UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xþQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: ~~September 30, 2004~~

March 31, 2005
or

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 333-61286

KID CASTLE EDUCATIONAL CORPORATION

(Exact name of Registrant as specified in its charter)


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

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

Registrant’s telephone number, including area code: 011-886-22218 5996

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered
Common Stock		N/A

Securities registered under Section 12(g) of the Act:

Title of class

None

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 last ninety days.

Yesxþ Noo

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yeso Noxþ

As of ~~November~~May 10, ~~2004,~~2005, there were 18,999,703 shares of the Registrant’s common stock outstanding.

Documents incorporated by reference: None.

Kid Castle Educational Corporation

Condensed Consolidated Balance Sheets

(Expressed in US Dollars)


	September 30,		December 31,		March 31,		December 31,
	2004		2003		2005		2004
	(Unaudited)				(Unaudited)
ASSETS

Current assets
Cash and bank balances	$	438,694	$	1,273,723	$	173,169	$	213,564
Bank fixed deposits – pledged (Note 12)		360,426		204,889		354,416		294,331
Notes and accounts receivable, net (Notes 5 and 10)		2,712,030		2,334,385		2,903,221		2,401,904
Inventories, net (Note 6)		2,547,764		1,991,951		2,983,890		2,979,738
Other receivables (Notes 7 and 10)		361,683		524,974		420,351		337,848
Prepayments and other current assets		168,398		122,292
Prepayments to related party (Note 10)		265,559		—
Prepayments and other current assets (Note 10)						440,200		478,752
Pledged notes receivable (Note 12)		957,385		1,062,406		1,220,482		1,218,356
Deferred income tax assets		535,200		615,286		256,105		218,574


Total current assets		8,347,139		8,129,906		8,751,834		8,143,067
Deferred income tax assets		136,374		120,335		167,093		170,477
Prepaid long-term investments		—		60,323
Long-term investments (Note 8)		146,432		114,200
Prepaid interest in associates						—		24,165
Interest in associates (Note 8)						137,213		99,467
Property and equipment, net		2,059,880		1,993,849		2,173,300		2,188,092
Intangible assets, net of amortization (Note 11)		874,156		989,865		856,147		894,419
Long-term notes receivable		361,196		505,091		224,185		240,971
Pledged notes receivable (Note 12)		248,101		444,302		573,832		407,149
Other assets		306,115		184,345		570,168		613,617


Total assets	$	12,479,393	$	12,542,216	$	13,453,772	$	12,781,424


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Bank borrowings – short-term and maturing within one year (Note 12)	$	1,865,412	$	1,317,690
Notes and accounts payable		1,175,404		1,072,584
Accounts payable to related party (Note 10)		607,310		—
Borrowings – short-term and maturing within one year (Note 12)					$	2,443,026	$	2,632,982
Notes and accounts payable (Note 10)						1,574,181		1,506,543
Accrued expenses		704,675		805,556		855,018		703,407
Amounts due to officers (Note 10)		—		572,160
Other payables		322,919		266,276		368,333		283,080
Deposits received		535,970		421,734		668,432		498,266
Receipts in advance (Note 13)		3,058,877		2,924,636		2,831,244		2,996,558
Income tax payable		86,722		44,067
Income tax payable (Note 9)						213,196		97,142
Obligation under capital leases due within one year		16,291		32,468		27,572		8,659


Total current liabilities		8,373,580		7,457,171		8,981,002		8,726,637
Bank borrowings maturing after one year (Note 12)		1,467,124		1,166,781

Borrowings maturing after one year (Note 12)						1,877,956		1,651,825
Receipts in advance (Note 13)		971,247		1,467,025		1,421,803		1,124,809
Obligation under capital leases		—		5,534		27,280		—
Deposits received		574,581		603,635		594,136		689,530
Accrued pension liabilities (Note 14)		144,839		134,073		190,820		160,907


Total liabilities		11,531,371		10,834,219		13,092,997		12,353,708

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Kid Castle Educational Corporation

Condensed Consolidated Statements of Operations

(Expressed in US Dollars)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three months ended March 31,
	2004			2003			2004			2003			2005			2004
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Operating Revenue
Sales of goods	$	2,444,267		$	2,488,914		$	5,661,046		$	5,476,362		$	2,375,155		$	2,029,853
Franchising income		622,244			473,337			1,814,984			1,320,286			597,925			528,132
Other operating revenue		185,932			126,295			389,846			261,814			149,912			52,353


Total net operating revenue		3,252,443			3,088,546			7,865,876			7,058,462			3,122,992			2,610,338


Operating costs
Cost of goods sold		(1,101,089	)		(912,418	)		(2,426,012	)		(1,982,501	)		(927,731	)		(674,505	)
Cost of franchising		(128,476	)		(139,913	)		(373,980	)		(409,307	)		(113,613	)		(132,101	)
Other operating costs		(171,921	)		(116,050	)		(307,660	)		(220,885	)		(74,196	)		(57,195	)


Total operating costs		(1,401,486	)		(1,168,381	)		(3,107,652	)		(2,612,693	)		(1,115,540	)		(863,801	)


Gross profit		1,850,957			1,920,165			4,758,224			4,445,769			2,007,452			1,746,537

Advertising costs		(72	)		(98,483	)		(448,971	)		(297,230	)		(33,363	)		(126,642	)

Other operating expenses		(1,525,248	)		(1,764,537	)		(4,960,945	)		(4,887,230	)		(1,785,500	)		(2,016,424	)


Income (loss) from operations		325,637			57,145			(651,692	)		(738,691	)		188,589			(396,529	)

Interest expenses, net		(35,956	)		(72,197	)		(100,892	)		(226,669	)		(59,253	)		(21,765	)
Share of profit (loss) of an investment		(20,816	)		—			10,609			(12,750	)
Loss on write-off of an investment		—			—			—			(132,842	)
Other non-operating income (loss), net		(10,788	)		69,997			70,982			145,000
Income (loss) before income taxes		258,077			54,945			(670,993	)		(965,952	)

Share of loss of investments														12,483			46,967

Other non-operating (loss) income, net														(48,939	)		43,673


Income (loss) before income taxes and minority interest income														92,880			(327,654	)

Provision for taxes		(110,345	)		(148,253	)		(111,567	)		(330,934	)		(143,453	)		—
Net income (loss) from operations		147,732			(93,308	)		(782,560	)		(1,296,886	)


Loss before minority interest income														(50,573	)		(327,654	)

Minority interest income		(2,611	)		—			(2,611	)		—			143			—

Net income (loss)	$	145,121		$	(93,308	)	$	(785,171	)	$	(1,296,886	)

Earnings (loss) per share – basic and diluted	$	0.008		$	(0.005	)	$	(0.041	)	$	(0.080	)
Net loss													$	(50,430	)	$	(327,654	)

Weighted-average shares used to compute earnings (loss) per share – basic and diluted		18,999,703			18,190,869			18,999,703			16,250,166

Loss per share – basic and diluted													$	(0.003	)	$	(0.017	)


Weighted-average shares used to compute (loss) earnings per share – basic and diluted														18,999,703			18,999,703

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Kid Castle Educational Corporation

Condensed Consolidated Statements of Stockholders’ Equity

(Expressed in US Dollars)

Accumulated
Common Stock Additional other
Number of paid-in Legal Accumulated comprehensive
shares
Amount
capital
reserve
deficit
loss
Total
Balance, December 31, 2002 15,074,329 $ 4,654,880 $ 194,021 $ 65,320 $ (4,116,891 ) $ (160,764 ) $ 636,566
Net loss for 2003 — — — — (1,940,591 ) — (1,940,591 )
Cumulative translation adjustment — — — — — (2,406 ) (2,406 )

Comprehensive loss (1,942,997 )

Issuance of common stock for cash 3,592,040 2,514,428 — — — — 2,514,428
Repayment of a liability by issuance of common stock 333,334 500,000 — — — — 500,000

Balance, December 31, 2003 18,999,703 7,669,308 194,021 65,320 (6,057,482 ) (163,170 ) 1,707,997
Net loss for the nine months ended September 30, 2004 (Unaudited) — — — — (785,171 ) — (785,171 )
Cumulative translation adjustment (Unaudited) — — — — — (5,879 ) (5,879 )

Comprehensive loss (Unaudited) (791,050 )

Balance, September 30, 2004 (Unaudited) 18,999,703 $ 7,669,308 $ 194,021 $ 65,320 $ (6,842,653 ) $ (169,049 ) $ 916,947


	Common Stock
												Accumulated
					Additional							other
	Number of				paid-in		Legal		Accumulated			comprehensive
	shares		Amount		capital		reserve		deficit			loss			Total

Balance, December 31, 2003		18,999,703		7,669,308		194,021		65,320		(6,057,482	)		(163,170	)		1,707,997

Net loss for 2004		—		—		—		—		(1,254,592	)		—			(1,254,592	)
Cumulative translation adjustment		—		—		—		—		—			(59,480	)		(59,480	)

Comprehensive loss																(1,314,072	)



Balance, December 31, 2004		18,999,703	$	7,669,308	$	194,021	$	65,320	$	(7,312,074	)	$	(222,650	)	$	393,925
Net loss for the three months ended March 31, 2005 (Unaudited)		—		—		—		—		(50,430	)		—			(50,430	)
Cumulative translation adjustment (Unaudited)		—		—		—		—		—			(16,670	)		(16,670	)

Comprehensive loss (Unaudited)																(67,100	)



Balance, March 31, 2005 (Unaudited)		18,999,703	$	7,669,308	$	194,021	$	65,320	$	(7,362,504	)	$	(239,320	)	$	326,825

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

-6-

Kid Castle Educational Corporation

Condensed Consolidated Statements of Cash Flows

(Expressed in US Dollars)


	Nine months ended September 30,						Three months ended March 31,
	2004			2003			2005			2004
	(Unaudited)						(Unaudited)
Cash flows from operating activities
Net loss	$	(785,171	)	$	(1,296,886	)	$	(50,430	)	$	(327,654	)
Adjustments to reconcile net loss to net cash used in operating activities
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation of property and equipment		137,746			133,094			66,681			52,266
Amortization of intangible assets		120,515			117,271			42,835			40,509
Provision of allowance for sales returns		56,597			77,077
Allowance for sales returns								95,267			71,890
Allowance for doubtful debts		115,940			93,514			284,537			156,221
Provision for (reversal of) loss on inventory obsolescence and slow-moving items		113,573			(163,831	)
Share of (gain) loss of investments		(10,609	)		12,750
Provision for (reversal of) allowance for loss on inventory obsolescence and slow-moving items								6,452			(69,180	)
Gain on disposal of property and equipment								(9,010	)		—
Minority interest income		2,611			—			(143	)		—
Loss on write-off of an investment		—			132,842
Share of gain of investments								(12,483	)		(46,967	)
(Increase)/decrease in:
Notes and accounts receivable		(482,415	)		(1,939,891	)		(775,674	)		192,461
Inventories		(403,744	)		(144,037	)		4,514			204,320
Other receivables		(99,282	)		(301,096	)		(129,129	)		72,016
Prepayments and other current assets		(250,194	)		(223,779	)		41,002			(6,073	)
Deferred income tax assets		67,378			330,283			(32,194	)		3,314
Other assets		(122,453	)		(18,505	)		46,591			(31,084	)
Increase/(decrease) in:
Notes and accounts payable		572,556			(59,094	)		60,036			107,712
Accrued expenses		(104,349	)		(22,668	)		148,876			(46,463	)
Other payables		(88,561	)		322,151			124,933			(76,311	)
Receipts in advance		349,247			613,267			(147,307	)		(261,384	)
Income taxes payable		42,967			—			115,635			(3,314	)
Deposits received		129,455			258,249			67,207			29,413
Accrued pension liabilities		10,406			43,893			29,115			(16,266	)

Net cash used in operating activities		(627,787	)		(2,035,396	)

Net cash provided by (used in) operating activities								(22,689	)		45,426


Cash flows from investing activities
Purchase of property and equipment		(197,389	)		(172,562	)		(104,562	)		—
Acquisition, net of cash acquired		79,135			—
Proceeds from disposal of property, plant and equipment		—			13,416
Prepayment of long-term investments		—			(58,828	)
Amount due from stockholder/director		—			122,973
Acquisition of long-term investments		(103,563	)		—
Proceeds from disposal of property and equipment								72,795			—
Bank fixed deposits – pledged		(156,518	)		(8,719	)		(58,629	)		(135,818	)
Pledged notes receivable		(77,685	)		38,081			29,990			30,129


Net cash used in investing activities		(456,020	)		(65,639	)		(60,406	)		(105,689	)

Kid Castle Educational Corporation

Condensed Consolidated Statements of Cash Flows – Continued

(Expressed in US Dollars)

Nine months ended September 30,
2004
2003
(Unaudited)
Cash flows from financing activities
Proceeds from bank borrowings $ 2,500,962 $ 2,240,020
Repayment of bank borrowings (1,652,431 ) (1,749,178 )
Repayment of capital leases (22,086 ) (13,409 )
Proceeds from loan from officers/stockholders — 69,017
Repayment of loan from officers/stockholders (581,228 ) —
Issuance of common stock for cash 2,181,578
Stock subscriptions received in advance — 122,850

