UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q10-Q/A
Amendment No. 1

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

For the quarterly period ended: June 30, 2006March 31, 2005
or

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

Commission File Number: 333-39629
 

KID CASTLE EDUCATIONAL CORPORATION
(Exact name of Registrant as specified in its charter)

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

8th Floor, No. 98 Min Chuan Road, Hsien Tien
Taipei, Taiwan ROC
(Address of principal executive offices)
011-886-22218 5996
(Registrant’s telephone number, including area code)
NONE
Taipei, Taiwan ROC
(Address of principal executive offices)
011-886-22218 5996
(Registrant’s telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o  No x 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).Act.
 
Large Accelerated Filer o  Accelerated Filer o Non-accelerated filer x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No x
 
As of June 30, 2006,May 24, 2007, there were 18,999,70325,000,000 shares of the Registrant’s common stock outstanding.
 

FORM 10-QEXPLANATORY NOTE:

KID CASTLE EDUCATIONAL CORPORATIONKid Castle Educational Corporation (the “Company”) is filing this Amendment No. 1 to the Quarterly Report on Form 10-Q/A (the “Amendment”) to amend and restate the Condensed Consolidated Statement of Cash Flows for the first quarter ended March 31, 2005 and the Note 2.1 and Note 10 B. (x) footnote 1 of the Notes to the Consolidated Financial Statements (collectively, the “Cash Flow Statement and the Related Notes”) contained in the Quarterly Report on Form 10-Q for the first quarter ended March 31, 2005 filed with the Securities and Exchange Commission (“SEC”) on May 20, 2005 (the “Original Filing”).  

TABLE OF CONTENTSThis Amendment amends and restates the Cash Flow Statement and the Related Note of the Original Filing to properly account for and reflect certain transactions that occurred during this quarterly period involving inappropriate withdrawals and subsequent repayments by Yu-En Chiu, a former Chief Financial Officer of the Company (“ex-CFO”).

This Amendment amends and restates as follows:

(1)Page
PART I FINANCIAL INFORMATION
 Item 1.UnauditedThe negative amount of $544,244 in the form of “Advances to ex-CFO” is inserted in the section entitled “Cash Flows From Investing Activities” under the column “Three months Ended March 31, 2005” in the Condensed Consolidated Financial Statements2
a) Condensed Consolidated Balance Sheet as of June 30, 2006 and December 31, 20052
b) Condensed Consolidated Statements of Operations for the three months ended June 30, 2006 and June 30, 20053
c) Condensed Consolidated Statements of Operations for the six months ended June 30, 2006 and June 30, 20054
d) Condensed Consolidated Statements of Stockholders’ Equity5
e) Condensed Consolidated StatementsStatement of Cash Flows for the sixfirst quarter ended March 31, 2005.

(2)The positive amount of $544,244 in the form of “Repayments of advances to ex-CFO” is inserted in the section entitled “Cash Flows From Investing Activities” under the column “Three months Ended March 31, 2005” in the Condensed Consolidated Statement of Cash Flows for the first quarter ended June 30, 2006 and June 30, 2005March 31, 2005.

(3)6
f)The disclosures under the Notes toof the Condensed Consolidated Financial Statements are revised by adding Note 2.1 “Restatement” to reflect the effects of such transaction on the Condensed Consolidated Financial Statements.

(4)8Footnote 1 of new subsection (x) entitled “Amount due to (from) officers/shareholders” is provided under Part B of Note 10 to the Notes of the Condensed Consolidated Financial Statements to reflect the above transactions.

(5)The discussion under Item 2.Management’s2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations23
 Item 3.Quantitative and Qualitative Disclosures About Market Risk28
 Item 4.Controls and Procedures29
PART II. OTHER INFORMATION
 Item 1.Legal Proceedings31
 Item 1ARisk Factors31
 Item 2.Unregistered SalesOperations” is revised by adding a paragraph to reflect the effects of Equity Securities and Use of Proceeds31
 Item 3.Defaults upon Senior Securities31
 Item 4.Submission of Matters to a Vote of Security Holders31
 Item 5.Other Information31
 Item 6Exhibits31
SIGNATURES32such transaction.

PART I. FINANCIAL INFORMATION
ITEM 1.(6)
FINANCIAL STATEMENTS
The discussion under Item 4, Controls and Procedures is revised in order to reflect the effects of such transactions.
 
Kid Castle Educational Corporation

Accordingly, the Condensed Consolidated Balance Sheets

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

Statement of Cash Flows for the first quarter ended March 31, 2005, Note 2.1 and footnote 1
Kid Castle Educational Corporation

Condensed Consolidated Balance Sheets - Continued

(Expressed in US Dollars)
  
June 30,
2006
 
December 31,
2005
 
  (Unaudited)   
Commitments and contingencies (Note 17)     
      
Minority interest  42,549  28,627 
        
Shareholders’ equity       
Common stock, no par share:       
25,000,000 shares authorized; 18,999,703 shares issued and outstanding at June 30, 2006 and December 31, 2005  7,669,308  7,669,308 
Additional paid-in capital  194,021  194,021 
Legal reserve  65,320  65,320 
Accumulated deficit  (8,925,276) (9,010,356)
Accumulated other comprehensive loss  (284,533) (244,864)
Total shareholders’ equity  (1,281,160) (1,326,571)
Total liabilities and shareholders’ equity $11,255,638 $10,982,937 
See accompanying notes of the new subsection (x) entitled “Amount due to (from) officers/shareholders” under Part B of Note 10 to the Notes of the Condensed Consolidated Financial Statements.Statements, and the narrative of Items 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 4, Controls and Procedures, as amended and restated, are produced in this Amendment in their entirety. Unaffected items in the Original Filing have not been restated in this Amendment.
 
As a result of this Amendment, the certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002, filed as exhibits to the Original Filing, have been re-executed and re-filed as of the date of this Amendment.

This Amendment does not otherwise reflect events occurring after the filing of the Original Filing, or otherwise update these disclosures. Accordingly, this Amendment should be read in conjunction with our filings with the SEC subsequent to the filing of the Original Filing.

