        of the Company’s outstanding capital stock. Generally accepted accounting
        principles (“GAAP”) require in certain circumstances that a company whose
        stockholders retain the majority voting interest in the combined business
        be
        treated as the acquirer for financial reporting purposes. Accordingly, the
        acquisition has been accounted for as a “reverse acquisition” whereby Higoal is
        deemed to have purchased the Company. However, the Company remains the legal
        entity and the registrant for Securities and Exchange Commission ( “SEC”)
        reporting purposes.
  In
        July
        2003, KCES entered into an agreement with 21 st Century
        Publishing House to incorporate Jiangxi 21 st Century
        Kid Castle Culture Media Co., Ltd (“KC Culture Media”). It was agreed that KCES
        and 21 st Century
        Publishing House would each own 50% of KC Culture Media and that each party
        would contribute Renminbi (“RMB”) $1 million for its ownership interest. On July
        2, 2004, KCES acquired an additional 40% of the equity of KC Culture Media
        from
        21 st Century
        Publishing House. KCES now owns 90% of KC Culture Media.
  On
        December 27, 2006, KCES established a wholly-owned subsidiary, Shanghai Kid
        Castle Educational Info Constitution Company Limited (“KCEI”) in the PRC, with
        total registered capital of RMB$1,200,000, in order to operate schools
        controlled by us in PRC. As of September 30, 2007, KCEI had total registered
        capital of RMB$2,000,000.
  -
            9
            -
  The
        Company, Higoal and its subsidiaries are sometimes collectively are referred
        to
        as the “Group”. The operations of the Group are principally located in Taiwan
        and the PRC.
  **NOTE
        2 - BASIS OF PRESENTATION**
  The
        accompanying financial data as of September 30, 2007 and for the nine months
        ended September 30, 2007 and 2006 have been prepared by the Group, without
        audit, pursuant to the rules and regulations of the SEC using United States
        (“U.S.”) GAAP. Certain information and footnote disclosures normally included in
        financial statements prepared in accordance with accounting principles generally
        accepted in the United States have been condensed or omitted pursuant to
        such
        rules and regulations. However, the Group believes that the disclosures are
        adequate to make the information presented not misleading. These financial
        statements should be read in conjunction with the financial statements and
        the
        notes thereto included in the Group’s audited annual financial statements for
        the year ended December 31, 2006.
  The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States requires management to make estimates
        that affect the reported amounts of assets, liabilities, revenues and expenses
        and the disclosure of contingent assets and liabilities. Actual results could
        differ from these estimates.
  Although
        it has been profitable for the first 9 months of 2007, the Group has incurred
        operating losses in most periods since inception. As of September 30, 2007,
        the
        accumulated deficit was $7,362,734. The Group plans to fund its working capital
        needs by growth in sales and obtaining new credit lines from financial
        institutions. If the Group is unable to meet its current operating plan,
        it will
        be required to obtain additional funding. Management believes such funding
        will
        be available, but there can be no assurances that such funding will be
        available, or if it is available, on terms acceptable to the Group. Management
        believes that if funding is not available, other actions can and will be
        taken
        to reduce costs. These actions may entail the Group to reduce headcount,
        sales
        and marketing, other expansion activities, which may affect the future growth
        of
        the Group’s operations.
  **NOTE
        3 - SUMMARY OF IMPORTANT ACCOUNTING POLICIES**
  **Revenue
        Recognition**
  Sales
        of
        books, magazines, audio and video tapes, compact disc’ and other merchandises
        are recognized as revenue on the transfer of risks and rewards of ownership,
        which generally coincides with the time when the goods are delivered to
        customers and title has passed. Provision is made for expected future sales
        returns and allowances when revenue is recognized.
  Franchise
        fees are the annual licensing fees for franchisees to use the Group’s brand name
        and consulting services. Franchising income is recognized on a straight-line
        basis over the terms of the relevant franchise agreements.
  **Allowance
        for Doubtful Accounts**
  An
        allowance for doubtful accounts is provided based on the evaluation of
        collectibility and aging analysis of notes and accounts
        receivables.
  **Inventories**
  Inventories
        are stated at the lower of cost or market value. Cost includes all costs
        of
        purchase, cost of conversion and other costs incurred in bringing the
        inventories to their present location and condition, and is calculated using
        the
        weighted average method. Market value is determined by reference to the sales
        proceeds of items sold in the ordinary course of business after the balance
        sheet date or to management estimates based on prevailing market
        conditions.
  -
            10
            -
  **Property
        and Equipment and Depreciation**
  Property
        and equipment are stated at cost. Depreciation is computed using the
        straight-line method to allocate the cost of depreciable assets over the
        estimated useful lives of the assets as follows:
 Estimated useful life
                  (years)Land
                