Net cash provided by financing activities 245,217 2,850,878

Net (decrease) increase in cash and cash equivalents (838,590 ) 749,843
Effect of exchange rate changes on cash and cash equivalents 3,561 27,593
Cash and cash equivalents at beginning of period 1,273,723 125,806

Cash and cash equivalents at end of period $ 438,694 $ 903,242

Supplemental disclosure of cash flow information Interest paid $ 184,155 $ 301,415

Income taxes paid $ 1,419 $ 1,738

Supplemental disclosure of significant non-cash transactions

Capital lease of transportation equipment $ — $ 57,887

Increase (decrease) of notes receivable and pledged notes receivable corresponding to the increase (decrease) in the following accounts:
Other receivables – related parties $ — $ (260,734 )

Deposits received $ (46,996 ) $ —

Other payables $ 17,659 $ —

Receipts in advance $ (712,252 ) $ 83,439

~~-8-~~

~~Kid Castle Educational Corporation~~

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

~~(Expressed in US Dollars)~~

Nine months ended September 30,
2004
2003
(Unaudited)
Increase of long-term investments corresponding to the (decrease) in the following accounts:
Prepaid long-term investments $ (61,202 ) $ —

Other receivables – related parties $ (120,422 ) $ —

Write-off of an associate investment against deferred income
Balance of an associate investment $ — $ 299,752
Balance of deferred income — (166,910 )

Loss on write-off of an associate investment $ — $ 132,842


	Three months ended March 31,
	2005			2004
	(Unaudited)
Cash flows from financing activities
Proceeds from bank borrowings	$	795,968		$	2,829,827
Repayment of bank borrowings		(781,513	)		(2,169,859	)
Proceeds from capital leases		57,089			—
Repayment of capital leases		(10,910	)		(5,662	)
Repayment of loan from officers/stockholders		—			(586,529	)


Net cash provided by financing activities		60,634			67,777


Net increase (decrease) in cash and cash equivalents		(22,461	)		7,514

Effect of exchange rate changes on cash and cash equivalents		(17,934	)		(30,792	)

Cash and cash equivalents at beginning of period		213,564			1,273,723


Cash and cash equivalents at end of period	$	173,169		$	1,250,445


Supplemental disclosure of significant non-cash transactions

Increase (decrease) of notes receivable and pledged notes receivable corresponding to the increase (decrease) in the following accounts:

Deposits received	$	1,586		$	(18,896	)


Other payables	$	6,473		$	(10,112	)


Receipts in advance	$	258,156		$	(123,465	)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

~~-9-~~-8-

Kid Castle Educational Corporation

Notes to Condensed Consolidated Financial Statements

(Expressed in US Dollars)

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

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

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

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

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

In July 2003, KCES entered into an agreement with 21^st Century Publishing House to incorporate Jiangxi 21^st Century Kid Castle Culture Media Co., Ltd (“Culture Media”). It was agreed that KCES and 21^st Century Publishing House each owned 50% ownership and that each party contributed RMB$1 million for the incorporation. On July 2, 2004, KCES acquired additional 40% of ownership in Culture Media from 21^st Century Publishing House. ~~As of September 30, 2004, the Group~~KCES now owns 90% of Culture ~~Media, which became a consolidated entity.~~Media.

~~-10-~~-9-

The Company, Higoal and its subsidiaries 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, 2004~~March 31, 2005 and for the ~~nine months and~~ three months ended ~~September 30,~~March 31, 2005 and 2004 ~~and 2003~~ have been prepared by the Group, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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, ~~2003.~~2004.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

The Group has incurred operating losses since inception and hence, as of ~~September 30, 2004,~~March 31, 2005, the balance of accumulated deficit was ~~$6,842,653.~~$7,362,504. The Group plans to fund its working capital needs by obtaining new credit lines from financial institutions and raising capital through the sale of equity securities. 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 ~~recognised~~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.

~~-11-~~-10-

INVENTORIES

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

PROPERTY AND EQUIPMENT AND DEPRECIATION

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


		Estimated useful life
		(in years)
Land		Indefinite
Buildings		50
Furniture and fixtures		3-10
Transportation equipment		2.5-5
Miscellaneous 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 accounts 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 tax rate expected to be in effect when taxes are actually paid or recovered. Valuation allowances are established when it is considered more likely than not that the deferred tax assets will not be realized.

INTANGIBLE ASSETS

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

COMPREHENSIVE INCOME (LOSS)

~~-12-~~-11-

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.

NET EARNINGS (LOSS) PER COMMON SHARE

The Group computes net earnings (loss) per share in accordance with SFAS No. 128, “Earnings per ~~Share”.~~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~~three months ended ~~September 30,~~March 31, 2005 and 2004, ~~and 2003,~~ 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 January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No.46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46”). FIN 46 clarifies when a company should consolidate in its financial statements the assets, liabilities and activities of a variable interest entity. FIN 46 provides general guidance as to the definition of a variable interest entity and requires a variable interest entity to be consolidated if a company absorbs the majority of the variable interest entity’s expected losses, or is entitled to receive a majority of the variable interest entity’s residual returns, or both. In December 2003, the FASB issued a revised interpretation of FIN 46 (“FIN 46-R”), which supercedes FIN 46 and clarifies and expands current accounting guidance for variable interest entities. FIN 46 and FIN 46-R are effective immediately for all variable interest entities created after January 31, 2003, and for variable interest entities created prior to February 1, 2003, no later than the end of the first reporting period after March 15, 2004. We have performed a review of all entities created prior to and subsequent to January 31, 2003, and determined the adoption of FIN 46 and FIN 46-R did not have a material impact on the Group’s financial reporting and disclosures.

On April 30, 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”(“SFAS No. 149”) SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the Derivatives Implementation Group (“DIG”) process that effectively required amendments to SFAS No. 133, and decisions made in connection with other FASB projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative and characteristics of a derivative that contains financing components. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Group does not expect SFAS No. 149 to have a material impact on the Group’s consolidated financial statements upon adoption.

~~-13-~~

In May 2003, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS No. 150”). SFAS No. 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS No. 150 is effective for all financial instruments created or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Group does not expect SFAS No. 150 to have a material impact on the Group’s consolidated financial statements upon adoption.

In December 2003, the Staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” which supercedes SAB 101, “Revenue Recognition in Financial Statements.” SAB 104’s primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements and revises the SEC’s “Revenue Recognition in Financial Statements Frequently Asked Questions and Answers” that have been codified in Topic 13. SAB 104 was effective immediately and did not have a material impact on the Group’s financial reporting and disclosures.

In December 2003, the FASB revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. It requires additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required information should be provided separately for pension plans and for other postretirement benefit plans. This Statement, which also requires new disclosures for interim periods beginning after December 15, 2003, is effective for fiscal years ended after December 15, 2003. The Group has adopted this Statement since the year ended December 31, 2003.

In September 2004, the EITF delayed the effective date for the recognition and measurement guidance previously discussed under EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-01”) as included in paragraphs 10-20 of the proposed statement. The proposed statement will clarify the meaning of other-than-temporary impairment and its application to investments in debt and equity securities, in particular investments within the scope of FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and investment accounted for under the cost method. The Group is currently evaluating the effect of this proposed statement on its financial position and results of operations.

In November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 151,Inventory Costs, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe the adoption of SFAS No. 151 will have a material impact on our financial statements.

In December 2004, the FASB issued SFAS No. 153,Exchanges of Nonmonetary Assets, which eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not believe the adoption of SFAS No. 153 will have a material impact on our financial statements.

NOTE 5 – NOTES AND ACCOUNTS RECEIVABLE

September 30, December 31,
2004
2003
(Unaudited)
Notes and accounts receivable
– Third parties $ 2,937,632 $ 2,140,073
– Related parties (NOTE 10) 126,325 631,153

Total 3,063,957 2,771,226
Allowance for doubtful accounts and sales returns (351,927 ) (436,841 )

Notes and accounts receivable, net $ 2,712,030 $ 2,334,385

~~-14-~~-12-

(i)

Shanghai Wonderland ~~was established in October 2003 as~~is a distributor of the Group. The Group ~~has~~ loaned Shanghai Wonderland RMB$~~450,000~~500,000 (approximately ~~$54,000)~~$60,000), RMB$250,000 (approximately $30,477), and RMB$500,000 ~~(approximately $60,000)~~each for operations in ~~December 2003~~July 2004, January 2005, and ~~July 2004,~~March 2005, respectively, which are ~~both~~all unsecured and ~~bears~~bear no interest. ~~The Group also paid certain pre-operating costs on behalf of Shanghai Wonderland. Shanghai Wonderland will have to repay the~~These loans ~~of RMB$450,000 and RMB$500,000 on or before January 23, 2005 and August 13, 2005, respectively.~~are due in one year.

NOTE 8 – ~~LONG-TERM INVESTMENTS~~INTEREST IN ASSOCIATES


	September 30,			December 31,			March 31,			December 31,
	2004			2003			2005			2004
	(Unaudited)						(Unaudited)
Jiangxi 21^st Century Kid Castle Culture Media Co., Ltd (“Culture Media”) (Note (i))
21^st Century Kid Castle Language and Education Center (“Education Center”) (Note (i))
Investment cost	$	—		$	120,646		$	91,430		$	90,620
Share of loss		—			(11,326	)		18			(32,752	)

	$	—		$	109,320
							$	91,448		$	57,868
21^st Century Kid Castle Language and Education Center (“Education Center”) (Note (ii))


Tianjin Kid Castle Educational Investment Consulting Co., Ltd. (“Tianjin Consulting”) (Note (ii))
Investment cost	$	90,431		$	30,161		$	85,335		$	60,413
Share of loss		(10,294	)		(25,281	)		(56,890	)		(40,886	)

	$	80,137		$	4,880
							$	28,445		$	19,527
Tianjin Kid Castle Educational Investment Consulting Co., Ltd. (“Tianjin Consulting”) (Note (iii))


Lanbeisi Education &Culture Industrial Co., Ltd (“Lanbeisi”) (Note (iii))
Investment cost	$	60,288		$	—		$	43,886		$	43,498
Share of loss		(25,801	)		—			(26,566	)		(21,426	)

	$	34,487		$	—
							$	17,320		$	22,072
Lanbeisi Education &Culture Industrial Co., Ltd (“Lanbeisi”) (Note (iv))
Investment cost	$	43,407		$	—
Share of loss		(11,599	)		—

	$	31,808		$	—

Total	$	146,432		$	114,200		$	137,213		$	99,467

(i)		~~In July 2003, the Group entered into an agreement with 21~~^st ~~Century Publishing House to incorporate Culture Media. It was agreed that KCES, the Group’s wholly owned PRC subsidiary, and 21~~^st Century Publishing House each had 50% ownership and that each party contributed RMB$1 million for the incorporation. On July 2, 2004, the Group acquired additional 40% of the ownership in Culture Media from 21^st ~~Century Publishing House. As of September 30, 2004, the Group owns 90% of Culture Media, which became a consolidated entity.~~

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

		For the ~~nine~~three months ended ~~September 30,~~March 31, 2005 and 2004, the Group recognized an investment income (loss) accounted for under the equity method in Education Center of ~~$14,987 in the current period’s operation results.~~$33,084 and ($41), respectively.

		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.

		For the ~~nine~~three months ended ~~September 30, 2004,~~March 31, 2005, the Group recognized an investment loss of $4,952, accounted for under the equity method, in ~~Lanbeisi of $11,599.~~Lanbeisi.

NOTE 9 – ~~ACQUISITION~~INCOME TAXES

~~In July 2003, the Group entered into an agreement with 21~~^st ~~Century Publishing House to incorporate Culture Media. It was agreed that KCES, the Group’s wholly owned PRC subsidiary, and 21~~^st Century Publishing House each had 50% ownership and that each party contributed RMB$1 million for the incorporation. On July 2, 2004, the Group acquired additional 40% of the ownership in Culture Media from 21^st ~~Century Publishing House for a purchase price of approximately $121,000 (RMB $1 million).~~ The Group’s management believed that the book value of the existing assets and liabilities of Culture Media approximated the fair value of these assets and liabilities, based on which the purchase price was determined for the purpose of applying purchase accounting. The acquisition expands the Group’s current sales and services in Shanghai and is expected to increase the Group’s competitive position in China. As of September 30, 2004, the Group owns 90% of Culture Media, which became a consolidated entity.