2

PART I: FINANCIAL INFORMATION

Kid Castle Educational Corporation
 
Condensed Consolidated Statements of OperationsCash Flows
 
(Expressed in US Dollars)
 
  Three months ended June 30, 
  2006 2005 
  (Unaudited) 
Operating Revenue     
Sales of goods $1,309,033 $1,174,176 
Franchising income  688,141  710,121 
Other operating revenue  (70,988) 156,436 
Total net operating revenue  1,926,186  2,040,733 
Operating costs       
Cost of goods sold  (562,738) (579,442)
Cost of franchising  (91,242) (63,042)
Other operating costs  (39,326) (103,075)
Total operating costs  (693,306) (745,559)
Gross profit  1,232,880  1,295,174 
Advertising costs  (14,747) (23,491)
Other operating expenses  (1,429,510) (1,465,044)
(Loss) income from operations  (211,377) (193,361)
Interest expenses, net  (86,752) (56,730)
Share of income (loss) of investments  (491) 
—
 
Other non-operating income (loss), net  38,910  102,563 
(Loss) income before income taxes  (259,710) (147,528)
Benefit (provision) for taxes  (18,428) ( 41,297)
(Loss) income after income taxes  (278,138) (188,825)
Minority interest income  5,359  (19,202)
Net (loss) income $(272,779)$(208,027)
(Loss) earnings per share - basic and diluted $(0.014)$( 0.01)
Weighted-average shares used to compute (loss) earnings per share - basic and diluted  18,999,703  18,999,703 
See accompanying notes to Condensed Consolidated Financial Statements.
  Three months ended March 31, 
  2005 2004 
  (Restated)   
  (Unaudited) 
      
Cash flows from operating activities     
Net (loss) income 
$
(50,430
)
$
(327,654
)
Adjustments to reconcile net (loss) income to net cash provided by operating activities       
Depreciation of property and equipment  
66,681
  
52,266
 
Amortization of intangible assets  
42,835
  
40,509
 
Allowance for sales returns  
95,267
  
71,890
 
Allowance for doubtful debts  
284,537
  
156,221
 
Provision (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  
(143
)
 
—
 
Share of loss (gain) of investments  
(12,483
)
 
(46,967
)
(Increase)/decrease in:       
Notes and accounts receivable  
(775,674
)
 
192,461
 
Inventories  
4,514
  
204,320
 
Other receivables  
(129,129
)
 
72,016
 
Prepayments and other current assets  
41,002
  
(6,073
)
Deferred income tax assets  
(32,194
)
 
3,314
 
Other assets  
46,591
  
(31,084
)
Increase/(decrease) in:       
Notes and accounts payable  
60,036
  
107,712
 
Accrued expenses  
148,876
  
(46,463
)
Other payables  
124,933
  
(76,311
)
Receipts in advance  
(147,307
)
 
(261,384
)
Income taxes payable  
115,635
  
(3,314
)
Deposits received  
67,207
  
29,413
 
Accrued pension liabilities  
29,115
  
(16,266
)
        
Net cash provided by (used in) operating activities  
(22,689
)
 
45,426
 
        
Cash flows from investing activities       
Purchase of property and equipment  
(104,562
)
 
—
 
Proceeds from disposal of property and equipment  
72,795
  
—
 
Bank fixed deposits - pledged  
(58,629
)
 
(135,818
)
Pledged notes receivable  
29,990
  
30,129
 
Advances to ex-CFO (restated)  (544,244) 
—
 
Repayments of advances to ex-CFO (restated)  544,244  
—
 
        
Net cash used in investing activities  
(60,406
)
 
(105,689
)

3

Kid Castle Educational Corporation

Condensed Consolidated Statements of OperationsCash Flows - Continued

(Expressed in US Dollars)

  Three months ended March 31, 
  2005 2004 
  (Restated)   
  (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  58,089  — 
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 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
)
 
  Six months ended June 30, 
  2006 2005 
  (Unaudited) 
Operating Revenue     
Sales of goods $3,529,529 $3,549,331 
Franchising income  1,194,688  1,308,046 
Other operating revenue  174,496  306,348 
Total net operating revenue  4,898,713  5,163,725 
Operating costs       
Cost of goods sold  (1,370,225) (1,507,173)
Cost of franchising  (171,367) (176,655)
Other operating costs  (81,577) (177,271)
Total operating costs  (1,623,169) (1,861,099)
Gross profit  3,275,544  3,302,626 
Advertising costs  (17,288) (56,854)
Other operating expenses  (2,844,640) (3,250,544)
(Loss) income from operations  413,616  (4,772)
Interest expenses, net  (120,125) (115,983)
Share of income (loss) of investments  (9,085) 12,483 
Other non-operating income (loss), net  1,175  53,624 
(Loss) income before income taxes  285,581  (54,648)
Benefit (provision) for taxes  (186,909) ( 184,750)
(Loss) income after income taxes  98,672  (239,398)
Minority interest income  (13,592) (19,059)
Net (loss) income $85,080 $(258,457)
(Loss) earnings per share - basic and diluted $0.004 $( 0.01)
Weighted-average shares used to compute (loss) earnings per share - basic and diluted  18,999,703  18,999,703 
SeeThe accompanying notes toare an integral part of these Condensed Consolidated Financial Statements.

4

Kid Castle Educational Corporation
 
Condensed Consolidated Statements of Stockholders’ Equity
(Expressed in US Dollars)
   Common Stock  Additional      Accumulated other   
  
Number of
shares
 Amount 
paid-in
capital
 
Legal
reserve
 
Accumulated
deficit
 comprehensive loss Total 
Balance, December 31, 2004  18,999,703 $7,669,308 $194,021 $65,320 $(7,312,074)$(222,650)$393,925 
Net loss for 2005  -  -  -  -  (1,698,282) -  (1,698,282)
Cumulative translation adjustment  -  -  -  -  -  (22,214) (22,214)
Comprehensive loss                    (1,720,496)
                       
Balance, December 31, 2005  18,999,703 $7,669,308 $194,021 $65,320 $(9,010,356)$(244,864)$(1,326,571)
Net income for the six months ended June 30, 2006 (Unaudited)  -  -  -  -  85,080  -  85,080 
Cumulative translation adjustment (Unaudited)  -  -  -  -  -  (39,669) (39,669)
Comprehensive loss (Unaudited)                    45,411 
                       
Balance, June 30, 2006 (Unaudited)  18,999,703 $7,669,308 $194,021 $65,320 $(8,925,276)$(284,533)$(1,281,160)
See accompanying notes to Condensed Consolidated Financial Statements.
5
Kid Castle Educational Corporation
Condensed Consolidated Statements of Cash Flows
(Expressed in US Dollars)
  Six months ended June 30, 
  2006 2005 
  (Unaudited) 
      