                
                IndefiniteBuildings
                
                
                50Furniture
                    and fixtures
                
                
                3-10Transportation
                    equipment
                
                
                2.5-5Miscellaneous
                    equipment
                
                
                5-10
  Maintenance,
          repairs and minor renewals are charged directly to the statement of operations
          as incurred. When assets are disposed of, the related cost and accumulated
          depreciation thereon are removed from the financial statements and any
          resulting
          gain or loss is included in the statement of operations.
  **Long-Lived
          Assets**
  Long-lived
          assets are reviewed for impairment whenever events or changes in circumstances
          indicate that the carrying amount of the assets might not be recoverable.
          The
          Group does not perform a periodic assessment of assets for impairment in
          the
          absence of such information or indicators. Conditions that would necessitate
          an
          impairment assessment include a significant decline in the observable market
          value of an asset, a significant change in the extent or manner in which
          an
          asset is used, or a significant adverse change that would indicate that
          the
          carrying amount of an asset or group of assets is not recoverable. For
          long-lived assets to be held and used, the Group measures fair value based
          on
          quoted market prices or based on discounted estimates of future cash
          flows.
  **Income
          Taxes**
  The
          Company and its subsidiaries account for income taxes in accordance with
          Statement of Financial Accounting Standards (“SFAS”) No. 109 “Accounting for
          Income Taxes”. Under SFAS No. 109, deferred tax liabilities or assets at the end
          of each period are determined using the currently enacted tax rate. Valuation
          allowances are established when it is considered more likely than not that
          the
          deferred tax assets will not be realized.
  **Intangible
          Assets**
  Franchises
          and copyrights are stated at cost and amortized on the straight-line method
          over
          their estimated useful lives of ten years.
  **Comprehensive
          Income (Loss)**
  Comprehensive
          income (loss) is defined as the change in equity of a company during a
          period from transactions and other events and circumstances excluding
          transactions resulting from investments from owners and distributions to
          owners.
          Comprehensive income (loss) is disclosed in the condensed consolidated
          statement of stockholders’ equity.
  -
              11
              -
  **Net
          Earnings (Loss) Per Common Share**
  The
          Group
          computes net earnings (loss) per share in accordance with SFAS No. 128,
          “Earnings per Share”. Under the provisions of SFAS No. 128, basic net earnings
          (loss) per share is computed by dividing the net earnings (loss) available
          to
          common shareholders for the period by the weighted average number of shares
          of
          common stock outstanding during the period. The calculation of diluted
          net
          earnings (loss) per share gives effect to common stock equivalents. For
          the nine
          months ended September 30, 2007 and 2006, the Group did not have any potential
          common stock shares.
  **Reclassification**
  The
          presentation of certain prior information has been reclassified to conform
          to
          current presentation.
 **NOTE** **4 –
            RECENT ACCOUNTING PRONOUNCEMENTS**
  In
            July
            2006, the Financial
            Accounting Standards Board (the “FASB”) released
            Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
            Interpretation of FASB Statement 109”. Effective for fiscal years beginning
            after December 15, 2006, this interpretation provides guidance on the
            financial
            statement recognition and measurement for income tax positions that we
            have
            taken or expect to take in our income tax returns. It also provides related
            guidance on derecognition, classification, interest and penalties, accounting
            in
            interim periods, disclosure, and transition. We have adopted this standard
            as of
            January 1, 2007. The adoption did not have a significant impact on our
            financial
            statements.
  In
            September 2006, the FASB released SFAS No. 157, “Fair Value Measurements” which
            defines fair value, establishes a framework for measuring fair value
            in GAAP,
            and enhances disclosures about fair value measurements. This standard
            applies
            when other accounting pronouncements require fair value measurements;
            it does
            not require new fair value measurements. SFAS No. 157 is effective for
            financial
            statements issued for fiscal years beginning after November 15, 2007,
            and
            interim periods within those years. We are currently evaluating the effect
            of
            the guidance contained in this standard and do not expect the implementation
            to
            have a material impact on our financial statements
  In
            February 2007, the FASB released SFAS No.159, “The Fair Value Option for
            Financial Assets and Financial Liabilities”. The standard is effective for
            fiscal years beginning after November 15, 2007, with early adoption permitted
            as
            of the beginning of a fiscal year that begins on or before the aforementioned
            date. We did not elect to adopt SFAS No. 159 early.
  **NOTE** **5 –
            NOTES AND ACCOUNTS RECEIVABLE**
  **September 30,**
                    **2007**
                  
                  **December 31,**
                    **2006**(Unaudited)Notes
                      and accounts receivable– Third
                      parties
                  
                  $
                  4,159,637
                  
                  $
                  2,995,538– Related
                      parties
                  
                  
                  66,529
                  
                  
                  113,928Total
                  
                  
                  4,226,166
                  
                  
                  3,109,466Allowance
                      for doubtful accounts and sales returns
                  
                  
                  (1,327,633
                  )
                  
                  (1,108,321
                  )Notes
                      and accounts receivable, net
                  
                  $
                  2,898,533
                  
                  $
                  2,001,145
 
 -
                12
                -
  **NOTE
            6 – INVENTORIES**
  **September 30,**
                    **2007**
                  
                  **December 31,**
                    **2006**(Unaudited)Work
                      in process
                  
                  $
                  178,419
                  
                  $
                  145,110Finished
                      goods and other merchandises
                  
                  
                  1,848,018
                  
                  
                  2,268,6082,026,437
                  
                  
                  2,413,718Less:
                      Allowance for obsolete inventories anddecline
                      of market value
                  
                  
                  (408,486
                  )
                  
                  (777,698
                  )$
                  1,617,951
                  
                  $
                  1,636,020
  **NOTE** **7 –
            OTHER RECEIVABLES**
 **September 30,**
                        **2007**
                      
                      **December 31,**
                        **2006**(Unaudited)Other
                          receivables – third parties:Tax
                          paid on behalf of landlord
                      
                      $
                      —
                      
                      $
                      —Advances
                          to staff
                      
                      
                      96,920
                      
                      
                      55,438Grants
                          from Market Information Center
                      
                      
                      —
                      
                      
                      —Receivables
                          from Shanghai Wonderland Educational
                        Resources
                          Co., Ltd.(i)(“Shanghai Wonderland”)
                      
                      
                      395,266
                      
                      
                      381,092Other
                          receivables
                      
                      
                      500,880
                      
                      
                      42,480Less
                          : Allowance for doubtful accounts
                      
                      
                      (395,266
                      )
                      
                      (381,092
                      )Sub-total
                      
                      
                      597,800
                      
                      
                      97,918Other
                          receivables – related parties
                      
                      
                      22,298
                      
                      
                      29,144$
                      620,098
                      
                      $
                      127,062
 
 Note:
  (i)
                  Shanghai
                      Wonderland was a distributor for the Group. The Group loaned
                      Shanghai
                      Wonderland RMB$450,000 (approximately $54,000), RMB$500,000
                      (approximately
                      $62,000) and RMB$2,500,000 (approximately $310,000) for operations
                      in
                      December 2003, July 2004 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, 2007, Shanghai Wonderland still owes the Group
                      a balance of
                      RMB$3,000,000 (approximately $395,266). Such sum has now been
                      itemized and
                      recorded as “Allowance for doubtful accounts” compared to its prior
                      recognition as “Other receivables”.
  -
                13
                -
  **NOTE
            8 –** **PREPAYMENTS AND OTHER CURRENT ASSETS**
  **September 30,**
                    **2007**
                  
                  **December 31,**
                    **2006**(Unaudited)Prepayments
                  
                  $
                  173,662
                  
                  $
                  139,582Temporary
                      payments
                  
                  
                  25,311
                  
                  
                  1,084Tax
                      recoverable
                  
                  
                  —
                  
                  
                  —Prepaid
                      interest
                  
                  
                  7,253
                  
                  
                  54Others
                  
                  
                  600
                  
                  
                  900$
                  206,826
                  
                  $
                  141,620
 
 **NO** **TE
            9– INTEREST IN ASSOCIATES**
 **September
                        30,**
                      **2007**
                    