~~The fair values of Culture Media’s assets and liabilities as at July 2, 2004 are presented below:~~

ASSETS
Cash and bank balances $ 31,660
Accounts receivable, net 112,175
Inventories, net 105,881
Other receivables 45,757
Prepayments and other current assets 25,795

Total assets $ 321,268

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable $ 56,635
Receipts in advance 222
Other payable 143,965

Total liabilities $ 200,822

NET ASSETS ACQUIRED $ 120,446

~~-17-~~

The result of operations of Culture Media during the period since July 2, 2004, the date that the respective acquisition was completed, to September 30, 2004 has been included in the Group’s condensed consolidated statements of operations. The following unaudited pro forma information presents a summary of the results of operationsincome taxes of the Group ~~assuming~~are substantially attributable to the ~~acquisition~~operations in Taiwan and the PRC whose statutory tax rates are 25% and 15%, respectively. The principal differences between taxes on income computed at the applicable statutory income tax rates and recorded income tax expense are as follows:


	Three months ended March 31,
	2005			2004
	(Unaudited)
Income taxes credit calculated on applicable statutory tax rates	$	(99,849	)	$	(432,789	)
Higher/(lower) effective income tax rates of other countries		16,296			33,955
Valuation allowance		384,329			146,148
Non-taxable income		(57,694	)		(18,720	)
Non-deductible expenses		(129,302	)		226,322
Tax on undistributed earnings		29,673			45,085


Income taxes expenses as recorded in statement of operations	$	143,453		$	—

At March 31, 2005, KCESD had net operating loss of ~~Culture Media occurred on January 1, 2004. And as Culture Media has not commenced its operation until October 2003,~~approximately US$1,587,730, available to be carried forward to offset future taxable income which will expire in the ~~information presented for the preceding year does not include the result of operations of Culture Media.~~

Nine months ended September 30,
2004
2003
(Unaudited)
Revenues $ 8,123,037 $ 7,058,462
Net income $ (758,764 ) $ (1,296,886 )
Net income per share – basic and diluted: $ (0.040 ) $ (0.080 )

period from 2006 to 2010. KCESD’s net operating loss carry-forwards to offset future taxable income is insignificant.

NOTE 10 – RELATED PARTY TRANSACTIONS

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


Names of related parties		Relationship with the Company
Mr. Kuo-An Wang		He is a director, stockholder
		and chairman of the Company

Mr. Yu-En Chiu		He is a director, stockholder
		and vice chairman of the Company

~~Kid Castle Enterprises Limited (“KCE”)~~		~~Its two directors and stockholders are Mr.~~
		~~Kuo-An Wang and Mr. Yu-En Chiu~~

Chevady Culture Enterprise Limited (“CCE”)		Its chairman is Mr. Kuo-An Wang

Private Kid Castle Short Term Language Cram School (“PKC Language”)		Its chairman is Mr. Yu-En Chiu

Taipei Country Private Kid Castle Short Term Language Cram School (“TCP PKC”)		Its chairman is Mr. Yu-En Chiu

Taipei Country Private Chevady ~~Preschool (“TCP Chevady”)~~		Its chairman is Mr. Yu-En Chiu

-15-


~~Names of related parties~~		~~Relationship with the Company~~

21st Century Kid Castle Language and Education Center (“Education Center”)		An investment accounted for under the equity method.

Tianjin Kid Castle Educational Investment Consulting Co., Ltd.(“Tianjin Consulting”)		An investment accounted for under the equity method

Sichuan Lanbeisi Kid Castle Education ~~& Culture~~ ~~Industrial~~Development Co., ~~Ltd~~Ltd. (“Lanbeisi”)		An investment accounted for under the equity method

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


				Nine months ended September 30,					Three months ended March 31,
				2004		2003			2005		2004
				(Unaudited)					(Unaudited)
(i)	(i	)	Sales to:					Sales to:
								- PKC Language	$	3,030	$	3,979
								- TCP PKC		3,030		3,979
			- PKC Language	$	10,496	$	12,553	- TCP Chevady		7,614		5,191
			- TCP PKC		10,496		12,553	- TCP Chung-hua		7,614		4,086
			- TCP Chevady		11,308		13,437	- TCP Wonderland		5,349		5,191
			- TCP Chung-hua		13,614		21,686	- TCP Kid Castle		4,996		4,949
			- TCP Wonderland		11,308		13,437	- English School		6,034		—
			- TCP Kid Castle		12,264		16,960	- Tianjin Consulting		4,589		—
			- English School		6,419		—	- Lanbeisi		26,793		—
			- Tianjin Consulting		4,875		—
			- Lanbeisi		13,225		—
									$	69,049	$	27,375
				$	94,005	$	90,626

(ii)	(ii)		Rental income from:					Rental income from:
			- KCE	$	—	$	1,302	- CCE	$	476	$	450
			- CCE		1,338		1,302

				$	1,338	$	2,604		$	476	$	450


(iii)	(iii)		Franchising income from:					Franchising income from:
			- PKC Language	$	496	$	—	- PKC Language	$	136	$	129
			- TCP PKC		496		1,447	- TCP PKC		136		129
			- TCP Kid Castle		6,898		6,312	- TCP Kid Castle		1,854		2,014
			- TCP Chung-Hua		1,770		1,103	- TCP Chung-Hua		—		214
			- TCP Chevady		3,449		3,156	- TCP Chevady		927		1,007
			- TCP Wonderland		3,449		3,156	- TCP Wonderland		927		1,007

				$	16,558	$	15,174
									$	3,980	$	4,500


(iv)								Purchase from:
								- Publishing House	$	319,640	$	—

									$	319,640	$	—

Note:

1.		As of March 31, 2005 and December 31, ~~2003,~~2004, the ~~amount~~amounts due from Publishing House ~~consists~~consist primarily of ~~amounts due under a loan~~certain operating expenses paid on behalf of ~~RMB$1,000,000 (approximately $120,000 from the Group to~~ Publishing House for the incorporation of Culture Media). The loan is unsecured and bears no interest. Pursuant to the terms of the loan, Publishing House was obligated to repay the loan on or before June 27, 2004 or it would be required to transfer its 40% ownership interest in Culture Media to the Group. On July 2, 2004, as Publishing House did not repay the loan, the Group decided to take over the 40% ownership from Publishing House, and therefore, the Group’s ownership in Culture Media has increased to 90% and Culture Media has become a consolidated entity as of September 30, 2004.House.

2.		Culture Media was incorporated in December 2003. The Group paid certain pre-operating costs on behalf of Culture Media. As of December 31, 2003, the amount due from this related party had no fixed repayment term and bears no interest. As of September 30, 2004, Culture Media was consolidated into the Group’s financial statements.

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

Prepayments to Publishing House are mainly for inventory ordered by Culture Media. According to ~~each contract~~the purchase agreements signed with Publishing House, Culture Media has to prepay a certain percentage of inventories purchased upon the effectiveness of the contracts. The remaining payments ~~will~~are to be made three months after the initial payment.

As of December 31, 2002, the outstanding balance of the loan amount due to Mr. Hsi-Ming Pai, a stockholder, which was unsecured and bore interest at 25.2% per annum, was $606,208 (including the principal of $600,000 and accrued interest). On November 15, 2003, the Group entered into a liability transfer agreement with the stockholder to transfer this liability to Mr. Kuo-An Wang and Mr. Yu-En Chiu. Pursuant to the liability transfer agreement, the Group transferred its original liability of $600,000 and the accrued interest thereon separately in two lump sum payments. The first transfer was completed on December 30, 2003 for $70,000, and the remaining balance, including the principal of $530,000 and accrued interest was transferred in January 2004.

September 30, December 31,
Notes
2004
2003
(Unaudited)
1,865,412 1,317,690

Bank borrowings maturing after one year $ 1,467,124 $ 1,166,781

Note:

(i) This line item represents bank loans that have been secured by a pledge of post-dated checks amounting to ~~$1,205,486~~$1,794,314 and ~~$1,506,708~~$1,625,505 that we have received from franchisees and the Group’s bank deposits of ~~$22,091~~$113,275 and ~~$87,621~~$57,813 as of ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003,~~2004, respectively, for the purpose of financing operations. The repayment dates of the loans coincided with the maturity dates of the corresponding pledged post-dated checks. The ~~applicable~~weighted average interest rates ~~range from 5.61% to 7.60%~~were 5,88% and 5.66% per annum as of ~~September 30, 2004.~~March 31, 2005 and 2004, respectively. For the ~~nine~~three months ended ~~September 30,~~March 31, 2005 and 2004, ~~and 2003,~~ the interest expenses charged to operations amounted to ~~$30,051~~$14,758 and ~~$53,384,~~$12,177, respectively.

(ii) In August 2003, KCIT obtained an unsecured short-term loan in the amount of ~~$235,363,~~$253,565, which is guaranteed by two directors and stockholders of the Group, to finance the Group’s operations. The loan bears interest at the Taiwan basic borrowing rate plus 1.20% per annum

-19-

		and is due and payable in June 2005. The applicable interest rate is approximately 4.50% per annum as of ~~September 30, 2004.~~March 31, 2005.

		In March 2004, KCIT obtained an unsecured short-term loan in the amount of ~~$294,204,~~$316,957, which iswas guaranteed by two directors and stockholders of the Group, to finance the Group’s operations. The loan bears interest at the Taiwan basic borrowing rate plus 1.65% per annum and ~~is due and payable~~was repaid in full in February 2005. ~~The applicable interest rate is approximately 5.11% per annum as of September 30, 2004.~~

		In April 2004, KCIT obtained another unsecured short-term loan in the amount of $147,102, which is also guaranteed by two directors and stockholders of the Group, to finance the Group’s operations. The loan bears interest at the Taiwan basic borrowing rate plus 1.24% per annum ~~is due~~ and ~~payable~~was repaid in ~~April~~full in January 2005. ~~The applicable interest rate is approximately 4.75% per annum as of September 30, 2004.~~

		For the ~~nine~~three months ended ~~September 30,~~March 31, 2005 and 2004, ~~and 2003,~~ the interest expense charged to operations from the above three unsecured short-term loans amounted to ~~$20,294~~$11,840 and ~~$2,230,~~$3,558, respectively.

(iii)		In March 2003, KCIT obtained a loan of ~~$588,408~~$633,914 from a financial institution, which bore interest at 13.5% per annum and was repayable in 18 equal monthly installments, to finance the Group’s operations. The last installment was due on September 30, 2004 and the Group has extended the term with the financial institution to September 2006. Pursuant to the amended terms of the loan, the loan bears interest at 9.69% per annum and is repayable in 24 equal monthly installments. As of ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003,~~2004, the loan was ~~pledged~~collateralized by KCIT’s refundable deposits of ~~$147,102~~$126,782 and ~~$117,268,~~$126,143, respectively, and guaranteed by two directors and stockholders of the Group. As of ~~September 30, 2004,~~March 31, 2005, the Group had repaid ~~$22,318~~$172,435 of the ~~loan.~~loan, and $461,479 remains outstanding.

~~-23-~~

In ~~March~~November 2004, KCIT ~~obtained~~signed a loan contract with a new ~~bank~~financial institution to obtain a loan of ~~$735,510,~~$633,914 for the purpose of financing operations, which is guaranteed by two directors of the Group. The loan bears interest at ~~5.25%~~5.26% per annum and is repayable in ~~24 equal~~18 monthly ~~installments, to finance the Group’s operations.~~installments. The last installment iswill be due on ~~March 31,~~May 10, 2006. As of ~~September 30, 2004,~~March 31, 2005, the loan was ~~pledged~~collateralized by ~~the~~ KCIT’s refundable deposits of ~~$220,653,~~$158,479, and ~~guaranteed by two directors and stockholders~~the Group had repaid $136,584 of the ~~Group. As of September 30, 2004, the Group repaid $176,718.~~loan, and $467,330 remains outstanding.

For the ~~nine~~three months ended ~~September 30,~~March 31, 2005 and 2004, ~~and 2003,~~ the interest expenses charged to operations from the aforementioned loans amounted to ~~$40,223~~$19,550 and ~~$34,094,~~$9,721, respectively.

(iv) In August 2003, KCIT obtained a bank loan in the principal amount of ~~$948,148~~$1,014,263 to repay its mortgage loan that was originally granted by a bank on October 5, 2001 and to finance its operations. The loan is secured by the Group’s land and buildings and personal guarantees provide by two directors and stockholders of the Group. The loan bears interest at the lending bank’s basic borrowing rate plus 1.45% per annum. On July 19, 2004, the bank extended the term of the loan and the Group repays the loan, which is now repayable in 168 equal monthly installments starting July 30, 2004. As of ~~September 30,~~March 31, 2005 and 2004, the applicable interest rate is approximately ~~3.00%~~3.14% and 4.79% per ~~annum.~~ annum, respectively. As of March 31, 2005, the Group had repaid $43,981, and $970,282 remains outstanding under the loan.
In March 2004, KCIT obtained a new bank loan of $792,393, which bears interest at 5.60% per annum and is repayable in 24 equal monthly installments. The last installment will be due on March 31, 2006. As of March 31, 2005, the loan was pledged by the KCIT’s bank deposit of $241,141, and guaranteed by two directors of the Group. As of March 31, 2005, the Group had repaid $385,035, and $407,358 remains outstanding under the loan.

-20-

		In January 2005, KCIT obtained a bank loan of $475,436, which bears interest at 6.00% per annum and is repayable in 36 equal monthly installments. The last installment will be due on February 3, 2008. As of March 31, 2005, the Group had repaid $12,086, and $463,350 remains outstanding under the loan.

		In March 2005, another bank loan of $316,957 was obtained. The loan bears interest at the Taiwan basic borrowing rate plus 1.65% per annum and is repayable in 36 equal monthly installments. The applicable interest rate as of March 31, 2005 is approximately 5.33%. The last installment will be due in March, 2008.