Cash flows from operating activities     
Net (loss) income $85,080 $(258,457)
Adjustments to reconcile net (loss) income to net cash provided by operating activities       
Depreciation of property and equipment  93,908  223,862 
Amortization of intangible assets  83,873    
Allowance for sales returns  2,356  92,463 
Allowance for doubtful debts  609,912  110,063 
Provision (reversal) of allowance for loss on inventory obsolescence and slow-moving items  90,588  95,147 
Minority interests  13,592  19,059 
Share of loss (gain) of investments  9,085  (12,483)
(Increase)/decrease in:       
Notes and accounts receivable  (1,369,563) (2,371,422)
Inventories  456,634  (139,918)
Other receivables  104,051  (88,654)
Prepayments and other current assets  98,622  (169,392)
Deferred income tax assets  (50,939) (34,147)
Other assets  225,219  ( 6,510)
Increase/(decrease) in:       
Notes and accounts payable  (35,104) 776,387 
Accrued expenses  176,759  153,429 
Other payables  (541,031) 228,281 
Receipts in advance  904,189  195,553 
Income taxes payable  103,224  83,722 
Deferred liability  (137) — 
Deposits received  516,262  102,551 
Other current liabilities  95,652  — 
Accrued pension liabilities  (5,971) 59,010 
        
Net cash provided by (used in) operating activities  1,666,261  (941,456)
Cash flows from investing activities       
Purchase of property and equipment  (26,115) (165,947)
Proceeds from disposal of property and equipment  —  — 
Amount due from stockholder/director  —  — 
Prepayment of long-term investments  —  — 
Acquisition of long-term investments  —  — 
Collection of long term notes     240,971 
Increase in interest in associates     ( 24,977)
Bank fixed deposits - pledged  (7,302) (61,519)
Pledged notes receivable  386,928  1,625,505 
Advances to ex-CFO  
—
  (1,544,244)
Repayments of advances to ex-CFO  
—
  1,544,244 
Net cash provided by investing activities  353,511  1,614,033 
6
 Six months ended June 30, 
  2006 2005 
  (Unaudited) 
      
Cash flows from financing activities     
Proceeds from bank borrowings $215,463 $795,968 
Proceeds from loan from a stockholder  —  — 
Repayment of bank borrowings  (1,026,017) (1,054,969)
Proceeds from capital leases  —  57,086 
Repayment of capital leases  —  (65,748)
Repayment of loan from officers/stockholders  (509,847) — 
        
Net cash used in financing activities  (1,320,401) (267,657)
        
Net increase in cash and cash equivalents  699,371  404,920 
        
Effect of exchange rate changes on cash and cash equivalents  (27,324) 148,142 
        
Cash and cash equivalents at beginning of period  613,391  213,564 
        
Cash and cash equivalents at end of period $1,285,438 $766,626 
See accompanying notes to Condensed Consolidated Financial Statements.
7
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 21st Century Publishing House to incorporate Jiangxi 21st Century Kid Castle Culture Media Co., Ltd (“Culture Media”). It was agreed that KCES and 21st 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 21st Century Publishing House. KCES now owns 90% of Culture Media.
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.
8
NOTE 2 - BASIS OF PRESENTATIONNOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying financial data as of June 30, 2006 and for the six months ended June 30, 2006 and 2005 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, 2005.
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 June 30, 2006, the balance of accumulated deficit was $8,925,276. 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 require the Group to reduce headcount, sales and marketing efforts or other expansion activities, which may affect the future growth of the Group’s operations.
NOTE 3.1 -2.1 — RESTATEMENT
 
During the sixthree months ended June 30,March 31, 2005, the Company’s then Chief Financial Officer (referred to as “ex-CFO”) made fund withdrawals from and repayments to the Company and returned the full withdrawn amount of cash by June 30,March31, 2005. The Company’s condensed consolidated statement of cash flows for the sixthree months ended June 30,March 31, 2005 will behas been restated to disclose the resulting cash flow impact onin the Condensed Consolidated Statement of Cash Flows. (ForFlows and to disclose such transactions in Note 10, “Related Party Transactions”, B, (x) “Amount due to(from) officers/shareholders”, footnote 1.

The impact of the restatement on the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 is as follows: 
  As Previously Reported Restated Amount 
Advances to ex-CFO     (544,244)
Repayments of advances to ex-CFO     544,244 
Net cash (used in) provided by investing activities  (60,406) (60,406)
NOTE 10 — RELATED PARTY TRANSACTIONS  (Restated - See B. (x))
B. Significant transactions and balances with related parties are as follows:
(x) Amount due to (from) officers/shareholders: 
March 31,
2005
March 31,
2004
Mr. Yu-En Chiu (Note 1)$—$—

Note 1:
During the three months period ended March 31, 2005, certain inappropriate withdrawals and subsequent repayments by the Company’s then Chief Financial Officer Yu-En Chiu have been recognized in the restated Consolidated Statements of Cash Flow as short term non-interest bearing advances to Mr. Chiu. During the three months period ended March 31, 2005, the highest balance of the advances to Mr. Yu-En Chiu was $307,009. As of March 31, 2005, Mr. Yu-En Chiu had repaid all the outstanding advances to the Company and there were no material amounts due from other officers of the Company. For further information subsequent to March 31, 2005 related to such transaction, please refer to 2004 Form 10-K/A and 2005 Form 10-K filed on March 8, 2007)2007

The impact of the restatement on the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 is as follows:
  As Previously Reported 
Restated
Amount
 
Advances to ex-CFO  
—
  (1,544,244)
Repayments of advances to ex-CFO  
—
  1,544,244 
Net cash (used in) provided by investing activities  1,614,033  1,614,033 
NOTE 3.2 - SUMMARY OF IMPORTANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Sales of books, magazines, audio and video tapes, compact discs and other merchandises are recognized as revenue on the transfer of risks and rewards of ownership, which generally coincides with the time when the goods are delivered to customers and title has passed. Provision is made for expected future sales returns and allowances when revenue is recognized.
9
Franchise fees are the annual licensing fees for franchisees to use the Group’s brand name and consulting services. Franchising income is recognized on a straight-line basis over the terms of the relevant franchise agreements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
An allowance for doubtful accounts is provided based on the evaluation of collectibility and aging analysis of notes and accounts receivables.
INVENTORIES
Inventories are stated at the lower of cost or market. 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)
LandIndefinite
Buildings50
Furniture and fixtures3-10
Transportation equipment2.5-5
Miscellaneous equipment5-10
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
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and tax loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are subject to valuation allowances based upon management’s estimates of reliability. Actual results may differ significantly from management’s estimate.
10
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)
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”. 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 six months ended June 30, 2006 and 2005, 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 November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs (as amended) an amendment of ARB No. 43. This statement clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This statement requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal.” It is effective for all fiscal years beginning after June 15, 2005. The Company does not expect the implementation of this statement to have a material impact on its consolidated financial statements.
NOTE 5 - NOTES AND ACCOUNTS RECEIVABLE
  