                    **December
                        31,**
                      **2006**(Unaudited)21stCentury Kid Castle Language and Education Center(i)
                      (“Education
                        Center”)Investment
                        cost
                    
                    $
                    99,686
                    
                    $
                    96,111Share
                        of loss
                    
                    
                    (3,427
                    )
                    
                    (52,091
                    )$
                    96,259
                    
                    $
                    44,020Tianjin
                        Kid Castle Educational Investment Consulting Co., Ltd.(ii)
                      (“Tianjin
                        Consulting”)Investment
                        cost
                    
                    $
                    93,039
                    
                    $
                    89,704Share
                        of loss
                    
                    
                    (102,889
                    )
                    
                    (104,693
                    )$
                    (9,850
                    )
                    $
                    (14,989
                    )Sichuan
                        Lanbeisi Kid Castle Education Development Co., Ltd
                      (“Lanbeisi”)
                        (Note (iii))Investment
                        cost
                    
                    $
                    -
                    
                    $
                    46,133Share
                        of loss
                    
                    
                    -
                    
                    
                    (41,869
                    )$
                    -
                    
                    $
                    4,264Total
                    
                    $
                    86,409
                    
                    $
                    33,295
 
 Notes:
  (i)
                  In
                      October 2003, the Group obtained the PRC government’s approval to co-found
                      Education Center with 21stCentury Publishing House in the PRC. In 2004, Education Center
                      registered
                      the total capital as RMB$1,500,000, and KCES and 21stCentury Publishing House each owns 50% of the company.. It
                      has been
                      determined that the Group has significant influence and should
                      therefore
                      account for its investment in Education Center on the equity
                      method.
  For
            the
            three months ended September 30, 2007 and 2006, the Group recognized
            investment
            income accounted for under the equity method in Education Center of
            $50,601 and
            $1,996 ,
            respectively .
  -
                14
                -
  (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 Consulting. It has been determined that the Group has
                      significant
                      influence and should therefore account for its investee on
                      the equity
                      method.  For the three months ended September
                    30, 2007
                    and 2006, the Group recognized an investment revenue of $5,698
                    and an
                    investment loss of $14,708 respectively, these amounts are accounted
                    for
                    under the equity method, in Tianjin Consulting.  (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.  As of September 30, 2007, the
                    Group acquired
                    100% interests in Sichuan Lanbeisi Kid Castle Education Development
                    Co.,
                    Ltd, which became a consolidated entity. (Please refer to Note
                    10 to our
                    condensed consolidated financial statements for more
                    information.)
  **NOTE
            10 – ACQUISITION**
  Jilin
            Kid
            Castle Educational Investment Development Ltd (“Jilin KCEI”) was established in
            September 2002. In March 2007, the Group entered into an equity transfer
            agreement with third parties to acquire 100% ownership in Jilin KCEI.
            In May
            2007, pursuant to this equity transfer agreement, KCES and KCEI, the
            Group’s
            wholly owned PRC subsidiaries, acquired, respectively, 49% and 51% interests
            in
            Jilin KCEI from the third parties for the purchase price of $550,196
            (RMB$4,200,000). The Group’s Management believes that the book value of the
            existing assets and liabilities of Jilin KCEI approximate the fair value
            of the
            assets and liabilities from which the purchase price was determined for
            the
            purpose of applying purchase accounting. The acquisition is expected
            to increase
            the Group’s profit margin and competitive position in the PRC. As of September
            30, 2007, the Group owns 100% of Jilin KCEI, which became a consolidated
            entity.
            The fair value of Jilin KCEI’s net assets as of May 1, 2007 are
            $569,894.
 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 (“Lanbeisi”). On May 10, 2007, the Group signed
              an equity transfer agreement with Lanbeisi Education & Culture Industrial
              Co., Ltd in Sichuan Province, PRC to acquire it’s interests of 45% in Lanbeisi
              for the purchase price of $43,741 (RMB$320,000). Pursuant to this equity
              transfer agreement, the Group and Sichuan Province Education Institutional
              Service Center in Sichuan Province, PRC own, respectively, 90% and
              10% interests
              in Lanbeisi. On June 30, 2007, the Group signed an equity transfer
              agreement
              with Sichuan Province Education Institutional Service Center in Sichuan
              Province, PRC for the purchase price of $13,669 (RMB$80,000). Pursuant
              to this
              equity transfer agreement the Group acquired 100% interests in Lanbeisi.
              The
              Group’s Management believes that the acquisition is beneficial to our expansion
              development in Sichuan Province, PRC. As of September 30, 2007, the
              Group owns
              100% of Lanbeisi, which became a consolidated entity. The fair value
              of
              Lanbeisi’s net liabilities as of August 1, 2007 are $36,756.
 On
            June
            1, 2007, the Group entered into an equity transfer agreement with a third
            party
            to acquire 100% ownership in Xian Yanta Green Field Preschool for the
            purchase
            price of $314,724 (RMB$2,500,000). The fair value of Xian Yanta Green
            Field
            Preschool’s net assets as of August 1, 2007 are $244,200. The Group’s Management
            believe that the acquisition enables the Group to expand its business
            into the
            Xian Province, PRC.
  -
                15
                -
 **NOTE** **11 –
            INTANGIBLE ASSETS**
  **September 30,**
                    **2007**
                  
                  **December 31,**
                    **2006**(Unaudited)Gross
                      carrying amountFranchise
                  
                  $
                  1,031,496
                  
                  $
                  1,043,775Copyrights
                  
                  
                  606,355
                  
                  
                  613,5721,637,851
                  
                  
                  1,657,347Less:
                      Accumulated amortizationFranchise
                  
                  
                  (773,622
                  )
                  
                  (704,548
                  )Copyrights
                  
                  
                  (454,766
                  )
                  
                  (414,161
                  )(1,228,388
                  )
                  
                  (1,118,709
                  )**Net**
                  
                  $
                  409,463
                  
                  $
                  538,638
  Amortization
            charged to operations were $122,857 and $124,899 for the nine months
            ended
            September 30, 2007 and 2006, respectively.
  The
            estimated aggregate amortization expenses for each of the three succeeding
            fiscal years are as follows:
  2008
                  