		For the ~~nine~~three months ended ~~September 30,~~March 31, 2005 and 2004, ~~and 2003,~~ the interest expenses charged to operations from the above loans amounted to ~~$29,716~~$14,335 and ~~$7,169,~~$11,620, respectively.

NOTE 13 – RECEIPTS IN ADVANCE

The balance comprises:


				September 30,		December 31,			March 31,		December 31,
	Notes			2004		2003		Notes	2005		2004
				(Unaudited)					(Unaudited)
Current liabilities:
Sales deposits received		(i	)	$	366,362	$	356,575	(i)	$	555,759	$	565,053
Franchising income received	(ii)				2,129,835		1,703,426
Franchising feesreceived								(ii)		1,756,352		1,906,286
Subscription fees received	(iii)				535,176		842,509	(iii)		493,198		435,635
Others					27,504		22,126			25,935		89,584

					3,058,877		2,924,636			2,831,244		2,996,558


Long-term liabilities:
Franchising income received	(ii)				949,162		1,432,343
Others					22,085		34,682
Franchising feesreceived								(ii)		1,421,803		1,124,809

					971,247		1,467,025
									$	4,253,047	$	4,121,367
				$	4,030,124	$	4,391,661

Note:

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

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

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

The Group previously disclosed in its financial statements for the year ended December 31, ~~2003,~~2004, that it expected to contribute ~~$54,355~~$46,679 to the Plan in ~~2004.~~2005. As of ~~September 30,~~March 31, 2005 and 2004 ~~$35,580 of~~ contributions ~~had been made. The~~made by the Group ~~presently anticipates contributing an additional $18,775~~amounted to ~~fund the Plan in 2004 for a total of $54,355.~~$11,497 and $23,319, respectively.

NOTE 15 – GEOGRAPHICAL SEGMENTS

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


	Taiwan				The PRC						Total						Taiwan					The PRC						Total					Corporate						Eliminations						Consolidated
	Nine months ended		Nine months ended		Nine months ended			Nine months ended			Nine months ended			Nine months ended			Three months ended		Three months ended			Three months ended			Three months ended			Three months ended		Three months ended			Three months ended			Three months ended			Three months ended			Three months ended			Three months ended		Three months ended
	September 30,		September. 30,		September 30,			September. 30,			September 30,			September. 30,			March 31,		March 31,			March 31,			March 31,			March 31,		March 31,			March 31,			March 31,			March 31,			March 31,			March 31,		March 31,
	2004		2003		2004			2003			2004			2003			2005		2004			2005			2004			2005		2004			2005			2004			2005			2004			2005		2004
Revenue
External revenue	$	6,180,392	$	6,227,909	$	1,637,648		$	830,553		$	7,818,040		$	7,058,462		$	2,313,293	$	2,241,656		$	805,513		$	394,238		$	3,118,806	$	2,635,894		$	4,186		$	—		$	—		$	—		$	3,122,992	$	2,635,894
Inter-segment revenue		6,111		5,739		—			—			6,111			5,739			522		1,362			—			—			522		1,362			—			—			(522	)		(1,362	)		—		—

	$	6,186,503	$	6,233,648	$	1,637,648		$	830,553		$	7,824,151		$	7,064,201
																	$	2,313,815	$	2,243,018		$	805,513		$	394,238		$	3,119,328	$	2,637,256		$	4,186		$	—		$	(522	)	$	(1,362	)	$	3,122,992	$	2,635,894


Profit (loss) from Operations	$	339,135	$	471,758	$	(762,233	)	$	(708,312	)	$	(423,098	)	$	(236,554	)	$	452,556	$	(10,560	)	$	(206,377	)	$	(293,247	)	$	246,178	$	(303,807	)	$	(57,590	)	$	(69,395	)	$	—		$	31,187		$	188,589	$	(342,015	)


Capital expenditures	$	22,196	$	150,338	$	175,193		$	80,111		$	197,389		$	230,449		$	11,475	$	—		$	3,208		$	—		$	14,683	$	—		$	—		$	—		$	—		$	—		$	14,683	$	—

As of March 31, 2005, the Company’s future minimum lease payments under non-cancellable operating lease expiring in excess of one year are as follows:


Years ending December 31,
2005	$	169,415
2006		247,935
2007		221,753
2008		207,540
2009		135,129

	$	981,772

B. Going concern

The accompanying financial statements have been prepared assuming the Group will continue as a going concern. As the Group is aggressively expanding its business in the PRC and the Group’s PRC operation is still in an emerging stage and has not turned profitable, the Group has suffered recurring losses from operations and has a net capital deficiency. The above ~~table,~~conditions raise substantial doubt about the Group’s ability to continue as a going concern, if the investment in the PRC will not gradually see returns. As discussed in Note 12, the majority of the Group’s existing loans were guaranteed by two directors of the Group who have expressed their continuous support to the Group until other sources of funds have been obtained. Moreover, the Group successfully obtained new bank facilities in the first ~~column(s) repeated]~~

Corporate
Eliminations
Consolidated
Nine months ended Nine months ended Nine months ended Nine months ended Nine months ended Nine months ended
September 30, September. 30, September 30, September. 30, September 30, September. 30,
2004
2003
2004
2003
2004
2003
Revenue
External revenue $ 47,836 $ — $ — $ — $ 7,865,876 $ 7,058,462
Inter-segment revenue — — (6,111 ) (5,739 ) — —

$ 47,836 $ — $ (6,111 ) $ (5,739 ) $ 7,865,876 $ 7,058,462

Profit (loss) from Operations $ (264,195 ) $ (454,451 ) $ 35,601 $ (47,686 ) $ (651,692 ) $ (738,691 )

Capital expenditures $ — $ — $ — $ — $ 197,389 $ 230,449

quarter of 2005. Management believes that, with continuous growth in the sales in the PRC, the existing directors’ support and the new bank facilities, the Group will have sufficient funds for operations. The financial statements do no 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.

~~-26-~~-23-

September 30, December 31, September 30, December 31, September 30, December 31,
2004 2003 2004 2003 2004 2003
Total assets $ 9,505,255 $ 10,614,292 $ 3,246,966 $ 2,053,029 $ 12,752,221 $ 12,667,321

~~[Additional columns below]~~

~~[Continued from above table, first column(s) repeated]~~

September 30, December 31, September 30, December 31, September 30, December 31,
2004 2003 2004 2003 2004 2003
Total assets $ 2,854 $ 7,487 $ (275,682 ) $ (132,592 ) $ 12,479,393 $ 12,542,216

~~NOTE 16 – COMMITMENT~~

~~(i)~~ On May 28, 2004, the Group signed a joint venture agreement with Zhangjhou Yu Hua Educational Investment Co., Ltd. in Henan Province, PRC to establish a company, Henan Kid Castle Education Development Co., Ltd. with registered capital of RMB$300,000. Pursuant to this joint venture agreement, the Group and Zhangjhou Yu Hua Educational Investment Co., Ltd. each owns 65% and 35% interests in Henan Kid Castle Education Development Co., Ltd. No capital contribution has yet been made for the joint venture as of September 30, 2004.
~~(ii)~~ On June 29, 2004, the Group signed a joint venture agreement with Li Kai and Zhang Wuen Shou in PRC to establish a company, Shanxi Kid Castle Education Development Co., Ltd. with registered capital of RMB$500,000. Pursuant to this joint venture agreement, the Group, Li Kai and Zhang Wuen Shou own, respectively, 51%, 30% and 19% interests in Shanxi Kid Castle Education Development Co., Ltd. No capital contribution has yet been made for the joint venture as of September 30, 2004.

~~-27-~~

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”,~~“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. ~~Should~~If one or more of these risks or uncertainties materialize, or ~~should~~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 Securities and Exchange Commission including, but not limited to our Annual Report on Form ~~10-KSB~~10-K for the year ended December 31, ~~2003.~~2004. We do not intend to update these forward-looking statements.

GENERAL

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, video tapes 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. ~~Currently, our~~Our major business isoriginally started in Taiwan. In 2001, we started to expand our business in the People’s Republic of China ~~(“PRC”)~~(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 ~~two~~2 to ~~twelve~~12 years of age a chance to learn exceptional English language and computer skills, and to provide a pre-school 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 accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to product returns, bad debts, inventories, equity investments, income taxes, financing operations, pensions, ~~and commitment~~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~~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 toway as sales to our direct customers. We estimate sales returns and discounts based on historical experience and record them as reductions to revenues.

~~-28-~~-24-

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

Allowance for ~~doubtful accounts~~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~~Obsolete Inventories and ~~lower~~Lower of ~~cost~~Cost or ~~market~~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~~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~~Assets and ~~depreciation~~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~~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, 2004,~~March 31, 2005, the balance of our amortizable intangible assets was ~~$874,156,~~$856,147, including franchise-related intangible assets of ~~$550,532~~$539,190 and copyrights of ~~$323,624.~~$316,957. The amortizable intangible assets are amortized on a straight-line basis over estimated useful lives of 10 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~~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

-25-

upon management’s estimates of realizability. Actual results may differ significantly from management’s estimate.

~~Currency Risk~~Our transactions with suppliers and customers are primarily effected in New Taiwan dollars, which is the functional currency of our Taiwanese subsidiary, Kid Castle Internet Technologies Limited. As a result of our expansion in the PRC, our transactions denominated in Renminbi, which is the functional currency of our PRC subsidiaries, Kid Castle Educational Software Development Company Limited and Jiangxi 21^st Century Kid Castle Culture Media Co., Ltd., are increasing. Our financial statements are reported in U.S. dollars. As a result, fluctuations in the relative exchange rate among the U.S. dollar, the New Taiwan dollar and the Renminbi will affect our reported financial results. Such impacts could be meaningful and are independent of the underlying performance of the business. The market price of our securities could be significantly harmed based on unfavorable changes in exchange rates. We do not actively manage our exposure to currency exchange rate fluctuations.

RESULTS OF OPERATIONS

Comparison of The ~~nine months ended September 30,~~Three Months Ended March 31, 2005 and 2004

Total Net Operating Revenue.Total net operating revenue consists of sales of goods, franchising income and ~~2003~~

other operating revenue. Total net operating revenues increased by ~~$807,414,~~$512,654, or ~~11%~~20%, to ~~$7,865,876~~$3,122,992 for the ~~nine~~three months ended ~~September 30, 2004~~March 31, 2005 from ~~$7,058,462~~$2,610,338 for the ~~nine~~three months ended ~~September 30, 2003,~~March 31, 2004, including the increase in sales of goods of ~~$184,684~~$345,302 and the franchising income of ~~$494,698~~$69,793 and other operating revenues of ~~$128,032.~~ $97,559

Sales of goods.The increase in sales of goods, from ~~$5,476,362~~$2,029,853 for the ~~nine~~three months ended ~~September 30, 2003~~March 31, 2004 to ~~$5,661,046~~$2,375,155 for the ~~nine~~three months ended ~~September 30, 2004,~~March 31, 2005, or 3%17%, was mainly due to the increase in net sales of goods generated from our Shanghai operations of ~~$510,366,~~$301,144, or ~~92%~~101%, to ~~$1,064,466~~$598,895 for the ~~nine~~three months ended ~~September 30, 2004~~March 31, 2005 from ~~$554,100~~$297,751 for the ~~nine~~three months ended ~~September 30, 2003.~~ March 31, 2004.

Franchising income.The increase in franchising income, from ~~$1,320,286~~$528,132 for the ~~nine~~three months ended ~~September 30, 2003~~March 31, 2004 to ~~$1,814,984~~$597,925 for the ~~nine~~three months ended ~~September 30, 2004,~~March 31, 2005, or ~~37%~~13%, was mainly due to the increase in ~~numbers~~the number of our franchised schools in Shanghai. Franchising income for Shanghai increased by $110,039 from $96,488 for the three months ended March 31, 2004 to $206,527 for the three months ended March 31, 2005.

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, and fees for designing the school layout ~~for~~of our franchised schools. Other operating ~~revenues~~revenue increased by ~~$128,032,~~$97,559, or ~~49%~~186%, to ~~$389,846~~$149,912 for the ~~nine~~three months ended ~~September 30, 2004~~March 31, 2005 from ~~$261,814~~$52,353 for the ~~nine~~three months ended ~~September 30, 2003.~~March 31, 2004. The increase was mainly due to ~~the fees paid by~~revenue generated from our ~~franchised schools for our~~ services rendered in connection with the construction and ~~decoration~~design layout of ~~those~~our franchised schools and ~~the income resulting from the~~ sales of ~~education related equipments~~education-related equipment to our franchised schools.

Gross Profit.Gross profit increased by ~~$312,455,~~$260,915, or 7%15%, to ~~$4,758,224~~$2,007,452 for the ~~nine~~three months ended ~~September 30, 2004~~March 31, 2005 from ~~$4,445,769~~$1,746,537 for the ~~nine~~three months ended ~~September 30, 2003.~~March 31, 2004. The increase in gross profit was attributable to the fact that the rate of increase in our franchising costs and other operating costs from ~~September 30, 2003~~March 31, 2004 to ~~September 30, 2004~~March 31, 2005 was lower than the rate of increase in our franchising income and other operating income for the same period. In addition, ~~our advertising campaign during this period particularly helped~~the gross margin decreased from 67% for the three months ended March 31, 2004 to ~~boost franchising income in both Taiwan~~61% for the three months ended March 31, 2005, primarily because of the consolidation of Culture Media that has a lower gross margin than KCIT and ~~Shanghai, PRC.~~KCESD. Culture Media’s gross margin for the three months ended March 31, 2005 was approximately 50%.