June 30,
2006
 
December 31,
2005
 
  (Unaudited)   
      
Notes and accounts receivable     
- Third parties $3,959,039 $2,944,574 
- Related parties (NOTE 10)  421,793  401,184 
        
Total  4,380,832  3,345,758 
Allowance for doubtful accounts and sales returns  (1,371,211) (752,482)
        
Notes and accounts receivable, net $3,009,621 $2,593,276 
11
 
NOTE 6 - INVENTORIESITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 
  
June 30,
2006
 
December 31,
2005
 
  (Unaudited)   
      
Work in process $107,138 $127,001 
Finished goods and other merchandises  2,300,907  2,696,942 
        
   2,408,045  2,823,943 
Less: Allowance for obsolete inventories and decline of market value  (854,649) (754,451)
        
  $1,553,396 $2,069,492 
NOTE 7 - OTHER RECEIVABLES

  
June 30,
2006
 
December 31,
2005
 
  (Unaudited)   
Other receivables - third parties:     
Tax paid on behalf of landlord $— $2,013 
Advances to staff  192,687  125,590 
Grants from Market Information Center  
—
  
—
 
Receivables from Shanghai Wonderland Educational Resources Co., Ltd. (“Shanghai Wonderland”) (Note (i))  372,065  368,528 
Other receivables  69,396  86,141 
Less : Allow for doubtful accounts  (372,065) (368,528)
        
Sub-total  262,083  213,744 
Other receivables - related parties (NOTE 10)  9,686  9,319 
  $271,769 $223,063 
Note:
(i)Shanghai Wonderland was a distributor of the Group. The Group loaned Shanghai Wonderland RMB$450,000 (approximately $54,000), RMB$500,000 (approximately $60,000) and RMB$2,500,000 (approximately $310,000) for operations in December 2003, July 2005 and August 2005, respectively. The identified loans were unsecured and bore no interest. Shanghai Wonderland has fully repaid the loan of RMB$450,000 in December 2004 and January 2005. As of June 30, 2006, Shanghai Wonderland still owes the Group a balance of RMB$3,000,000 (approximately $372,065). Such sum has now been itemized and recorded as "allowance for doubtful accounts" compared to its prior recognition as "Other receivables".
NOTE 8 - PREPAYMENTS AND OTHER CURRENT ASSETS
  
June 30,
2006
 
December 31,
2005
 
  (Unaudited)   
      
Prepayments $287,922 $399,659 
Temporary payments  4,409  11,038 
Tax recoverable  —  — 
Prepaid interest  59  — 
Others  26,635  829 
        
  $319,025 $411,526 
12
NOTE 9 - INTEREST IN ASSOCIATES
  
June 30,
2006
 
December 31,
2005
 
  (Unaudited)   
      
21st Century Kid Castle Language and Education Center (“Education Center”) (Note (i))
     
Investment cost $93,834 $92,942 
Share of loss  (32,873) (40,803)
        
  $60,961 $52,139 
        
Tianjin Kid Castle Educational Investment Consulting Co., Ltd. (“Tianjin Consulting”) (Note (ii))       
Investment cost $87,579 $86,746 
Share of loss  (94,997) (80,360)
        
  $(7,418)$6,386 
        
Lanbeisi Education &Culture Industrial Co., Ltd (“Lanbeisi”) (Note (iii))       
Investment cost $45,040 $44,612 
Share of loss  (35,864) (31,979)
        
  $9,176 $12,633 
        
Total $62,719 $71,158 
Note:
(i)
In October 2003, the Group obtained the government’s approval to co-found Education Center with 21st Century Publishing House in the PRC. In 2004, Education Center registered the total capital as RMB$1,500,000, and KCES and 21st Century Publishing House each owns 50% of the investee. It has been determined that the Group has significant influence and should therefore account for its investee on the equity method.
For the six months ended June 30, 2006 and 2005, the Group recognized investment income accounted for under the equity method in Education Center of $8,042 and $8,337, respectively.
(ii)On AprilThis Amendment No. 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 six months ended June 30, 2006 and 2005, the Group recognized an investment loss of $13,399 and $24,756 respectively, accounted for under the equity method, in Tianjin Consulting.
13
(iii)On April 28, 2004, the Group signed a joint venture agreement with Lanbeisi Education & Culture Industrial Co., Ltd in Sichuan Province, PRC and Sichuan Province Education Institutional Service Center in Sichuan Province, PRC. Pursuant to this joint venture agreement, the Group, Lanbeisi Education & Culture Industrial Co., Ltd and Sichuan Province Education Institutional Service Center own, respectively, 45%, 45% and 10% interests in Sichuan Lanbeisi Kid Castle Education Development Co., Ltd. It has been determined that the Group has significant influence and should therefore account for its investee using the equity method.
For the six months ended June 30, 2006 and 2005, the Group recognized an investment loss of $3,458 and $6,345 respectively, accounted for under the equity method, in Lanbeisi.
14
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 WangIn October 2005 resigned as chairman of the board of directors, president and chief executive officer of the Company. On October 18, 2006 resigned as director of the board of directors.
Mr. Yu-En ChiuOn June 1, 2006 resigned as chief financial officer and director of the board of directors. Mr. Chiu remained the Chairman of PRC operation until February 28, 2007,
Mr. Min-Tan YangDirector and chief executive officer of the Company since November 2, 2005.
Mr. Suang-Yi PaiDirector and chairman of the board of directors since November 2, 2005.
Private Kid Castle Short Term Language Cram School (“PKC Language”)Its chairman of the board of directors is Mr. Yu-En Chiu.
Taipei Country Private Kid Castle Short Term Language Cram School (“TCP PKC”)Its chairman of the board of directors is Mr. Yu-En Chiu.
Taipei Country Private Chevady Preschool (“TCP Chevady”)Its chairman of the board of directors is Mr. Yu-En Chiu.
Taipei Country Private Chung-hua Preschool (“TCP Chung-hua”)Its chairman of the board of directors is Mr. Yu-En Chiu.
Taipei Country Private Wonderland Preschool (“TCP Wonderland”)Its chairman of the board of directors is Mr. Yu-En Chiu.
Taipei City Private Kid Castle Preschool (“TCP Kid Castle”)Its chairman of the board of directors is Mr. Yu-En Chiu.
Taipei Country Private Kid’s Castle Yin Cyun Preschool(“TCP Yin Cyun”)Its chairman of the board of directors is Mr. Min-Tan Yang.
Taipei Country Private Yin Tzu Preschool (“TCP Yin Tzu”)Its chairman of the board of directors is Mr. Min-Tan Yang.
Private Kuan Lung Short Term Language Cram School (“Kuan Lung Language”)Its chairman of the board of directors is Mr. Min-Tan Yang.
Taipei City Private Chu Sheng Preschool (“TCP Chu Sheng”)Its chairman of the board of directors is Mr. Min-Tan Yang.
Taipei Country Private Chu Yao Preschool (“TCP Chu Yao”)Its chairman of the board of directors is Mr. Min-Tan Yang.
Private Liang Yu Language & Computer School ("Liang Yu Language")Its chairman of the board of directors is Mr. Min-Tan Yang.
21st Century Publishing House (“Publishing House”)A joint venture partner (third-party after July 2004).
Jiangxi 21st Century Kid Castle Culture Media Co., Ltd (“Culture Media”)An investment accounted for under the equity method before July 2, 2004. It has become a consolidated entity after July 2, 2004.
21st Century Kid Castle Language and Education Center (“Education Center”)An investment accounted for under the equity method.
Tianjin Kid Castle Educational Investment Consulting Co., Ltd. (“Tianjin Consulting”)An investment accounted for under the equity method.
Sichuan Lanbeisi Kid Castle Education Development Co., Ltd. (“Lanbeisi”)An investment accounted for under the equity method.
15
B.Significant transactions and balances with related parties are as follows:
   