                  $
                  163,7852009
                  
                  
                  163,7852010
                  
                  
                  40,965$
                  368,535
 
 **NOTE** **12 –
            BANK BORROWINGS**
  **September 30,**
                    **2007**
                  
                  **December 31,**
                    **2006**(Unaudited)Bank
                      term loans(i)
                  
                  $
                  594,716
                  
                  $
                  108,922Short-term
                      unsecured bank loans(ii)
                  
                  
                  813,975
                  
                  
                  446,086Mid-term
                      secured bank loan(iii)
                  
                  
                  1,028,611
                  
                  
                  1,232,3522,437,302
                  
                  
                  1,787,360Less:
                      Balances maturing within one year included in current
                      liabilitiesBank
                      term loans
                  
                  
                  499,952
                  
                  
                  103,523Short-term
                      unsecured bank loans
                  
                  
                  813,975
                  
                  
                  446,086Mid-term
                      secured bank loan
                  
                  
                  164,533
                  
                  
                  258,4281,478,460
                  
                  
                  808,037Bank
                      borrowings maturing after one year
                  
                  $
                  958,842
                  
                  $
                  979,323
  -
                16
                -
  Notes:
  (i)
                  This
                      line item represents bank loans that have been secured by a
                      pledge of
                      post-dated checks amounting to $789,218 and $261,142 that we
                      have received
                      from franchisees and the Group’s bank deposits of $18,402 and $1,963 as of
                      September 30, 2007 and December 31, 2006, 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,
                      and was
                      extended on October 18, 2006. The weighted average interest
                      rates were
                      5.37% and 6.055% per annum as of September 30, 2007 and 2006,
                      respectively.
  For
            the
            nine months ended September 30, 2007 and 2006, the interest expense charged
            to
            operations amounted to $4,438 and $16,092, respectively.
  (ii)
                  In
                      August 2005, KCIT obtained an unsecured short-term loan to
                      finance the
                      Group’s operations in the amount of $304,553, which was collateralized
                      by
                      KCIT’s refundable deposits of $60,911, notes receivables approximating
                      30%
                      of the loan balance and guaranteed by two directors and stockholders
                      of
                      the Group. The loan bears interest at the lending bank’s basic fixed
                      deposit rate plus 3.29% per annum. The short-term loan was
                      extended in
                      February 2007 and is due on February 2008. A portion of the
                      principal of
                      the loan amounting to $146,186 is repayable in 12 equal monthly
                      installments and the remaining principal amount of $158,367
                      will be
                      repayable at maturity. The applicable interest rate is approximately
                      5.51%
                      and 5% per annum as of September 30, 2007 and 2006,
                      respectively.
  In
            March
            2005, KCIT obtained an unsecured short-term loan to finance the Group’s
            operations in the amount of $304,553, which was extended on October 18,
            2006.
            The loan was guaranteed by two directors and stockholders of the Group
            and bears
            interest at the Taiwan basic borrowing rate plus 1.3% per annum. The
            short-term
            loan is repayable in 36 equal monthly installments. The last installment
            will be
            due on March 19, 2008.
  In
            May
            2007, KCES obtained an unsecured short-term loan to finance the Group’s
            operations in the amount of $327,498, which was guaranteed by Director
            Mr. Yang
            and KCIT, and KCIT’s refundable deposits of $340,000. The loan bears interest at
            the PRC basic borrowing rate per annum, and is due in April 2008.
  For
            the
            nine months ended September 30, 2007 and 2006, the interest expense charged
            to
            operations from the above three unsecured short-term loans amounted to
            $31,008
            and $8,219 respectively.
  (iii)
                  In
                      August 2005, KCIT obtained a bank loan in the principal amount
                      of $944,115
                      to repay its mortgage loan that was originally granted by a
                      bank on August
                      10, 2003 and to finance its operations. The loan is secured
                      by the Group’s
                      land and buildings and is personally guaranteed by two directors
                      of the
                      Group. The loan bears interest at the lending bank’s basic fixed deposit
                      rate plus 0.69% per annum for the two-year period from 2005
                      to 2007, plus
                      1.69% per annum for the year 2008.  On August 10, 2005, the bank
                      extended the term of the loan and it is now repayable in 84
                      equal monthly
                      installments starting on August 10, 2012. As of September 30, 2007,
                      the applicable interest rate is approximately 2.7% and the
                      Group has
                      repaid $108,487.
  -
                17
                -
  In
            February 2005, KCIT obtained a bank loan of $456,830, which bears interest
            at
            6% per annum and is repayable in 36 equal monthly installments. The last
            installment will be due on February 2, 2008. The loan was collateralized by
            notes receivables approximating 30% of the loan balance, and guaranteed
            by two
            directors of the Group. As of September 30, 2007, the Group has repaid
            $386,677.
  In
            August
            2005, KCIT obtained a new bank loan of $213,187, which bears interest
            at 4.1%
            and 3.7% per annum as of September 30, 2007 and December 31, 2006, respectively,
            and is repayable in 60 equal monthly installments. The last installment
            will be
            due on August 10, 2010, and guaranteed by two directors of the Group.
            As of
            September 30, 2007, the Group has repaid $83,493.
  For
            the
            nine months ended September 30, 2007 and 2006, the interest expense charged
            to
            operations amounted to $28,559 and $37,828, respectively.
  **NOTE
            1** **3 –
            RECEIPTS IN ADVANCE**
  The
            balance comprises:
  **September 30,**
                    **2007**
                  
                  **December 31,**
                    **2006**(Unaudited)Current
                      liabilities:Sales
                      deposits received(i)
                  
                  $
                  500,940
                  
                  $
                  481,334Franchising
                      income received(ii)
                  
                  
                  1,425,412
                  
                  
                  1,608,066Subscription
                      fees received(iii)
                  
                  
                  447,061
                  
                  
                  285,531Related
                      Parties
                  
                  
                  -
                  
                  
                  566Others
                  
                  
                  12,542
                  
                  
                  27,1272,385,955
                  
                  
                  2,402,624Long-term
                      liabilities:Franchising
                      income received(ii)
                  
                  
                  1,155,162
                  
                  
                  1,275,638$
                  3,541,117
                  
                  $
                  3,678,262
 
 Notes:
  (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
                      balancerepresents
                      subscription fees received in advance for subscription of magazines
                      published by the Group.
  -
                18
                -
  **NOTE
            14 – RETIREMENT PLANS**
 