Total Operating Expenses.Total operating expenses ~~increased~~decreased by ~~$225,456,~~$324,203, or 4%15%, to ~~$5,409,916~~$1,818,863 for the ~~nine~~three months ended ~~September 30, 2004~~March 31, 2005 from ~~$5,184,460~~$2,143,066 for the ~~nine~~three months ended ~~September 30, 2003.~~March 31, 2004. Advertising costs ~~increased~~decreased by ~~$151,741,~~$93,279, or ~~51%~~74%, to ~~$448,971~~$33,363 for the ~~nine~~three months ended ~~September 30, 2004~~March 31, 2005 from ~~$297,230~~$126,642 for the ~~nine~~three months ended ~~September 30, 2003. The increase~~March 31, 2004. This decrease was mainly due to the ~~additional~~allocation of our adverting budget for 2005. We do most of our advertising during the summer vacation period rather than winter vacation period, and therefore incur most of our advertising expenses ~~incurred with respect to~~in the ~~filming of commercials for our new promotional campaign for our products~~second and franchised schools. Other operating expenses increased by $73,715, or 2%, to $4,960,945 for the nine months ended September 30, 2004 from $4,887,230 for the nine months ended September 30, 2003, principally due to increases in expenses as a result of the expansion in Shanghai, PRC.third quarters.

~~-30-~~-26-

Other Operating Expenses.Other operating expenses decreased by $230,924, or 11%, to $1,785,500 for the three months ended March 31, 2005 from $2,016,424 for the three months ended March 31, 2004, principally due to decreases in salary expenses resulting from a reduction in employee headcount in our Taiwan operations.

Interest Expenses, Net.Net interest expenses ~~decreased~~increased by ~~$125,777,~~$37,488, or ~~55%~~172%, to ~~$100,892~~$59,253 for the ~~nine~~three months ended ~~September 30, 2004~~March 31, 2005 from ~~$226,669~~$21,765 for the ~~nine~~three months ended ~~September 30, 2003,~~March 31, 2004, primarily due to the ~~repayment~~increase of ~~a loan due~~the borrowings during the three months ended March 31, 2005 comparing to ~~a stockholder~~the three months ended March 31, 2004 (please refer to Note 12 to our Condensed Consolidated Financial Statements for more information).

Loss on write-off of an investment in the nine months ended September 30, 2003, was due to an agreement to change of our relationship with Global International from one of equity ownership to that of a strategic alliance. As a result, during the nine months ended September 30, 2003, we recognized a loss of $132,842 in our operating results.

~~The decrease of income tax expenses from $330,934~~Provision for ~~the nine months ended September 30, 2003 to $111,567~~Taxes.Provision for the nine months ended September 30, 2004 was mainly due to the reversal of tax benefits recognized in prior years in the amount of approximately $220,000 during the nine months ended September 30, 2003, which was resulted from the provision of valuation allowance against deferred income tax assets from our Shanghai and Taiwan operations.

~~The three months ended September 30, 2004 and 2003~~

~~Total net operating revenues increased by $163,897, or 5%, to $3,252,443~~taxes for the three months ended ~~September 30,~~March 31, 2005 and 2004 ~~from $3,088,546~~were $143,453 and $0, respectively. These provisions for ~~the three months ended September 30, 2003, including the decrease in sales of goods of $44,647, increase in franchising~~ income ~~of $148,907 and increase in other operating revenues of $59,637. The decrease in sales of goods, from $2,488,914 for the three months ended September 30, 2003~~taxes relate to $2,444,267 for the three months ended September 30, 2004, or 2%, was mainly due to the termination of the direct marketing department during this year that generated net sales of $216,697 for the three months ended September 30, 2003. The increase in franchising income from $473,337 for the three months ended September 30, 2003 to $622,244 for the three months ended September 30, 2004, was mainly due to the increase in numbers of our franchised schools and the increase in the annual franchising fees. 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, and designing the school layout for franchised schools. Other operating revenues increased to $185,932 for the three months ended September 30, 2004 from $126,295 for the three months ended September 30, 2003, mainly due to the fees paid by our franchised schools for our services in connection with the construction and decoration of those franchised schools and the incometaxes resulting from ~~the sales of education related equipments to~~ our ~~franchised schools.~~

Gross profit decreased by $69,208, or 4%, to $1,850,957 for the three months ended September 30, 2004 from $1,920,165 for the three months ended September 30, 2003. The decrease was mainly attributable to the consolidation of Culture media that has a lower margin compared to our usual operations.

Total operating expenses decreased by $337,700, or 18%, to $1,525,320 for the three months ended September 30, 2004 from $1,863,020 for the three months ended September 30, 2003. Advertising costs decreased by $98,411, or 100%, to $72 for the three months ended September 30, 2004 from $98,483 for the three months ended September 30, 2003. The decrease was mainly because we filmed our new commercials on the promotion of our products and franchised schoolsoperations in the first half of 2004 and recorded as occurred in Q2, 2004. Other operating expenses decreased by $239,289, or 14%, to $1,525,248 for the three months ended September 30, 2004 from $1,764,537 for the three months ended September 30, 2003, primarily because we saved some personnel expenses by closing down our direct-marketing department in April, 2004.Taiwan.

~~-31-~~

LIQUIDITY AND CAPITAL RESOURCES

Comparison of Fiscal Years 2004 and 2003

As of ~~September 30, 2004,~~March 31, 2005, our principal sources of liquidity included cash and bank balances of ~~$438,694~~$173,169 which decreased from ~~$1,273,723~~$213,564 at December 31, ~~2003.~~2004. The decrease was mainly due to the expenditures to fund the daily ~~operations and the new investments in our Shanghai operations (please refer to Note 8 to our Condensed Consolidated Financial Statement for more information).~~operations.

Net cash ~~used in~~(used in) provided by operating activities was ~~$627,787~~($22,689) and ~~$2,035,396~~$45,426 during the ~~nine~~three months ended ~~September 30,~~March 31, 2005 and 2004, ~~and 2003,~~ respectively. Net cash used in operating activities during the ~~nine~~three months ended ~~September 30, 2004~~March 31, 2005 was primarily attributed to net ~~loss and an increase in notes and accounts receivable, that was partially offset by an increase in notes and accounts payable.~~loss.

Net cash used in investing activities ~~was $456,020~~were $60,406 and ~~$65,639~~$105,689 during the ~~nine~~three months ended ~~September 30,~~March 31, 2005 and 2004, ~~and 2003,~~ respectively. The ~~$390,381~~$45,283 difference was primarily attributable to cash used in purchase of property and equipment of $104,562 during the ~~collections of amount due from stockholder/director of $122,973, the acquisitions of long-term investments in two investees,~~three months ended March 31, 2005 and the increase inof pledged bank fixed deposits ~~of $156,518~~by 58,629 during the ~~nine~~three months ended ~~September 30,~~March 31, 2005, compared to increase of $135,818 during the three months ended March 31, 2004.

Net cash provided by financing activities during the ~~nine~~three months ended ~~September 30, 2004~~March 31, 2005 was ~~$245,217~~$60,634 as compared to ~~$2,850,878~~$67,777 during the ~~nine~~three months ended ~~September 30, 2003.~~March 31, 2004. The ~~$2,605,661~~$7,143 difference was primarily attributable to the decrease of net proceeds from bank borrowings of ~~$2,181,578 we received from the issuance of 3,116,540 shares of common stock during the nine months ended September 30, 2003,~~645,512, and the repayment of loans from officers/~~stockholders~~shareholders of ~~$581,228~~$586,529 during the ~~nine~~three months ended ~~September 30,~~March 31, 2004.

~~As of September 30, 2004, the Company has a total line of credit of $3,926,155 from certain banks and the unused credit facility was $593,619.~~

Off-Balance Sheet ~~Arrangement~~Arrangements

~~The Securities and Exchange Commission (“SEC”) has described various characteristics to identify contractual arrangements that would fall within the SEC’s definition~~ As of March 31, 2005, we did not engage in any off-balance sheet ~~arrangements.~~arrangements as defined in Item 303(a)(4) of Regulation S-K promulgated by the SEC under the Securities Exchange Act of 1934.

-27-

One of our financing sources is from bank borrowings. As of ~~September 30,~~March 31, 2005 and 2004, ~~and December 31, 2003,~~ the balances of bank borrowings, including current and non-current portions, were ~~$3,332,536~~$4,320,982 and ~~$2,484,471,~~$3,217,258, respectively.

~~Equity investments in joint ventures~~

~~We did not enter into any~~ On May 28, 2004, the Group signed a joint venture ~~agreements~~agreement with Zhangjhou Yu Hua Educational Investment Co., Ltd. in Henan Province, PRC to establish a company, Henan Kid Castle Education Development Co., Ltd. with registered capital of RMB$300,000. Pursuant to this joint venture agreement, the Group and Zhangjhou Yu Hua Educational Investment Co., Ltd. own 65% and 35% interests in Henan Kid Castle Education Development Co., Ltd., respectively. No capital contribution has yet been made for the ~~three months ended September 30, 2004.~~joint venture as of March 31, 2005.

On June 29, 2004, the Group signed a joint venture agreement with Li Kai and Zhang Wuen Shou in the PRC to establish a company, Shanxi Kid Castle Education Development Co., Ltd. with registered capital of RMB$500,000. Pursuant to this joint venture agreement, the Group, Li Kai and Zhang Wuen Shou own, respectively, 51%, 30% and 19% interests in Shanxi Kid Castle Education Development Co., Ltd. No capital contribution has yet been made for the joint venture as of March 31, 2005.

Pension Benefit

We have a non-contributory and funded defined benefit retirement plan (the “Plan”) covering all regular employees of KCIT, our subsidiary in Taiwan, as described in Note 14 to our Condensed Consolidated Financial Statements. The benefits expected to be paid in each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter are $0 and ~~$40,913,~~$28,845, respectively. We also make defined contributions to a retirement benefits plan for ~~its~~our employees in the PRC in accordance with local regulations. The contributions made by us for the ~~nine~~three months ended ~~September 30,~~March 31, 2005 and 2004 ~~and 2003~~ amounted to ~~$79,528~~$11,497, and ~~$73,855,~~$23,319, respectively.

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Operating Leases

We have entered into several non-cancelable lease arrangements for administrative office space, warehouse space and sales offices for various lengths of time.

Going Concern

The accompanying financial statements have been prepared assuming the Group will continue as a going concern. As the Group is aggressively expanding its business in ~~various periods.~~the PRC and the Group’s PRC operation is still in an emerging stage and has not turned profitable, the Group has suffered recurring losses from operations and has a net capital deficiency. The above conditions raise substantial doubt about the Group’s ability to continue as a going concern, if the investment in the PRC does not gradually see returns. As discussed in Note 12 to our Condensed Consolidated Financial Statements, the majority of the Group’s existing loans were guaranteed by two directors of the Group who have expressed their continuous support to the Group until other sources of funds have been obtained. Moreover, the Group successfully obtained new bank facilities in the first quarter of 2005 (please refer to Note 12 to our Condensed Consolidated Financial Statements for more information). Management believes that, with continuous growth in the sales in the PRC, the existing directors’ support and the new bank facilities, the Group will have sufficient funds for operations. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. Management is currently evaluating the effect of adopting FIN 46 on its results of operations and financial position.

On April 30, 2003, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS No. 149”). SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the Derivatives Implementation Group (“DIG”) process that effectively required amendments to SFAS No. 133, and decisions made in connection with other FASB projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative and characteristics of a derivative that contains financing components. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after September 30, 2003 and for hedging relationships designated after September 30, 2003. We believe that the adoption of SFAS No. 149 will have no material impact on our consolidated financial statements.

In May 2003, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS No. 150”). SFAS No. 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS No. 150 is effective for all financial instruments created or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We believe that the adoption of SFAS No. 150 will have no material impact on our consolidated financial statements.

~~-33-~~

In December 2003, the Staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” which supersedes SAB 101, “Revenue Recognition in Financial Statements.” SAB 104’s primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements and revises the SEC’s “Revenue Recognition in Financial Statements Frequently Asked Questions and Answers” that have been codified in Topic 13. SAB 104 was effective immediately and did not have a material impact on our financial reporting and disclosures.

In December 2003, the FASB revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. It requires additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required information should be provided separately for pension plans and for other postretirement benefit plans. This Statement, which also requires new disclosures for interim periods beginning after December 15, 2003, is effective for fiscal years ended after December 15, 2003. We have adopted this Statement since the year ended December 31, 2003, and the adoption of this Statement has no impact on our consolidated financial statements.

In September 2004, the EITF delayed the effective date for the recognition and measurement guidance previously discussed under EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-01”) as included in paragraphs 10-20 of the proposed ~~statement.~~statement until further guidance is issued for its application. The proposed statement will clarify the meaning of other-than-temporary impairment and its application to investments in debt and equity securities, in particular investments within the scope of FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and investment accounted for under the cost method. The Group is currently evaluating the effect of this proposed statement on its financial position and results of operations.