Six months ended June 30,
 
   
2006
 
2005
 
   (Unaudited) 
(i)
Sales to:
     
 - PKC Language $— $5,425 
 - TCP PKC  
—
  5,425 
 - TCP Chung-hua  3,468  15,508 
 - TCP Chevady  
—
  4,917 
 - TCP Wonderland  
—
  4,917 
 - TCP Kid Castle  
—
  9,823 
 - Kuan Lung Language  7,924  
—
 
 - TCP Chu Yao  18,212  
—
 
 - TCP Chu Sheng  7,636  
—
 
 - TCP Yin Cyun  41,636  
—
 
 - TCP Yin Tzu  21,835  
—
 
 - Liang Yu Language  27,197  
—
 
 - English School  10,532  1,838 
 - Tianjin Consulting  16,802  176 
 - Lanbeisi  9,907  3,947 
         
   $165,149 $51,976 
         
(ii)
Rental income from:
       
 - CCE $1,242 $951 
         
   $1,242 $951 
         
(iii)
Franchising income from:
       
 - TCP Kid Castle $— $6,811 
 - TCP Chung-Hua  
—
  
—
 
 - TCP Wonderland  
—
  3,406 
 - TCP Chu Sheng  5,810  
—
 
 - TCP Yin Cyun  2,556  
—
 
 - TCP Yin Tzu  5,577  
—
 
 - Liang Yu Language $1,242 $— 
         
   $15,185 $10,217 

(iv)The two directors and stockholders, Mr. Min-Tan Yang and Mr. Suang-Yi Pai, have given personal guarantees to certain bank loans and borrowings. Please see the details as described in Note 12 - Bank Borrowings.
16
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)Accounts and notes receivable - related parties:
Name of related parties  
June 30,
2006
  
Decenber 31,
2005
 
   (Unaudited)    
        
- PKC Language  39,007  26,147 
- TCP PKC  39,007  52,294 
- TCP Chung-hua  51,131  53,665 
- TCP Chevady  48,290  48,685 
- TCP Wonderland  48,290  48,685 
- TCP Kid Castle  56,531  58,172 
- Kuan Lung Language  2,050  
—
 
- TCP Chu Yao  20,260  
—
 
- TCP Chu Sheng  12,706  
—
 
- TCP Yin Cyun  39,443  33,585 
- TCP Yin Tzu  14,451  29,062 
- Liang Yu Language  9,145  12,071 
- Education Center  
—
  
—
 
- Tianjin Consulting  18,193  20,826 
- Lanbeisi  23,289  17,992 
        
  $421,793 $401,184 

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

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

17
2.Education Center was founded in October 2003. The amount due from the associate is mainly inventory purchases paid by the Group on behalf of Education Center. The amount due from this related party has no fixed repayment term and bears no interest.

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

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

(viii)Significant transactions and balances with related parties are as follows:
1. Other payables - Amount due to directors/related parties:
 
Name of Related Parties
  
June 30,
2006
  
December 31,
2005
 
        
Mr. Kuo-An Wang $
—
 $60,911 
        
Mr. Min-Tan Yang (note 1) $840,789 $840,789 
        
Mr. Suang-Yi Pai $
—
 $76,138 
        
Education Center $520 $
—
 
        
Lanbeisi $128 $
—
 
        
  $841,437 $977,838 

Note 1. In the fourth quarter of 2005, Mr. Yang loaned $1,050,000 to the Company, and third parties, Olympic Well International Ltd.(“Olympic”) and Chen-Chen Shih (“Shih”), procured by Mr. Pai loaned $690,000 and $60,089, respectively. The loans were treated as a short-term loans, due in three months, with a per annum interest rate of 7%. A portion of the loan made by Olympic in the amount of US$342,364 was assigned to Mr. Pai on or about December 30, 2005. That amount, along with $209,211 which was owed Mr. Yang were forgiven in exchange for the Company’s forgiveness of Mr. Chiu’s debt to the Company of amount of $551,575 (NT$18,500,000, the currency has been translated at the exchange rates at the time of the loans) at the end of 2005. Outstanding loans of $347,636 (Olympic), $60,089 (Shih) are recorded as other payables, and $840,789 due to Mr. Yang was recorded as related parties.
18
NOTE 11 - INTANGIBLE ASSETS

  
June 30,
2006
 
December 31,
2005
 
  (Unaudited)   
      
Gross carrying amount     
Franchise $1,050,122 $1,036,178 
Copyrights  617,303  609,106 
        
   1,667,425  1,645,284 
Less: Accumulated amortization       
Franchise  (656,326) (595,802)
Copyrights  (385,815) (350,236)
        
   (1,042,141) (946,038)
        
Net
 $625,284 $699,246 
Amortization charged to operations was $83,873 and $85,669for the six months ended June 30, 2006 and 2005, respectively.
The estimated aggregate amortization expenses for each of the five succeeding fiscal years are as follows:
2007 
$
167,747
 
2008  
167,747
 
2009  
167,747
 
2010  
38,170
 
     
  
$
541,411
 

NOTE 12 - BANK BORROWINGS
   Notes  
June 30,
2006
  
December 31,
2005
 
      (Unaudited)    
           
Bank term loans  (i) 
$
318,870
 
$
564,704
 
Short-term unsecured bank loans  (ii)  
498,493
  
539,583
 
Mid-term loan  (iii)  
268,957
  
586,436
 
Mid-term secured bank loan  (iv)  
1,307,765
  
1,466,574
 
           
      