 The
            Group
            maintains tax-qualified defined contribution and benefit retirement plans
            for
            its employees in accordance with the ROC Labor Standard Law in Taiwan.
            As a
            result, the Group currently maintains two different retirement plans
            with
            contribution and benefit calculation formulae. On July 1, 2005, the Bureau
            of
            National Health Insurance issued new labor retirement pension regulations
            in
            Taiwan. The Group has a new defined contribution retirement plan (the
“New
            Plan”) covering all regular employees of KCIT. KCIT contributes monthly amounts
            equivalent to 6% of the employees’ base salaries and wages to the Bureau of
            National Health Insurance. The Group still maintains the benefit retirement
            plan
            (the “Old Plan”) which commenced in September 2003, which only applies to
            the regular employees of KCIT who were employed prior to June 2005. KCIT
            contributes monthly amounts equivalent to 2% of the employees’ total salaries
            and wages to an independent retirement trust fund deposited with the
            Central
            Trust of China in accordance with the ROC Labor Standards Law. The retirement
            fund is not included in the Group’s financial statements. Net periodic pension
            cost is based on annual actuarial valuations which use the projected
            unit credit
            cost method of calculation and is charged to the consolidated statement
            of
            operations on a systematic basis over the average remaining service lives
            of
            current employees. Under the Old Plan, the employees are entitled to
            receive
            retirement benefits upon retirement in the manner stipulated by the ROC
            Labor
            Standard Law. The benefits under the Old Plan are based on various factors
            such
            as years of service and the final base salary preceding retirement.
 
 The
            net
            periodic pension cost is as follows:
 **Nine months ended September 30,****2007**
                          
                          **2006**(Unaudited)Service
                              cost
                          
                          $
                          —
                          
                          $
                          —Interest
                              cost
                          
                          
                          9,162
                          
                          
                          9,204Expected
                              return on assets
                          
                          
                          (1,818
                          )
                          
                          (1,827
                          )Amortization
                              of unrecognized loss
                          
                          
                          2,217
                          
                          
                          2,227Net
                              periodic pension cost
                          
                          $
                          9,561
                          
                          $
                          9,604
 
 **NOTE** **15 –
            GEOGRAPHIC SEGMENTS**
  The
            Group
            is principally engaged in the business of child educational teaching
            materials
            and related services focusing on English language in Taiwan and the PRC.
            Accordingly, the Group has two reportable geographic segments: Taiwan
            and the
            PRC. The Group evaluates the performance of each geographic segment based
            on its
            net income or loss. The Group also accounts for inter-segment sales as
            if the
            sales were made to third parties. Information concerning the operations
            in these
            geographic segments is as follows:
  -
                19
                -
  Taiwan
                  
                  The PRC
                  
                  TotalNine months
                    ended
                    September 30,
                    2007
                  
                  Nine months
                    ended
                    September 30,
                    2006
                  
                  Nine months
                    ended
                    September 30,
                    2007
                  
                  Nine months
                    ended
                    September 30,
                    2006
                  
                  Nine months
                    ended
                    September 30,
                    2007
                  
                  Nine months
                    ended
                    September 30,
                    2006RevenueExternal
                      revenue
                  
                  $
                  5,287,849
                  
                  $
                  5,716,524
                  
                  $
                  3,944,216
                  
                  $
                  2,895,355
                  
                  $
                  9,232,065
                  
                  $
                  8,611,879Inter-segment
                      revenue
                  
                  
                  —
                  
                  
                  (562
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (562
                  )$
                  5,287,849
                  
                  $
                  5,715,962
                  
                  $
                  3,944,216
                  
                  $
                  2,895,355
                  
                  $
                  9,232,065
                  
                  $
                  8,611,317Profit
                      (loss) fromOperations
                  
                  $
                  946,474
                  
                  $
                  666,032
                  
                  $
                  973,485
                  
                  $
                  682,815
                  
                  $
                  1,919,960
                  
                  $
                  1,348,847Capital
                      expenditures
                  
                  $
                  35,359
                  
                  $
                  32,863
                  
                  $
                  41,408
                  
                  $
                  16,077
                  
                  $
                  76,767
                  
                  $
                  48,940
  September 30,
                    2007
                  
                  December 31,
                    2006
                  
                  September 30,
                    2007
                  
                  December 31,
                    2006
                  
                  September 30,
                    2007
                  
                  December 31,
                    2006Total
                      assets
                  
                  $
                  7,459,199
                  
                  $
                  7,409,359
                  
                  $
                  4,009,428
                  
                  $
                  1,960,446
                  
                  $
                  11,468,627
                  
                  $
                  9,369,805
  Corporate
                    
                    Eliminations
                    
                    ConsolidatedNine months
                      ended
                      September 30,
                      2007
                    
                    Nine months
                      ended
                      September 30,
                      2006
                    
                    Nine months
                      ended
                      September 30,
                      2007
                    
                    Nine months
                      ended
                      September 30,
                      2006
                    
                    Nine months
                      ended
                      September 30,
                      2007
                    
                    Nine months
                      ended
                      September 30,
                      2006RevenueExternal
                        revenue
                    
                    $
                    —
                    
                    $
                    —
                    
                    $
                    —
                    
                    $
                    —
                    
                    $
                    9,232,065
                    
                    $
                    8,611,879Inter-segment
                        revenue
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    (562
                    )$
                    —
                    
                    $
                    —
                    
                    $
                    —
                    
                    $
                    —
                    
                    $
                    9,232,065
                    
                    $
                    8,611,317Profit
                        (loss) fromOperations
                    
                    $
                    (129,362
                    )
                    $
                    (202,407
                    )
                    $
                    —
                    
                    $
                    —
                    
                    $
                    1,790,598
                    
                    $
                    1,146,440Capital
                        expenditures
                    
                    $
                    —
                    
                    $
                    —
                    
                    $
                    —
                    
                    $
                    —
                    
                    $
                    76,767
                    
                    $
                    48,940
  September 30,
                      2007
                    
                    December 31,
                      2006
                    
                    September 30,
                      2007
                    
                    December 31,
                      2006
                    
                    September 30,
                      2007
                    
                    December 31,
                      2006Total
                        assets
                    
                    $
                    3,130
                    
                    $
                    359,772
                    
                    $
                    (169,033
                    )
                    $
                    (356,354
                    )
                    $
                    11,302,724
                    