~~FACTORS THAT MAY AFFECT OUR FUTURE RESULTS AND FINANCIAL CONDITION~~ In November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 151,Inventory Costs, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe the adoption of SFAS No. 151 will have a material impact on our financial statements.

~~Investing~~ In December 2004, the FASB issued SFAS No. 153,Exchanges of Nonmonetary Assets, which eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not believe the adoption of SFAS No. 153 will have a material impact on our financial statements.

Non-GAAP Financial Measures

None.

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Risks Relating to Our Business

We have a history of operating losses and we anticipate losses and negative cash flow to continue for the foreseeable future, and unless we are able to generate profits and positive cash flow on a consistent basis we may not be able to continue operations.

Our ability to attain a positive cash flow and become profitable depends on our ability to generate and maintain greater revenue while incurring reasonable expenses. This, in turn, depends, among other things, on the development of our business of child educational teaching materials and related services focusing on English language in Taiwan and the PRC. We may be unable to achieve and maintain profitability if we fail to do any of the following:

•   maintain and improve our current products and services and develop or license new products on a timely basis;
•   compete effectively with existing and potential competitors;
•   further develop our business activities;
•   manage expanding operations; and
attract and retain qualified personnel.

We have incurred operating losses since inception. As a result, as of March 31, 2005, we had an accumulated deficit of $7,342,858. We incurred net losses of $1,906,996, $1,940,591, and $1,254,592 for the years ended December 31, 2002, 2003 and 2004, respectively, and had cash flow from operations of $33,886, ($2,689,688) and $(1,544,902) for the years ended December 31, 2002, 2003 and 2004, respectively. If we are unable to achieve and maintain a positive cash flow and profitability, we may be unable to continue our operations. Even if we do achieve a positive cash flow and profitability, we cannot be certain that we will be able to sustain or increase them on a quarterly or annual basis in the future.

Our inability to achieve or maintain profitability or positive cash flow could result in disappointing financial results, impede implementation of our growth strategy or cause the market price of our common stock to decrease. Specifically, if we cannot effectively maintain, improve and develop our products and services, we may not be able to recover our fixed costs or otherwise turn profitable. We may not be able to develop and introduce new products, services and enhancements that respond to technological changes, evolving education industry standards or customer needs and trends on a timely basis. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new products, services or service enhancements. These new products, services and service enhancements may not achieve market acceptance or our competitors may develop alternative technologies and methods that gain broader market acceptance than our products and services. Accordingly, we cannot assure you that we will be able to generate the cash flow and profits necessary to sustain our business expectations, which makes our ability to successfully implement our business plan uncertain.

We cannot predict whether demand for our products and services will continue to develop, particularly at the volume or prices that we need to become profitable.

Although the market for English language instruction and education is growing rapidly, we cannot be certain that this growth will continue at its present rate, or at all. We believe our success ultimately will

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depend upon, among other things, our ability to:

•   increase awareness of our brand and the availability of our products and services;
•   continue to attract and develop relationships with educational institutions and regulatory authorities in our targeted geographic markets; and
•   continue to attract and retain customers.

Because our operating results are tied, in part, to the success of our franchisees, the failure of our franchisees could adversely affect our operating results.

Our revenues include licensing fees received from franchisees of Kid Castle. Accordingly, our future revenues will be impacted by the gross revenues of Kid Castle franchisees and the number of schools operating by these franchisees. Although our revenues from Kid Castle franchise operations will vary directly with the gross revenues of our franchisees, we are not directly dependent on the franchisees’ profitability. We believe, however, that the profitability of existing franchisees is key to our ability to attract new franchisees and open new franchised schools. Therefore, factors that adversely affect the revenues and profitability of our franchisees may have an adverse effect on our operating results.

There can be no assurance that our franchisees will operate schools successfully. While no individual franchisee represents more than 1% of our franchise revenues, a significant failure of our franchisees to operate successfully could adversely affect our operating results. The resolution of certain franchisee financial difficulties may cause us to incur additional costs, due to uncollectible accounts receivable related to franchise and license fees, the purchase of teaching and learning materials and/or potential claims by franchisees and could have a material adverse effect on our results of operations.

An increase in market competition could have a negative impact on our business.

Our markets are new, rapidly evolving and highly competitive, and we expect this competition to persist and intensify in the future. This increase in competition could lead to price reductions, decreased sales-volume, under-utilization of employees, reduced operating margins and loss of market share. There can be no assurance that we will be able to successfully compete for customers in our ~~securities involves~~targeted markets.

Our failure to maintain and enhance our competitive position could seriously harm our business and operating results. We encounter current or potential competition from a ~~high degree~~number of ~~risk.~~sources, including:

•   branches and franchises of international language instruction companies;
•   public institutions and private schools; and
•   private tutors.

Because we face competition from established competitors, we may be unable to maintain the market share.

Our primary competitors, including Giraffe Language School in Taiwan, Ladder Digital Education Corp. in Taiwan and the PRC, and Joy Enterprises Organization in Taiwan and the PRC, have significant financial, technical and marketing resources, and/or name recognition. Some of these competitors have a longer operating history and greater overall resources than we do. These companies also have established customer support and professional services organizations. As a result, our competitors may be able to adapt more quickly to changes in customer needs, offer products and services at lower prices than we do, and devote greater resources than we do to the development and sale of teaching/learning products and services, which could result in reducing our market share.

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Because we intend to expand internationally, we will be subject to risks of conducting business in foreign countries.

As we expand our operations outside of Taiwan, we will be subject to the risks of conducting business in foreign countries, including:

•   our inability to adapt our products and services to local cultural traits and customs;
•   our inability to locate qualified local employees, partners and suppliers;
•   difficulties managing foreign operations;
•   the potential burdens of complying with a variety of foreign laws;
•   trade standards and regulatory requirements;
•   geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships;
•   legal uncertainties or unanticipated changes regarding regulatory requirements, liability, export and import restrictions, tariffs and other trade barriers;
•   uncertainties of laws and enforcement relating to the protection of intellectual property;
•   political, economic and social conditions in the foreign countries where we conduct operations;
•   currency risks and exchange controls;
•   potential inflation in the applicable foreign economies; and
•   foreign taxation of earnings and payments received by us from our franchisees and affiliates.

We cannot be certain that the risks associated with our anticipated foreign operations will not negatively affect our operating results or prospects, particularly as these operations expand in scope, scale and significance.

Because we may not be able to protect our proprietary rights on a global basis, we may incur substantial costs to defend or protect our business and intellectual property.

We strategically pursue the registration of our intellectual property rights. However, effective patent, trademark, service mark, copyright and trade secret protection may not always be available and the steps we have taken may be inadequate to protect our intellectual property. In addition, there can be no assurance that competitors will not independently develop similar intellectual property. If others are able to copy and use our products and delivery systems, we may not be able to maintain our competitive position. If we fail to protect our intellectual property, we may be exposed to expensive litigation or risk jeopardizing our competitive position. We may have to litigate to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. This litigation could result in substantial costs and the diversion of our management and technical resources, which could harm our business.

In addition, laws in the PRC have traditionally been less protective of intellectual property rights

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and enforcement relating to the protection of intellectual property in the PRC has been sporadic at best. Deterioration in compliance with existing legal protections or reductions in the legal protection for intellectual property rights in the PRC could adversely affect our revenue as we continue to expand into the PRC market.

Because we may not be able to avoid claims that we infringed the proprietary rights of others, we may incur substantial costs to defend or protect our business and intellectual property.

Although we have taken steps to avoid infringement claims from others, these measures may not be adequate to prevent others from claiming that we violated their copyrights, other ~~information contained in this quarterly report, you should consider~~trademarks or other proprietary rights. Any claim of infringement could cause us to incur substantial costs defending against the ~~following factors before investing~~claim, even if the claim is invalid, and could distract our management from our business. A party making a claim could secure a judgment that requires us to pay substantial damages or we may lose the rights to use our products or to modify them.

We rely substantially on bank loans and our inability to obtain sufficient funding may adversely affect our liquidity and financial condition.

We rely substantially on bank loans to satisfy our funding requirements. As of December 31, 2002, 2003 and 2004, our bank loans and loans from financial institutions were $4,284,807, $2,484,471 and $1,982,019 respectively. Although, in our ~~securities.~~experience, our bank loans and loans from financial institutions have been, in the past, a stable source of funding, no assurances can be given that this will continue to be the case. If we are unable to secure sufficient borrowings, our liquidity position would be adversely affected, and we may be required to seek more expensive sources of funding to finance our operations.

Implementing our strategies may require substantial capital expenditures. To the extent these expenditures exceed our cash resources, we will be required to seek additional debt or equity financing. Our ability to obtain sufficient financing and the cost of such financing will depend on numerous factors, some of which are beyond our control, including:

•   our financial condition;
•   general economic and capital market conditions;
•   availability of credit from banks or lenders and conditions in the financial markets;
•   investor confidence in us; and
•   economic, political and other conditions in Taiwan and the PRC.

If we are unable to obtain sufficient funding for our operations or development plans on commercially acceptable terms, or at all, our liquidity and financial condition may be adversely affected.

Because we conduct operations in New Taiwan Dollars and Renminbi (RMB), we are subject to risk from exchange rate fluctuations.

Our transactions with suppliers and customers are effected in New Taiwan dollars, the functional currency of our Taiwanese subsidiary, Kid Castle Internet Technologies Limited (KCIT), and, as a result of our expansion in the PRC, increasingly in RMB, the functional currency of our PRC subsidiary, Kid Castle Educational Software Development Company Limited (KCES). Our financial statements are reported in U.S. dollars. As a result, fluctuations in the relative exchange rate among the U.S. dollar, the

-33-

New Taiwan dollar and the RMB will affect our reported shareholders’ equity from one period to the next. Such impacts could be meaningful and are independent of the underlying performance of our business. The market price of our securities could be significantly affected by unfavorable changes in exchange rates. We do not actively manage our exposure to such unfavorable changes in exchange rates.

Because our officers and directors are not U.S. ~~Persons,~~persons, and our operating subsidiaries are Taiwan and People’s Republic of China companies, you may ~~not~~ be ~~able~~unable to enforce judgments under the Securities Act.

Our operating subsidiaries are a Taiwanese company and a ~~People’s Republic of China~~PRC company and our officers and directors are residents of various jurisdictions outside the United States. All or a substantial portion of the assets of our business and of such persons are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon such persons or to enforce court judgments in the United States ~~courts judgments~~ obtained against such persons in the United States courts and predicated upon the civil liability provisions of the Securities Act.

~~Because~~Our internal controls and management systems are not currently consistent with international practices in certain respects and we ~~face competition~~are in the process of improving these controls to enable us to certify the effectiveness of our internal controls under the Sarbanes-Oxley Act of 2002. Our failure to timely and successfully upgrade these controls and systems could subject us to regulatory actions and harm the price of our stock.

Our internal control and management systems were designed to meet the standards generally adopted by private Taiwan companies and the internal control and management systems of our PRC subsidiaries were designed to the standards generally adopted by companies in China. These standards are different from ~~established competitors,~~the standards and best practices adopted by companies in the United States. We have identified areas in which our current control and management systems do not meet international standards and practices. In addition, during their audit, our external auditors brought to our attention a number of areas in which our current internal controls and management systems do not reduce undetected material errors or fraud to a relatively low level of risk, which could adversely affect our ability to accurately and timely record, process, summarize and report financial data. Pursuant to the Sarbanes-Oxley Act of 2002 and the various rules and regulations adopted pursuant thereto or in conjunction therewith, we are required, for fiscal year 2005, to perform an evaluation of our internal controls over financial reporting and file an assessment of its effectiveness with the U.S. Securities and Exchange Commission. Unless we successfully upgrade our controls and systems, we will not be able to satisfactorily comply with our obligation under the Sarbanes-Oxley Act of 2002 and our external auditors will be unable to provide a satisfactory certification. We have prepared an internal plan of action for compliance, which includes a schedule of activities to address our need to meet these standards and best practices. If we fail to successfully complete the improvements we have scheduled on a timely basis, or if the activities fail to raise our internal controls and management systems to the levels required by international standards or legal requirements, or if we fail to implement new or improved controls, then we may fail to meet our reporting obligations and our auditors may be unable to ~~maintain market share.~~

~~Our primary competitors have significant financial, technical and marketing resources, and/or name recognition, including Giraffe, G-Telp and Jia Yin. Some~~certify the management’s assertion of ~~these competitors have a longer operating history and greater overall resources than we do. These companies also have established customer support and professional services organizations. As a result,~~the effectiveness of our ~~competitors may be able to adapt more quickly to changes in customer needs, offer products and services at lower prices than us, devote greater resources~~

~~-34-~~

cease employment with us before we find qualified replacements, it would have a significant negative impact on our operations. We do not have employment agreements with any of our executive officers.

Moreover, our growth and success depend on our ability to attract, hire and retain additional highly qualified management, educators, technical, marketing and sales personnel. These individuals are in high demand and we may not be able to attract the staff we need. The hiring process is intensely competitive, time consuming and may divert the attention of our management from our operations. Competitors and others have in the past, and may in the future, attempt to recruit our employees. If we lose the services of any of our senior management or key education personnel, or if we fail to continue to attract qualified personnel, our business could suffer.