2,394,085
  
3,157,297
 
Less: Balances maturing within one year included in current liabilities          
Bank term loans     
82,038
  
145,042
 
Short-term unsecured bank loans     
498,493
  
539,583
 
Mid-term loan     
157,248
  
586,436
 
19
   Notes   
 June 30,
2006 
 
 December 31,
2005 
 
      (Unaudited)     
          
Mid-term secured bank loan     
308,651
  
245,845
 
           
      
1,046,430
  
1,516,906
 
           
Bank borrowings maturing after one year    
$
1,347,655
 
$
1,640,391
 
Note:
(i)This line item represents bank loans that have been secured by a pledge of post-dated checks amounting to $590,761 and $873,215 that we have received from franchisees and the Group’s bank deposits of $47,301 and $46,456 as of June 30, 2006 and December 31, 2005, respectively, for the purpose of financing operations. The repayment dates of the loans coincided with the maturity dates of the corresponding pledged post-dated checks. The weighted average interest rates were 6.055% and 5.88% per annum as of June 30, 2006 and 2005, respectively. For the six months ended June 30, 2006 and 2005, the interest expenses charged to operations amounted to $12,887 and $27,775, respectively.
(ii)In August 2005, KCIT obtained an unsecured short-term loan in the amount of $304,553 and was extended on February 2006, which was collateralized by notes receivables in the amount approximately the loan balance, the KCIT’s refundable deposits of $60,911 and notes receivables approximating 30% of loan balance, and guaranteed by two directors and stockholders of the Group, to finance the Group’s operations. The loan bears interest at the lending bank’s basic borrowing rate plus 3.29% per annum and is due and payable in August 2006. The applicable interest rate is approximately 5% per annum as of June 30, 2006.
In April 2006, KCIT obtained an unsecured short-term loan in the amount of $214,173, which was guaranteed by two directors and stockholders of the Group, to finance the Group’s operations. The loan bears interest at the Taiwan basic borrowing rate plus 1.65% per annum and was fully settled in March 2007.
For the six months ended June 30, 2006 and 2005, the interest expense charged to operations from the above six unsecured short-term loans amounted to $14,622 and $28,504, respectively.
(iii)In June 2005, KCIT obtained a loan of $609,106 from a financial institution, which bore interest at 5% per annum and was repayable in 18 equal monthly installments, to finance the Group’s operations. The last installment was due on December 13, 2006. As of June 30, 2006, the loan was collateralized by the KCIT’s refundable deposits of 121,821 and notes receivables approximating 20% of loan balance, and the Group repaid $406,376.
For the six months ended June 30, 2006 and 2005, the interest expenses charged to operations from the aforementioned loans amounted to $8,600 and $34,836, respectively.
(iv)In August 2005, KCIT obtained a bank loan in the principal amount of $944,115 to repay its mortgage loan that was originally granted by a bank on August 10, 2005 and to finance its operations. The loan is secured by the Group’s land and buildings and personal guarantees provide by two directors of the Group. The loan bears interest at the lending bank’s basic fixed deposit rate plus 0.69% between annum for the year 2005 to 2007, and plus 1.69% from the annum for the year 2008.  On August 10, 2005, the bank extended the term of the loan and the Group repays the loan, which is now repayable in 84 equal monthly installments starting August 10, 2012. As of June 30, 2006, the applicable interest rate is approximately 2.4%, the Group repaid $44,287
20
In February 2005, KCIT obtained a new bank loan of $456,830, which bears interest at 6% per annum and is repayable in 36 equal monthly installments. The last installment will be due on February 2, 2008, was collateralized by notes receivables in 30% approximating the loan balance, and guaranteed by two directors of the Group. As of June 30, 2006, the Group repaid $196,724
In August 2005, KCIT obtained a new bank loan of $213,187, which bears interest at 3.7% per annum, and is repayable in 60 equal monthly installments. The last installment will be due on August 10, 2010, and guaranteed by two directors of the Group. As of June 30, 2006, the Group repaid $33,511
For the six months ended June 30, 2006 and 2005, the interest expense charged to operations amounted to $25,378 and $29,298, respectively.
NOTE 13 - RECEIPTS IN ADVANCE
The balance comprises:
   Notes  
June 30,
2006
  
December 31,
2005
 
      (Unaudited)    
           
Current liabilities:          
Sales deposits received  (i) 
$
964,227
 
$
682,553
 
Franchising income received  (ii)  
1,592,603
  
1,391,625
 
Subscription fees received  (iii)  
308,058
  
234,342
 
Others     
22,301
  
45,160
 
      
2,887,189
  
2,353,680
 
           
Long-term liabilities:          
Franchising income received  (ii)  
1,542,355
  
1,130,207
 
           
     
$
4,429,544
 
$
3,483,887
 
Note:
(i)The balance represents receipts in advance from customers for goods sold to them.
(ii)
The balance mainly represents franchising income received in advance which is attributable to the periods after the respective period end dates.
(iii)The balance represents subscription fees received in advance for subscription of magazines published by the Group.
NOTE 14 - OTHER PAYABLES
As of June 30, 2006, the balance of other payables was $801,372, and included the short-term loans with a per annum interest rate of 7% from third parties, Olympic and Shih, of $347,636 and $60,089, respectively, as discussed in Note 10 (viii), footnote1.

21

NOTE 15 - RETIREMENT PLANS

    The Group maintains tax-qualified defined contribution and benefit retirement plans for its employees in accordance with ROC Labor Standard Law. On July 1, 2005, the Bureau of National Health Insurance issued new Labor Retirement pension regulations in Taiwan. As a result, the Group currently maintains two different retirement plans with contribution and benefit calculation formulas. The Group has a new defined contribution retirement plan (the “New Plan”) covering all regular employees of KCIT, and KCIT contributes a monthly amount equal to 6% of the employees’ base salaries and wages to the Bureau of National Health Insurance. The Group still maintains the benefit retirement plan (the “Old Plan”), which commenced in September 2003 and which only applies to the regular employees of KCIT who were employed before June 2005. KCIT contributes a monthly amount equal to 2% of the employees’ total salaries and wages to an independent retirement trust fund deposited with the Central Trust of China in accordance with the ROC Labor Standards Law in Taiwan. The retirement fund is not included in the Group’s financial statements. Net periodic pension cost is based on annual actuarial valuations, which use the projected unit credit cost method of calculation, and is charged to the consolidated statement of operations on a systematic basis over the average remaining service lives of current employees. Under the old plan, the employees are entitled to receive retirement benefits upon retirement in the manner stipulated by the ROC Labor Standard Law in Taiwan. The benefits under the old plan are based on various factors such as years of service and the final base salary preceding retirement.
     The net periodic pension cost is as follows:
  