                    $
                    9,373,223
 
 **NOTE
            16 –** **COMMITMENT** **AND CONTINGENCIES**
  **A.
            Lease Commitment**
 
 As
            of
            September 30, 2007, the Company’s future minimum lease payments under a
            non-cancelable operating lease expiring in excess of one year are as
            follows:
 **Years
                        ending December 31,**2008
                    
                    $
                    193,7602009
                    
                    
                    53,4432010
                    
                    
                    —2011
                    
                    
                    —2012
                    
                    
                    —$
                    247,203






-
          20
          -




**B.
      Going concern**





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





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




This
      report contains certain forward-looking statements and information relating
      to
      us that are based on the beliefs and assumptions made by our Management as
      well
      as information currently available to the Management. When used in this
      document, the words “anticipate,” “believe,” “estimate,” and “expect” and
      similar expressions, are intended to identify forward-looking statements. Such
      statements reflect our current views with respect to future events and are
      subject to certain risks, uncertainties and assumptions. If one or more of
      these
      risks or uncertainties materialize, or if underlying assumptions prove
      incorrect, actual results may vary materially from those described herein as
      anticipated, believed, estimated or expected. Certain of these risks and
      uncertainties are discussed under the caption “Factors That May Affect Our
      Future Results And Financial Condition” contained herein and other factors
      disclosed in our filings with the SEC including, but not limited to our Annual
      Report on Form 10-K/A for the year ended December 31, 2006. We do not
      intend to update these forward-looking statements.





**OVERVIEW**




We
      are engaged in the business of children’s education, focusing on the publication
      and sale of kindergarten language school and primary school teaching materials
      and magazines. We also provide management and consulting services to our
      franchised kindergarten and language schools. Our teaching materials include
      books, audio tapes, DVD, VCD and compact discs. A major portion of our
      educational materials focuses on English language education. We also sell
      educational tools and equipment that are complementary to our business. Our
      major business originally started in Taiwan. In 2001, we started to expand
      our
      business in the PRC. We officially launched our operations in Shanghai in
      April 2002. As in Taiwan, we offer advanced teaching materials and tools,
      and monthly and bi-weekly magazines to provide children ranging from 2 to 12
      years of age a chance to learn English language and computer skills, and to
      provide a preschool education program.





**CRITICAL
      ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES**





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





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




-
          21
          -




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





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





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





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





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





As
      of September 30, 2007, the balance of our amortizable intangible assets was
      $409,463, including franchise-related intangible assets of $257,874 and
      copyrights of $151,589. The amortizable intangible assets are amortized on
      a
      straight-line basis over estimated useful lives of ten years. In
      determining the useful lives and recoverability of the intangibles, assumptions
      must be made regarding estimated future cash flows and other factors to
      determine the fair value of the assets, which may not represent the true fair
      value. If these estimates or their related assumptions change in the future,
      there may be significant impact on our results of operations in the period
      of
      the change incurred.





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




-
          22
          -


**RESULTS
      OF OPERATIONS**





**Three
      Months Ended September 30, 2007 Compared to Three Months Ended September 30,
      2006**





***Total
      Net Operating Revenue*** **.** Total
      net
      operating revenue consists of sales of goods, franchising income and other
      operating revenue. Total net operating revenues increased by $395,348, or 11%,
      to $4,107,952 for the three months ended September 30, 2007 from $3,712,604
      for
      the three months ended September 30, 2006. This was comprised of increase in
      other operating revenue of $312,340, increase in sales of goods of $362,559,
      and
      decrease in franchising income of $279,551.





***Sales
      of goods*** **.** The
      increase in sales of goods, from $2,573,101 for the three months ended September
      30, 2006 to $2,935,660 for the three months ended September 30, 2007, a 14%
      increase, was mainly due to increases in sales in our Shanghai
      operations.





***Franchising
      income*** **.** The
      decrease in franchising income, from $831,805 for the three months ended
      September 30, 2006 to $552,254 for the three months ended September 30, 2007,
      a
      34% increase, was mainly due to the decrease in franchising income in Taiwan
      operations.





***Other
      operating revenue*** **.** Our
      other
      operating revenues represent revenues from other activities and services such
      as
      training of teachers, arranging for personal English language tutors, organizing
      field trips and educational fairs, fees for designing the school layout of
      our
      franchised schools, and tuition from schools controlled by us. Other operating
      revenue increased by $312,340, or 102%, to $620,038 for the three months ended
      September 30, 2007 from $307,698 for the three months ended September 30, 2006,
      mainly due to the increase in Shanghai operations.





***Gross
      Profit*** **.** Gross
      profit increased by $257,030, or 12%, to $2,372,030 for the three months ended
      September 30, 2007 from $2,115,000 for the three months ended September 30,
      2006. The gross profit increase was mainly due to the increase in
      revenue.





***Total
      Operating Expenses*** **.** Total
      operating expenses increased by $83,899, or 6%, to $1,466,075 for the three
      months ended September 30, 2007 from $1,382,176 for the three months ended
      September 30, 2006, principally due to increases in daily expenditures in our
      operations.





***Other
      Operating Expenses*** **.** Other
      operating expenses increased by $83,353, or 6%, to $1,463,233 for the three
      months ended September 30, 2007 from $1,379,880 for the three months ended
      September 30, 2006, principally due to increases in expenditures to fund daily
      operations.





***Interest
      Expenses, Net*** **.** Net
      interest expenses decreased by $13,471, or 43%, to $18,161 for the three months
      ended September 30, 2007 from $31,632 for the three months ended September
      30,
      2006, primarily due to the decrease of the borrowings during the three months
      ended September 30, 2007 compared to the three months ended September 30, 2006.





***Provision
      for Taxes*** **.** Provision
      for taxes for the three months ended September 30, 2007 and 2006 were $150,545
      and $62,552, respectively. These provisions for income taxes relate to income
      taxes resulting from our Taiwan operations.




-
          23
          -




**Nine
      Months Ended September 30, 2007 compared to Nine Months Ended September 30,
      2006**





***Total
      Net Operating Revenue*** **.** Total
      net
      operating revenue consists of sales of goods, franchising income and other
      operating revenue. Total net operating revenues increased by $620,748, or 7%,
      to
      $9,232,065 for the nine months ended September 30, 2007 from $8,611,317 for
      the
      nine months ended September 30, 2006. This was comprised of the increase in
      sales of goods of $529,378, an increase in other operating revenues of $475,431,
      and a decrease in franchising income of $384,061.