~~Because we conduct operations in New Taiwan (NT) Dollars and Renminbi (RMB), we are subject to risk from exchange rate fluctuations.~~

Our transactions with suppliers and customers are effected in New Taiwan dollars, the functional currency of our Taiwanese subsidiary, KCIT, and increasingly in RMB, the functional currency of our PRC subsidiary, KCES, as a result of our expansion in the PRC. Our financial statements are reported in U.S. dollars. As a result, fluctuations in the relative exchange rate among the U.S. dollar, the NT dollar and the RMB will affect our reported financial results from one period to the next. Such impacts could be meaningful and are independent of the underlying performance of our business. The market price of our securities could be significantly harmed based on unfavorable changes in exchange rates. We do not actively manage our exposure to such effects.

~~An increase in market competition could have a negative impact on our business.~~

~~Our failure to maintain and enhance our competitive position could seriously harm our business and operating results. We encounter current or potential competition from a number of sources, including:~~

• ~~branches and franchises of international language instruction companies;~~
• ~~public institutions and private schools; and~~
• ~~private tutors.~~

~~We cannot predict whether demand for our products and services will continue to develop, particularly at the volume or prices that we need to remain profitable.~~

Although the market for English language instruction and education is growing rapidly, we cannot be certain that this growth will continue in its present form, or at all. We believe our success ultimately will depend upon, among other things, our ability to:

~~-35-~~

• ~~increase awareness of our brand and the availability of our products and services;~~
• ~~continue to attract and develop relationships with educational institutions and regulatory authorities in our targeted geographic markets; and~~
• ~~continue to attract and retain customers.~~

~~We have a history of operating losses, and unless we are able to generate profits and positive cash flow on a consistent basis we may not be able to continue operations.~~

Our ability to attain a positive cash flow and become profitable depends on our ability to generate and maintain greater revenues while incurring reasonable expenses. This, in turn, depends, among other things, on the development of our business of child educational teaching materials and related services focusing on English language in Taiwan and the PRC, and we may be unable to achieve and maintain profitability if we fail to do any of the following:

~~maintain and improve our current products and services and develop or license new ones on a timely basis;~~

~~compete effectively with existing and potential competitors;~~

~~further develop our business activities;~~

~~manage expanding operations; and~~

~~attract and retain qualified personnel.~~

We have incurred operating losses since inception and hence, as of September 30, 2004, the balance of accumulated deficit was $6,842,653. We incurred net losses of $1,940,591, $1,906,996, and $2,500 for the years ended December 31, 2003, 2002 and 2001, respectively, and had cash flow from operations of $(2,689,688), 33,886 and $0 in 2003, 2002 and 2001, respectively. If we are unable to achieve and maintain a positive cash flow and profitability, we may be unable to continue our operations. Even if we do achieve a positive cash flow and profitability, we cannot be certain that we will be able to sustain or increase them on a quarterly or annual basis in the future.

Our inability to achieve or maintain profitability or positive cash flow could result in disappointing financial results, impede implementation of our growth strategy or cause the market price of our common stock to decrease. Specifically, if we cannot effectively maintain, improve and develop products and services we may not be able to recover our fixed costs or otherwise turn profitable. We may not be able to develop and introduce new products, services and enhancements that respond to technological changes, evolving education industry standards or customer needs and trends on a timely basis. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new products, services and service enhancements. These new products, services and service enhancements may not achieve market acceptance or our competitors may develop alternative technologies and methods that gain broader market acceptance than our products and services. Accordingly, we cannot assure you that we will be able to generate the cash flow and profits necessary to sustain our business expectations, which makes our ability to successfully implement our business plan uncertain.

~~Because we may not be able to protect our proprietary rights on a global basis, we may incur substantial costs to defend or protect our business and intellectual property.~~

~~-36-~~

If we fail to protect our intellectual property, we may be exposed to expensive litigation or risk jeopardizing our competitive position. The steps we have taken may be inadequate to protect our intellectual property. We may have to litigate to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. This litigation could result in substantial costs and the diversion of our management and technical resources which could harm our business.

In addition, laws in the PRC have traditionally been less protective of intellectual property rights and enforcement relating to the protection of intellectual property in the PRC has been sporadic at best. Deterioration in compliance with existing legal protections or reductions in the legal protection for intellectual property rights in the PRC could adversely affect our revenue as we continue to expand into the PRC market.

~~Because we may not be able to avoid claims that we infringed the proprietary rights of others, we may incur substantial costs to defend or protect our business and intellectual property.~~

Although we have taken steps to avoid infringement claims from others, these measures may not be adequate to prevent others from claiming that we violated their copyrights, other trademarks or other proprietary rights. Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract our management from our business. A party making a claim could secure a judgment that requires us to pay substantial damages.

~~Because we intend to expand internationally, we will be subject to risks of conducting business in foreign countries.~~

~~As we expand our operations outside of Taiwan, we will be subject to the risks of conducting business in foreign countries, including:~~

~~our inability to adapt our products and services to local cultural traits, customs and mobile user preferences;~~

~~our inability to locate qualified local employees, partners and suppliers;~~

~~difficulties managing foreign operations;~~

~~the potential burdens of complying with a variety of foreign laws;~~

~~trade standards and regulatory requirements;~~

~~geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships;~~

~~legal uncertainties or unanticipated changes regarding regulatory requirements, liability, export and import restrictions, tariffs and other trade barriers;~~

~~uncertainties of laws and enforcement relating to the protection of intellectual property;~~

~~political, economic and social conditions in the foreign countries where we conduct operations;~~

~~currency risks and exchange controls;~~

~~-37-~~

~~potential inflation in the applicable foreign economies; and~~

~~foreign taxation of earnings and payments received by us from our franchisees and affiliates.~~

~~Our operations in the PRC are subject to political, regulatory and economic uncertainties.~~

Our operations and assets in the PRC are subject to significant political, regulatory and economic uncertainties. Changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition. Under its current leadership, the PRC government has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the PRC government will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.

~~In addition, our subsidiary, KCES, entered into agreements in July 2003 to establish two joint ventures, Culture Media and Education Center, with a local Chinese party, 21~~^st Century Publishing House, in Jiangxi Province. We established Culture Media and Education Center to engage mainly in the publication and distribution of English language education materials, the operation of kindergarten and language schools, and the running of cooperative schools in China. We intend to use these joint ventures as one of our primary vehicles for our expansion in the PRC market. Although we have received, on January 19, 2004 and October 31, 2003, licenses from the applicable government authorities to conduct the business of Culture Media and Education Center, respectively, in the PRC, the regulations with respect to operation of businesses by foreign-owned entities are still in flux. There is no assurance that the licenses will not be challenged by the PRC authorities.

~~The lack of remedies and impartiality under the PRC’s legal system could negatively impact us.~~

Unlike the U.S., the PRC has a civil law system based on written statutes in which judicial decisions have little precedential value. The PRC government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. These matters may be subject to the exercise of considerable discretion by agencies of the PRC government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination.

“Penny Stock” regulations may impose certain restrictions on marketability of our common stock.

The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share. Our common stock may fall within the definition of penny stock and be subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000, or annual incomes exceeding $200,000 or $300,000, together with their ~~spouse)~~spouses).

~~-38-~~

For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell our common stock and may affect the ability of investors to sell our common stock in the secondary market.

An outbreak of Severe Acute Respiratory Syndrome ~~(“SARS”)~~(SARS) may adversely affect our results of operations.

In March 2003, Guangdong Province of the PRC, Hong Kong, Singapore, Taiwan and several other Asian countries encountered inan outbreak of SARS, a highly contagious form of atypical pneumonia. ~~Although the SARS epidemic now appears to become under control, some experts fear that the SARS epidemic might resurface as number of isolated SARS cases have been reported recently.~~ In the future, if any of our employees or students is suspected to have contracted SARS, under certain circumstances such employees, students and affected areas of our premises may have to be quarantined. As a result, we may have to temporarily suspend all or part of our operations. Furthermore, a future outbreak of SARS may negatively impact our ability to attract foreign teachers, who may be less inclined to come to Taiwan, and to attract and retain students, whose parents may choose to have them taught at home by ~~an individual.~~

~~Investors could lose confidence in~~individual tutors or forego supplemental English learning altogether. Although the ~~reliability of the Company’s financial statements if the Company fails to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.~~

If the Company is unable to complete its assessment as to the adequacy of its internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002, investors could lose confidence in the reliability of the Company’s financial statements, which could result in a decrease in the value of the Company’s Common Stock.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on the company’s internal control over financial reporting in their annual reports on Form 10-K. This report is required to contain an assessment by management of the effectiveness of such company’s internal controls over financial reporting. In addition, the public accounting firm auditing a public company’s financial statements must attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting. While the Company is expending significant resources in developing the necessary documentation and testing procedures required by Section 404, there is a significant risk that the Company will not comply withWorld Health Organization removed all of the ~~requirements imposed~~above regions from its list of areas affected by ~~Section 404. If~~SARS by the ~~Company fails~~summer of 2003, and there have been only a relatively small number of confirmed cases of SARS since that time, we cannot rule out the possibility of a future outbreak or predict the effect any such future outbreak could have on our company.

Risks Relating to ~~implement required new or improved controls, it may be unable to comply with the requirements~~The People’s Republic of SEC 404 in a timely manner. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of the Company’s financial statements, which could cause the market price of the Company’s Common Stock to decline and make it more difficult for the Company to finance its operations.China

~~-39-~~-35-

Our operations in the PRC are subject to political, regulatory and economic uncertainties.

Our operations and assets in the PRC are subject to significant political, regulatory and economic uncertainties. Changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, restrictions on the manner of operating educational institutions or disseminating educational materials, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition. Under its current leadership, the PRC government has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the PRC government will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.

In addition, in July 2003, our subsidiary, KCES, entered into agreements with a local Chinese party, 21^st Century Publishing House, in Jiangxi Province to establish two joint ventures, Jiangxi 21^st Century Kid Castle Culture Media Co., Ltd. (Culture Media) and 21^st Century Kid Castle Language and Education Center (Education Center). Culture Media and Education Center are established to engage primarily in the publication and distribution of English language education materials, enter into franchise and consulting relationships with kindergarten and language schools, and provide services to cooperative schools in China. We intend to use them as one of our primary vehicles for our expansion into the PRC market. Although we received, on January 19, 2004 and October 31, 2003, licenses from the applicable government authorities to conduct the business of Culture Media and Education Center in the PRC, the regulations with respect to operation of businesses by foreign-owned entities are still in flux. There is no assurance that the licenses will not be challenged by the PRC authorities.

The lack of remedies and impartiality under the PRC’s legal system could negatively impact us.

Unlike the United States, the PRC has a civil law system based on written statutes in which judicial decisions have little precedential value. The PRC government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. These matters may be subject to the exercise of considerable discretion by agencies of the PRC government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~Market~~ We are exposed to market risk, ~~represents the risk of loss that may affect us due to adverse~~including from changes in ~~financial market prices and rates. Our market risk exposure is primarily fluctuations in~~certain foreign currency exchange rates and interest rates. All of these market risks arise in the normal course of business, as we do not engage in speculative trading activities. We have not entered into derivative or hedging transactions to manage risk in connection with such fluctuations.

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

Interest rate exposure

We are exposed to fluctuating interest rates related to variable rate bank borrowings. In analyzing the effect of interest rate fluctuations based on the average balances of our outstanding bank borrowings for

-36-

the ~~nine~~three months ended ~~September 30, 2004,~~March 31, 2005, we have projected that, if interest rates were to increase by 1%, the result would be an annual increase in our interest expense of ~~$29,085.~~$43,030. 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 Development Ltd. and its ~~subsidiaries other than KCES~~subsidiary, Kid Castle Internet Technologies Ltd. is NT Dollars and the financial records are maintained and the financial statements are prepared for these entities in ~~NT$.~~NT Dollars. The functional currency of ~~KCES~~Kid Castle Educational Software Development Company Ltd. and its consolidated investee, Jiangsi 21th Century Kid Castle Culture Media Co. Ltd. is RMB and the financial records are maintained and the financial statements are prepared for ~~KCES~~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 ~~are~~do we use such instruments ~~used~~ for speculative purposes. ~~However, fluctuations in the relative exchange rate will affect our reported financial results.~~ The translation from the applicable local currency assets and liabilities to the ~~US dollar~~U.S. Dollar is performed using exchange rates in effect at the balance sheet date except for ~~stockholders’~~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 ~~stockholders’~~shareholders’ equity.

ITEM 4. CONTROLS AND PROCEDURES

We are in the process of identifying, developing and implementing measures to improve the effectiveness of our disclosure controls and procedures, and, in particular, internal controls, including plans to enhance our resources, systems and training with respect to our financial reporting and disclosure responsibilities, and to review our actions with the audit committee and independent auditors. Since April 2004, we have been in the process of implementing a system with respect to internal control over financial reporting. In May 2004, we began installing a new ~~Enterprise Resource Planning (ERP)~~ERP system through ~~[an~~an application service ~~provider],~~provider, and we expect the installation to be completed in the fourth quarter of 2005. Our CEO and our CFO believe that such measures will help improve our disclosure controls and procedures. Based on this information, as of ~~September 30, 2004,~~March 31, 2005, our CEO and our CFO believe that, subject to the limitations noted above, our disclosure controls and procedures are effective in ensuring that material information required to be included in Kid Castle’s SEC reports is made known to them on a timely basis.