Six months ended June 30,
  
 2006
 
 2005
 
  (Unaudited)
Service cost $
—
 $25,500 
Interest cost  6,181  4,884 
Expected return on assets  (2,455) (1,697)
Amortization of unrecognized loss  1,496  428 
       
Net periodic pension cost $5,222 $29,115 
NOTE 16 - GEOGRAPHICAL SEGMENTS
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:
  TaiwanThe PRCTotalCorporateEliminationsConsolidated
  
 Six months ended
June 30, 2006
 
 Six months ended
June 30, 2005
 
 Six months ended
June 30, 2006
 
 Six months ended
June 30, 2005
 
 Six months ended
June 30, 2006
 
 Six months ended
June 30, 2005
 
 Six months ended
June 30, 2006
 
 Six months ended
June 30, 2005
 
 Six months ended
June 30, 2006
 
 Six months ended
June 30, 2005
 
 Six months ended
June 30, 2006
 
 Six months ended
June 30, 2005
 
                                      
Revenue                                     
External revenue 
$
3,436,956
 
$
3,651,100
 
$
1,462,323
 
$
1,508,438
 
$
4,899,279
 
$
5,159,538
 
$
—
 
$
4,187
 
$
—
 
$
—
 
$
4,899,279
 
$
5,163,725
 
Inter-segment revenue  
(566
)
 
—
  
—
  
—
  
(566
)
 
—
  
—
  
—
  
—
  
—
  
(566
)
 
—
 
                                      
  
$
3,436,390
 
$
3,651,100
 
$
1,462,323
 
$
1,508,438
 
$
4,898,713
 
$
3,119,328
 
$
—
 
$
4,187
 
$
—
 
$
—
 
$
4,898,713
 
$
3,122,992
 
                                      
Profit (loss) from Operations 
$
425,672
 
$
395,666
 
$
113,846
 
$
(279,098
)
$
539,518
 
$
116,568
 
$
(125,902
)
$
(121,339
)
$
—
 
$
—
 
$
413,616
 
$
(4,772
)
                                      
Capital expenditures 
$
20,865
 
$
8,460
 
$
5,094
 
$
14,687
 
$
25,959
 
$
23,147
 
$
—
 
$
—
 
$
—
 
$
—
 
$
25,959
 
$
23,147
 
   June 30, 2006 December 31, 2005  June 30, 2006  December 31, 2005  June 30, 2006 December 31, 2005  June 30, 2006  December 31, 2005  June 30, 2006 December 31, 2005  June 30, 2006 December 31, 2005 
Total assets 
$
9,289,779
 
$
8,503,513
 
$
2,052,738
 
$
2,311,798
 
$
11,342,517
 
$
10,815,311
 
$
33,345
 
$
299,141
 
$
(120,224
)
$
(131,515
)
$
11,255,638
 
$
10,982,937
 
22

NOTE 17 - COMMITMENT AND CONTINGENCIES
A. Lease Commitment

     As of June 30, 2006, the Company’s future minimum lease payments under non-cancelable operating leases expiring in excess of one year are as follows:
Years ending December 31,   
2007 $244,847 
2008  61,481 
2009  20,494 
2010  
—
 
2011  
—
 
    
  $326,822 

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 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 fourth 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.

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Theour Quarterly Report on Form 10-Q/A10-Q for the quarterly period ended June 30,March 31, 2005 filed with the Securities and Exchange Commission on August 26,May 20, 2005 (the “First Amendment”) will beis being filed to restate Kid Castle's condensed consolidated statement of cash flow for the sixthree months ended June 30,March 31, 2005 to reflect the impact of cash withdrawals from, and repayments to the Company by the ex-Chief Financial Officer, Mr. Yu-En Chiu (referred to as “ex-CFO”), during the sixthree months period ended June 30,March 31, 2005. The impact of the restatement is described in detail in Note 3.12.1 to the accompanying restated condensed consolidated financial statements. Additionally, revisions have been made to the presentation and disclosures on related party transactions under Note 10, B. (x) footnote 1. Kid Castle has also revised the discussion under this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
     This report contains certain forward-looking statementsOperations, and information relatingItem 4, Controls and Procedures in order to us that are basedreflect the impact of the restatement on management's evaluation of the beliefseffectiveness of the Company's disclosure controls and assumptions made by our managementprocedures as well as information currently available to the management. When used in this document, the words “anticipate,” “believe,” “estimate,” and “expect” and similar expressions, are intended to identify forward-looking statements. Such statements reflect our current viewsof March 31, 2005. Except with respect to futurethese matters, the financial statements in this Form 10-Q/A do not reflect any subsequent events and are subject to certain risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. Certain of these risks and uncertainties are discussed underthat have occurred after 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 on2005 Form 10-K10-Q for the yearfirst quarter ended DecemberMarch 31, 2005. We do not intend to update these forward-looking statements.

23
2005 was initially filed.
 
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. Our major business originally started in Taiwan. In 2001, we started to expand our business in the People’s Republic of China (PRC). We officially launched our operations in Shanghai in April 2002. As in Taiwan, we offer advanced teaching materials and tools, and monthly and bi-weekly magazines to provide children ranging from 2 to 12 years of age a chance to learn 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, 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.ITEM 4. We recognize sales of teaching materials and educational tools and equipment as revenue when title of the product and risk of ownership are transferred to the customer, which occurs at the time of delivery, or when the goods arrive at the customer designated location, depending on the associated shipping terms. Additionally, we deliver products sold by our distributors directly to the distributors’ customers and as such the delivered goods are recognized as revenue in a similar way as sales to our direct customers. We estimate sales returns and discounts based on historical experience and record them as reductions to revenues.
 If market conditions were to decline, we may take actions to increase sales discounts, possibly resulting in an incremental reduction of revenue at the time when revenues are recognized.

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

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

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

24
Fixed Assets and Depreciation. Our fixed assets are stated at cost. Major improvements and betterments to existing facilities and equipment are capitalized. Expenditures for maintenance and repairs that do not extend the life of the applicable asset are charged to expense as incurred. Buildings are depreciated over a 50-year term. Fixtures and equipment are depreciated using the straight-line method over their estimated useful lives, which range from two-and-a-half years to ten years.

Impairment of Long-Lived Assets. We review our fixed assets and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset over its remaining useful life. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The estimate of fair value is generally based on quoted market prices or on the best available information, including prices for similar assets and the results of using other valuation techniques.
     As of June 30, 2006, the balance of our amortizable intangible assets was $625,284, including franchise-related intangible assets of $393,796 and copyrights of $231,488. 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. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and tax loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are subject to valuation allowances based upon management’s estimates of realizability. Actual results may differ significantly from management’s estimate.