***Sales
      of goods*** **.** The
      increase in sales of goods by $529,378, or 9%, from $6,102,630 for the nine
      months ended September 30, 2006 to $6,632,008 for the nine months ended
      September 30, 2007, was mainly due to the increase in net sales of goods from
      our Shanghai operations.





***Franchising
      income*** **.** The
      decrease in franchising income, from $2,026,493 for the nine months ended
      September 30, 2006 to $1,642,432 for the nine months ended September 30, 2007,
      a
      19% decrease, was mainly due to the decrease in franchising income from our
      operations.





***Other
      operating revenue*** **.** Our
      other
      operating revenues represent revenues from other activities and services such
      as
      training of teachers, arranging for personal English language tutors, organizing
      field trips and educational fairs, fees for designing the school layout of
      our
      franchised schools and tuition from schools controlled by us. Other operating
      revenue increased by $475,431, or 99%, to $957,625 for the nine months ended
      September 30, 2007 from $482,194 for the nine months ended September 30, 2006.
      The increase was mainly due to increase in revenues from our Shanghai
      operations.





***Gross
      Profit*** **.** Gross
      profit increased by $266,820, or 5%, to $5,657,364 for the nine months ended
      September 30, 2007 from $5,390,544 for the nine months ended September 30,
      2006.
      The increase in Gross Profit was principally due to the increase in our
      operating revenue.





***Total
      Operating Expenses*** **.** Total
      operating expenses decreased by $377,338, or 9%, to $3,866,766 for the nine
      months ended September 30, 2007, from $4,224,520 for the nine months ended
      September 30, 2006. The decrease in total operating expenses was principally
      due
      to decreases in bad debt allowance in Taiwan operations.





***Other
      Operating Expenses*** **.** Other
      operating expenses decreased by $378,769, or 9%, to $3,845,751 for the nine
      months ended September 30, 2007, from $4,224,520 for the nine months ended
      September 30, 2006, principally due to decreases in reserved for additional
      bad
      debt allowance in Taiwan operations.





***Interest
      Expenses, Net*** **.** Net
      interest expenses decreased by $90,979, or 60%, to $60,778 for the nine months
      ended September 30, 2007, from $151,757 for the nine months ended September
      30,
      2006, primarily due to the decrease of borrowings during the nine months ended
      September 30, 2007 compared to the nine months ended September 30, 2006. (Please
      refer to Note 12 of Condensed Consolidated Financial Statements for more
      information.)





***Other
      Non-operating Income, Net*** **.** Net
      other non-operating income increased by $268,184, to $347,078 for the nine
      months ended September 30, 2007, from $78,894 for the nine months ended
      September 30, 2006. The increases in net other non-operating income was
      principally due to gains in the value of recovered inventory of
      $360,118.





***Provision
      for Taxes*** **.** Provision
      for taxes for the nine months ended September 30, 2007 and 2006 were $343,556
      and $249,461, respectively. These provisions for income taxes relate to income
      taxes resulting from our operations in Taiwan.




-
          24
          -




**LIQUIDITY
      AND CAPITAL RESOURCES**





As
      of September 30, 2007, our principal sources of liquidity included cash and
      bank
      balances of $1,001,231 which decreased from $1,419,873 at December 31,
      2006. The decrease was mainly due to decreased expenditures to fund daily
      operations.





We
      have
      aggressively expanded business in the PRC. Shanghai operations have turned
      profitable in 2006, and the Group has turned profitable in the first nine months
      of 2007. We anticipate continued expansion of the market for our learning
      materials and an increase in the number of franchise schools. Furthermore,
      we
      foresee better utilization of capital and funds as we identify and implement
      alternatives for restructuring and refinancing in order to increase our profit
      margin. We began to set up schools controlled by us in 2007. Based on our
      internal historical records and growing market demand, Management believes
      that
      by directly operating our schools we can increase our profit margin. In 2007,
      Management expects that in the initial stage of the direct school operating
      business, we need to invest additional funds to acquire control of schools
      that
      will become profitable in 2008. Because of the rapid expansion in Shanghai,
      we
      expect that additional funds will be required in the near future to facilitate
      the expansion plans for our Shanghai operations in 2008. Management expects
      that
      the Group still requires approximately US$1 million for the next twelve months
      to invest in business development. We will rely on short-term loans from
      financial institutions as a source for additional funding. As discussed in
      Note
      12 of Condensed Consolidated Financial Statements, the majority of the Group’s
      existing loans were guaranteed by two of our directors who have expressed their
      willingness to continue to support us until other sources of funds have been
      obtained. Management believes that, with continuous growth of sales in the
      PRC,
      the existing directors’ support, and the new bank facilities, we will have
      sufficient funds for operations over the foreseeable future. Management expects
      that the Group will be able to repay the loans from our directors by the end
      of
      2007.





Net
      cash provided by operating activities was $1,775,753 and $2,126,847 during
      the
      nine months ended September 30, 2007 and 2006, respectively. The $351,094
      difference was primarily attributed to (i) reversal of allowance for loss on
      inventory obsolescence and slow-moving items of $360,118 during the nine months
      ended September 30, 2007, compared to provision of $57,204 during the nine
      months ended September 30, 2006, (ii) a decrease of accrued expense of $197,992
      during the nine months ended September 30, 2007, compared to an increase of
      $153,224 during the nine months ended September 30, 2006, and (iii) decrease
      of
      receipts in advance of $125,205 during the nine months ended September 30,
      2007,
      compared to an increase of $566,707 during the nine months ended September
      30,
      2006.





Net
      cash used in investing activities was $1,988,515 during the nine months ended
      September 30, 2007 and net cash provided by investing activities was $679,970
      during the nine months ended September 30, 2006. The $2,668,185 difference
      was
      primarily attributable to acquisition and a decrease of pledged notes receivable
      in the amount of $433,690 during the nine months ended September 30, 2007,
      compared to an increase of $695,875 during the nine months ended September
      30,
      2006.





Net
      cash provided by financing activities during the nine months ended September
      30,
      2007 amounted to an increase of $74,813, as compared to a decrease of $1,814,965
      during the nine months ended September 30, 2006. The $1,889,778 difference
      was
      primarily attributable to (i) an increase of $900,814 in cash provided by bank
      borrowings, (ii) a decrease of $1,022,414 in cash used in repayment of bank
      borrowings, and (iii) an increase of $38,198 in cash used to repay loans from
      related parties.