In ~~July 2004,~~May 2005, our accounting ~~manger,~~manager, who ~~was in charge of handling~~assisted our CFO with our internal control over financial reporting, resigned. We ~~hired~~are in the process of searching for a ~~new~~candidate to hire as an accounting manager ~~in August 2004, who is responsible for general accounting matters and coordinating~~to handle our internal control over financial reporting. Although this personnel change caused a temporary interruption of our internal control over financial reporting, we believe that ~~our timely replacement of accounting personnel,~~ the ongoing implementation of our new system with respect to internal control over financial reporting and the installation of our ERP system have minimized any adverse effect that may have been caused by such resignation.

~~-40-~~

ITEM 2. CHANGES IN SECURITIES

Pursuant to a stock purchase agreement dated August 18, 2003, Globe Wisdom Investments Limited (“GWIL”), a Samoan international business company, subscribed for 175,500 shares of our common stock at an aggregate purchase price of $122,850 in a private offering. As of ~~September 30, 2004,~~March 31, 2005, we had not yet issued any shares to GWIL pursuant to the August 18, 2003 stock purchase agreement.

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 AND REPORTS ON FORM 8-K


A.		Exhibits
31.1		Certification of Kuo-An Wang, Chief Executive Officer of the registrant, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Yu-En Chiu, Chief Financial Officer of the registrant, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Kuo-An Wang, Chief Executive Officer of the registrant, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Yu-En Chiu, Chief Financial Officer of the registrant, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

B.		Reports on Form 8-K

		Not applicable.

-38-


	~~Page~~
~~PART I FINANCIAL INFORMATION~~
~~Item 1. Unaudited Condensed Consolidated Financial Statements~~			Page
PART I	FINANCIAL INFORMATION			2
	Item 1.	Unaudited Condensed Consolidated Financial Statements.		2
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operations.		2824
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		4036
	Item 4.	Controls and ~~Procedures~~Procedures.		37
PART II.	OTHER INFORMATION			37
	Item 1.	Legal ~~Proceedings~~Proceedings.		4137
	Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity ~~Securities~~Securities.		4138
	Item 3.	Defaults upon Senior ~~Securities~~Securities.		4138
	Item 4.	Submission of Matters to a Vote of Security ~~Holders~~Holders.		4138
	Item 5.	Other ~~Information~~Information.		4138
	Item 6	Exhibits and Reports on Form ~~8-K~~8-K.		4238
SIGNATURES				39


		Pages
Condensed Consolidated Balance Sheet		2 – 3
Condensed Consolidated Statements of Operations		4
Condensed Consolidated Statements of Stockholders’ Equity		5
Condensed Consolidated Statements of Cash Flows		6 – 8
Notes to Condensed Consolidated Financial Statements		9 – 26
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


		~~Pages~~
~~Condensed Consolidated Balance Sheet~~		~~3–4~~
~~Condensed Consolidated Statements of Operations~~		5
~~Condensed Consolidated Statements of Stockholders’ Equity~~		6
~~Condensed Consolidated Statements of Cash Flows~~		~~7–9~~
~~Notes to Condensed Consolidated Financial Statements~~		~~10–27~~


	September 30,			December 31,			March 31,			December 31,
	2004			2003			2005			2004
	(Unaudited)						(Unaudited)
Work in process	$	97,019		$	53,756		$	106,262		$	99,610
Finished goods and other merchandises		3,217,177			2,589,990			3,663,746			3,655,864

		3,314,196			2,643,746
								3,770,008			3,755,474
Less: Allowance for obsolete inventories and decline of market value		(766,432	)		(651,795	)		(786,118	)		(775,736	)

	$	2,547,764		$	1,991,951
							$	2,983,890		$	2,979,738


	September 30,		December 31,		March 31,		December 31,
	2004		2003		2005		2003
	(Unaudited)				(Unaudited)
Other receivables – third parties:
Tax paid on behalf of landlord	$	1,522	$	1,442	$	973	$	1,575
Advances to staff		93,921		43,242		84,856		74,396
Penalties receivables		—		14,658
Grants from Market Information Center						—		29,959
Receivables from Shanghai Wonderland Educational Resources Co., Ltd. (“Shanghai Wonderland”) (Note (i))		131,188		105,847		169,538		87,082
Other receivables		111,990		43,622		150,161		114,900


Sub-total		338,621		208,811		405,528		307,912

Other receivables – related parties (NOTE 10)		23,062		316,163		14,822		29,936

	$	361,683	$	524,974	$	420,350	$	337,848

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

		For the ~~nine~~three months ended ~~September 30, 2004,~~March 31, 2005, the Group recognized an investment loss of $15,649, accounted for under the equity method, in Tianjin ~~Consulting of $25,801.~~Consulting.

~~(iv)~~(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,


ASSETS
Cash and bank balances	$	31,660
Accounts receivable, net		112,175
Inventories, net		105,881
Other receivables		45,757
Prepayments and other current assets		25,795

Total assets	$	321,268

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	56,635
Receipts in advance		222
Other payable		143,965

Total liabilities	$	200,822

NET ASSETS ACQUIRED	$	120,446


Names of related parties		Relationship with the Company
Preschool (“TCP Chevady”)

Taipei Country Private Chung-hua Preschool (“TCP Chung-hua”)		Its chairman is Mr. Yu-En Chiu

Taipei Country Private Wonderland Preschool (“TCP Wonderland”)		Its chairman is Mr. Yu-En Chiu

Taipei City Private Kid Castle Preschool (“TCP Kid Castle)		Its chairman is Mr. Yu-En Chiu

21st Century Publishing House (“ (“Publishing House”)		A joint venturer

Jiangxi 21st Century Kid Castle Culture Media Co., Ltd (“Culture Media”)		An investment accounted for under the equity method before July 2, 2004. It has become a consolidated entity after July 2, 2004.

~~(iv)~~	(v)	The two directors and stockholders, Mr. Kuo-An Wang and Mr. Yu-Eng Chiu, have given personal guarantees to certain bank loans and borrowings. Please see the details as described in Note 12 – ~~Bank~~ Borrowings.

		~~Our~~The management of the Group is of the opinion that the above transactions were carried out in the normal course of business at agreed upon terms.

~~(v)~~	(vi)	Accounts and notes receivable – related parties:


					March 31,		December 31,
Name of related parties	2004		2003		2005		2004
	(Unaudited)				(Unaudited)
- KCE	$	—	$	571,755	$	3,803	$	—
- PKC Language		12,299		3,358		20,345		16,772
- TCP PKC		12,298		3,358		20,345		16,772
- TCP Chung-hua		22,090		2,863		39,353		27,506
- TCP Chevady		20,079		2,537		40,505		24,431
- TCP Wonderland		20,079		2,537		40,505		24,431
- TCP Kid Castle		27,090		—		47,564		31,586
- Education Center		578		—		57		726
- Tianjin Consulting		5,029		42,646		15,439		15,746
- Lanbeisi		6,783		2,099		53,370		19,475

	$	126,325	$	631,153
					$	281,286	$	177,445

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

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


2005	$	160,687
2006		160,687	$	171,340
2007		160,687		171,340
2008		160,687		171,340
2009		160,687		171,340
2010				171,340

	$	803,435
			$	856,700

(i)		This line item represents bank loans that have been secured by a pledge of post-dated checks amounting to ~~$1,205,486~~$1,794,314 and ~~$1,506,708~~$1,625,505 that we have received from franchisees and the Group’s bank deposits of ~~$22,091~~$113,275 and ~~$87,621~~$57,813 as of ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003,~~2004, respectively, for the purpose of financing operations. The repayment dates of the loans coincided with the maturity dates of the corresponding pledged post-dated checks. The ~~applicable~~weighted average interest rates ~~range from 5.61% to 7.60%~~were 5,88% and 5.66% per annum as of ~~September 30, 2004.~~March 31, 2005 and 2004, respectively. For the ~~nine~~three months ended ~~September 30,~~March 31, 2005 and 2004, ~~and 2003,~~ the interest expenses charged to operations amounted to ~~$30,051~~$14,758 and ~~$53,384,~~$12,177, respectively.

(ii)		In August 2003, KCIT obtained an unsecured short-term loan in the amount of ~~$235,363,~~$253,565, which is guaranteed by two directors and stockholders of the Group, to finance the Group’s operations. The loan bears interest at the Taiwan basic borrowing rate plus 1.20% per annum


	Corporate						Eliminations						Consolidated
	Nine months ended			Nine months ended			Nine months ended			Nine months ended			Nine months ended			Nine months ended
	September 30,			September. 30,			September 30,			September. 30,			September 30,			September. 30,
	2004			2003			2004			2003			2004			2003
Revenue
External revenue	$	47,836		$	—		$	—		$	—		$	7,865,876		$	7,058,462
Inter-segment revenue		—			—			(6,111	)		(5,739	)		—			—

	$	47,836		$	—		$	(6,111	)	$	(5,739	)	$	7,865,876		$	7,058,462

Profit (loss) from Operations	$	(264,195	)	$	(454,451	)	$	35,601		$	(47,686	)	$	(651,692	)	$	(738,691	)

Capital expenditures	$	—		$	—		$	—		$	—		$	197,389		$	230,449

~~(i)~~		On May 28, 2004, the Group signed a joint venture agreement with Zhangjhou Yu Hua Educational Investment Co., Ltd. in Henan Province, PRC to establish a company, Henan Kid Castle Education Development Co., Ltd. with registered capital of RMB$300,000. Pursuant to this joint venture agreement, the Group and Zhangjhou Yu Hua Educational Investment Co., Ltd. each owns 65% and 35% interests in Henan Kid Castle Education Development Co., Ltd. No capital contribution has yet been made for the joint venture as of September 30, 2004.

~~(ii)~~		On June 29, 2004, the Group signed a joint venture agreement with Li Kai and Zhang Wuen Shou in PRC to establish a company, Shanxi Kid Castle Education Development Co., Ltd. with registered capital of RMB$500,000. Pursuant to this joint venture agreement, the Group, Li Kai and Zhang Wuen Shou own, respectively, 51%, 30% and 19% interests in Shanxi Kid Castle Education Development Co., Ltd. No capital contribution has yet been made for the joint venture as of September 30, 2004.


															Payments Due by Period
	Payments Due By Period (Thousand dollars)														Total		2005		2006		2007		2008		2009		Thereafter
	Total		2004		2005		2006		2007		2008		Thereafter		(Thousand dollars)
Contractual obligations
Bank borrowing	$	3,333		425		1,656		449		60		62		681		4,321		2,474		780		366		89		89		523
Pension Benefit		41		—		—		—		—		—		41
Pension benefit																29		—		—		—		—		—		29
Operating leases		339		62		97		81		54		39		6		1,508		169		248		222		208		135		526


Total	$	3,713		487		1,753		530		114		101		728		5,858		2,643		1,028		588		297		224		1,078

	•	maintain and improve our current products and services and develop or license new products on a timely basis;

	•	compete effectively with existing and potential competitors;

	•	further develop our business activities;

	•	manage expanding operations; and

		attract and retain qualified personnel.

	•	increase awareness of our brand and the availability of our products and services;

	•	continue to attract and develop relationships with educational institutions and regulatory authorities in our targeted geographic markets; and

	•	continue to attract and retain customers.

	•	branches and franchises of international language instruction companies;

	•	public institutions and private schools; and

	•	private tutors.

	•	our inability to adapt our products and services to local cultural traits and customs;

	•	our inability to locate qualified local employees, partners and suppliers;

	•	difficulties managing foreign operations;

	•	the potential burdens of complying with a variety of foreign laws;

	•	trade standards and regulatory requirements;

	•	geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships;

	•	legal uncertainties or unanticipated changes regarding regulatory requirements, liability, export and import restrictions, tariffs and other trade barriers;

	•	uncertainties of laws and enforcement relating to the protection of intellectual property;

	•	political, economic and social conditions in the foreign countries where we conduct operations;

	•	currency risks and exchange controls;

	•	potential inflation in the applicable foreign economies; and

	•	foreign taxation of earnings and payments received by us from our franchisees and affiliates.

	•	our financial condition;

	•	general economic and capital market conditions;

	•	availability of credit from banks or lenders and conditions in the financial markets;

	•	investor confidence in us; and

	•	economic, political and other conditions in Taiwan and the PRC.

•		~~branches and franchises of international language instruction companies;~~

•		~~public institutions and private schools; and~~

•		~~private tutors.~~

•		~~increase awareness of our brand and the availability of our products and services;~~

•		~~continue to attract and develop relationships with educational institutions and regulatory authorities in our targeted geographic markets; and~~

•		~~continue to attract and retain customers.~~



~~By:~~	By:	/s/ Kuo-An Wang

		Name:	Kuo-An Wang
		Title:	Chief Executive Officer