**Off-Balance
      Sheet Arrangements**





As
      of September 30, 2007, we did not engage in any off-balance sheet arrangements
      as defined in Item 303(a)(4) of Regulation S-K promulgated by the SEC
      under the Securities Exchange Act of 1934.




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**Bank
      Borrowing**





One
      of our financing sources is bank borrowings. As of September 30, 2007 and 2006,
      the balances of bank borrowings, including current and non-current portions,
      were $2,437,302 and $1,904,828, respectively.





**Pension
      Benefit**





As
      of July 1, 2005, the Group maintains two different retirement plans, according
      to the ROC Labor Standard Law, a non-contributory and funded defined
      contribution retirement plan (the “New Plan”) covering all regular employees of
      KCIT, our subsidiary in Taiwan, and the benefit retirement plan (the “Old Plan”)
      which commenced in September 2003, and only applies to the regular employees
      of
      KCIT who were employed prior to June 2005. (See Note 14 of Condensed
      Consolidated Financial Statements.) The benefits under both plans expected
      to be
      paid in each of the next five fiscal years, and in the aggregate for the five
      fiscal years thereafter are $0 and $16,735, respectively. We also make defined
      contributions to a retirement benefits plan for our employees in the PRC in
      accordance with local regulations. The contributions made by us for PRC
      employees for the nine months ended September 30, 2007 and 2006 amounted to
      $39,611, and $26,326, respectively.




**NEW
      ACCOUNTING PRONOUNCEMENTS**





In
      July 2006, the Financial Accounting Standards Board (the “FASB”) released
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an
      Interpretation of FASB Statement 109.” Effective for fiscal years beginning
      after December 15, 2006, this interpretation provides guidance on the financial
      statement recognition and measurement for income tax positions that we have
      taken or expect to take in our income tax returns. It also provides related
      guidance on derecognition, classification, interest and penalties, accounting
      in
      interim periods, disclosure, and transition. We have adopted this standard
      as of
      January 1, 2007. The adoption did not have a significant impact on our financial
      statements.




In
      September 2006, the FASB released SFAS No. 157, “Fair Value Measurements” which
      defines fair value, establishes a framework for measuring fair value in GAAP,
      and enhances disclosures about fair value measurements. This standard applies
      when other accounting pronouncements require fair value measurements; it does
      not require new fair value measurements. SFAS No. 157 is effective for financial
      statements issued for fiscal years beginning after November 15, 2007, and
      interim periods within those years. We are currently evaluating the effect
      of
      the guidance contained in this standard and do not expect the implementation
      to
      have a material impact on our financial statements.




In
      February 2007, the FASB released SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities.” The standard is effective for
      fiscal years beginning after November 15, 2007, with early adoption permitted
      as
      of the beginning of a fiscal year that begins on or before the aforementioned
      date. We did not elect to adopt SFAS No. 159 early.





**Non-GAAP
      Financial Measures**





None.





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





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




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





***Interest
      rate exposure***





We
      are
      exposed to fluctuating interest rates related to variable rate bank borrowings.
      In analyzing the effect of interest rate fluctuations based on the average
      balances of our outstanding bank borrowings for fiscal year 2006, we have
      projected that, if interest rates were to increase by 1 percent, the result
      would be an annual increase in our interest expense of $18,991. This analysis
      does not take into consideration the effect of changes in the level of overall
      economic activity on interest rate fluctuations.





***Foreign
      currency exposure***





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





**ITEM
      4.****CONTROLS
      AND PROCEDURES**




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





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





Based
      on
      deficiencies noted by our auditors, problems discovered relating to misuse
      of
      company funds by a company officer, and other issues noted in our Management’s
      evaluation, we conclude that as of September 30, 2007 our disclosure controls
      and procedures were ineffective. We are taking steps to improve our disclosure
      controls and procedures, instituting a new Enterprise Resource Planning (“ERP”)
      system and engaging an outside accounting firm to advise the Company with
      respect to setting up internal auditing and other controls and procedures.
      The
      ERP system was launched into its trial run period beginning in 2007 and our
      Management evaluated that it will be extended to the fourth fiscal quarter
      2007
      to verify its functionality. The old system currently in use by the Company
      will
      be phased out after the new ERP completes its trial run period. During the
      phase
      out period, certain functions and operations will run in parallel on the old
      and
      new systems, data will be migrated to the new ERP system, and staff will be
      trained in its use.




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




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





We
      recognize that the internal controls and procedures adopted by the Company
      were
      inadequate and gave rise to misappropriation of funds as disclosed in our Form
      8-K filed with the SEC on June 23, 2006. During the third quarter of 2007 we
      have continued to make changes that have materially affected, or are reasonably
      likely to affect, our internal control over financial reporting in a positive
      way. Among other
      improvements, we began
      implementing a comprehensive ERP system that would improve the Company’s
      internal controls. The ERP system is currently at a trial run stage. The
      required software and hardware input have been fully installed and the system
      is
      now running to detect bugs that may reside in the system. The system is expected
      to be fully operational in first fiscal quarter of 2008. The Company believes
      that full implementation of its new ERP System will will perform the following
      functions that will improve 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.





In
      addition to implementing a new ERP system, the following additional procedures
      have been implemented to improve internal control over financial
      reporting:





·
            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, a copy of
                the
                relevant invoice, or a 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, and finally, approval 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.




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





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




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





We
      have no material pending legal proceedings.





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





In
      addition to the other information set forth in this report, you should carefully
      consider the factors discussed in Part 1, “Item 1A. Risk Factors” in
      our Annual Report on Form 10-K/A for the year ended December 31, 2006,
      which could materially affect our business, financial condition or future
      results. We caution the reader that these risk factors may not be exhaustive.
      We
      operate in a continually changing business environment and new risk factors
      emerge from time to time. Management cannot predict such new risk factors,
      nor
      can we assess the impact, if any, of such new risk factors on our business
      or
      the extent to which any factor, or combination of factors, may impact our
      business. There have not been any material changes during the quarter ended
      September 30, 2007 from the risk factors disclosed in the above-mentioned
      Form 10-K/A for the year ended December 31, 2006, filed with the SEC on
      November 13, 2007.





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




None.





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




None.





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




None.





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




None.





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





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




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          29
          -





**SIGNATURES**


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








Dated:
      November 12 ,
      2007


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




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