RESULTS OF OPERATIONS

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

Total Net Operating Revenue. Total net operating revenue consists of sales of goods, franchising income and other operating revenue. Total net operating revenues decreased by $114,547, or 6%, to $1,926,186 for the three months ended June 30, 2006 from $2,040,733 for the three months ended June 30, 2005, including the increase in sales of goods of $134,857, the decrease in franchising income of $21,980 and the other operating revenues of $277,424.

Sales of goods. The increase in sales of goods, from $1,174,176 for the three months ended June 30, 2005 to $1,309,033 for the three months ended June 30, 2006, or 11%, was mainly due to increase in our Taiwan operations.

Franchising income. The decrease in franchising income, from $710,121 for the three months ended June 30, 2005 to $688,141 for the three months ended June 30, 2006, or 3%, was mainly due to the decrease in franchising income from certain schools that exceeded the increases in franchising income.

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 of our franchised schools. Other operating revenue decreased by $227,424, or 145%, to ($70,988) for the three months ended June 30, 2006 from $156,436 for the three months ended June 30, 2005. The decrease was mainly due to the reclassification of the copyright revenue of $111,244 to Franchising income.

25
Gross Profit. Gross profit decreased by $62,294, or 5%, to $1,232,880 for the three months ended June 30, 2006 from $1,295,174 for the three months ended June 30, 2005. The decrease in gross profit was attributable to the decrease in revenue.

Total Operating Expenses. Total operating expenses decreased by $44,278, or 3%, to $1,444,257 for the three months ended June 30, 2006 from $1,488,535 for the three months ended June 30, 2005, principally due to decreases in salary expenses resulting from a reduction in employee headcount in our Taiwan and Shanghai operations.

Other Operating Expenses. Other operating expenses decreased by $35,534, or 2%, to $1,429,510 for the three months ended June 30, 2006 from $1,465,044 for the three months ended June 30, 2005, principally due to decreases in salary expenses resulting from a reduction in employee headcount in our Taiwan operations.

Interest Expenses, Net. Net interest expenses increased by $30,022, or 53%, to $86,752 for the three months ended June 30, 2006 from $56,730 for the three months ended June 30, 2005, primarily due to the increase of the borrowings from shareholders.

Provision for Taxes. Provision for taxes for the three months ended June 30, 2006 and 2005 were $18,428 and $41,297, respectively. These provisions for income taxes relate to income taxes resulting from our operations in Taiwan.

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

Total Net Operating Revenue. Total net operating revenue consists of sales of goods, franchising income and other operating revenue. Total net operating revenues decreased by $265,012, or5%, to $4,898,713 for the Six months ended June 30, 2006 from $5,163,725 for the Six months ended June 30, 2005, including the decrease in sales of goods of $19,802 and the franchising income of $113,358 and the other operating revenues of $131,852.

Sales of goods. The decrease in sales of goods, from $3,549,331 for the Six months ended June 30, 2005 to $3,529,529 for the Six months ended June 30, 2006, or 0.6%, was mainly due to exchange rate differences.

Franchising income. The decrease in franchising income, from $1,308,046 for the Six months ended June 30, 2005 to $1,194,688 for the Six months ended June 30, 2006, or 9%, was mainly due to the decrease in franchising income from certain schools that exceeded the increases in franchising income.

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 of our franchised schools. Other operating revenue decreased by $131,852, or 43%, to $174,496 for the Six months ended June 30, 2006 from $306,348 for the Six months ended June 30, 2005. The decrease was mainly due to the decrease in franchised schools.

Gross Profit. Gross profit decreased by $27,082, or 0.8%, to $3,275,544 for the Six months ended June 30, 2006 from $3,302,626 for the six months ended June 30, 2005. The decrease in gross profit was attributable to the decrease in revenue.

Total Operating Expenses. Total operating expenses decreased by $445,470, or 13%, to $2,861,928 for the six months ended June 30, 2006 from $3,307,398 for the six months ended June 30, 2005, principally due to decreases in salary expenses resulting from a reduction in employee headcount in our Taiwan and Shanghai operations.
26
Other Operating Expenses. Other operating expenses decreased by $405,904, or 12%, to $2,844,640 for the six months ended June 30, 2006 from $3,250,544 for the six months ended June 30, 2005, principally due to decreases in salary expenses resulting from a reduction in employee headcount in our Taiwan operations.

Interest Expenses, Net. Net interest expenses increased by $4,142, or 4%, to $120,125 for the six months ended June 30, 2006 from $115,983 for the six months ended June 30, 2005, primarily due to the increase of the borrowings from shareholders.

Provision for Taxes. Provision for taxes for the six months ended June 30, 2006 and 2005 were $186,909 and $184,750, respectively. These provisions for income taxes relate to income taxes resulting from our operations in Taiwan.

LIQUIDITYCONTROLS AND CAPITAL RESOURCES

Comparison of Fiscal Years 2006 and 2005

     As of June 30, 2006, our principal sources of liquidity included cash and bank balances of $1,285,438 which increased from $613,391 at December 31, 2005. The increase was mainly due to decreases in expenses of operations in Taiwan and Shanghai.

     Net cash (used in) provided by operating activities was $1,666,261 and $(941,456) during the six months ended June 30, 2006 and 2005, respectively. Net cash used in operating activities during the six months ended June 30, 2006 was primarily attributed to the net income, increase in receipts in advance and decrease in notes and accounts receivable.

     Net cash provided by investing activities were $353,511 and $1,614,033 during the six months ended June 30, 2006 and 2005, respectively. The $1,260,522 difference was primarily attributable to less cash provided by the Pledged notes receivable, which was $386,928 during the six months ended June 30, 2006 compared to $1,625,505 during the six months ended June 30, 2005.

     Net cash used in financing activities during the six months ended June 30, 2006 was $1,320,401 as compared to $267,657 during the six months ended June 30, 2005. The $1,052,744 difference was primarily attributable to the decrease of net proceeds from bank borrowings and use in repayment of loan from officers/stockholders during the six months ended June 30, 2006.

Off-Balance Sheet Arrangements
     As of June 30, 2006, we did not engage in any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K promulgated by the SEC under the Securities Exchange Act of 1934.

Contractual Obligations

The following table represents the Group’s contractual obligations:

  
Payments Due by Period
   
Total
  
2006
  
2007
  
2008
  
2009
  
2010
  
Thereafter
 
  
(Thousand dollars)
Contractual obligations
Bank borrowing  3,157  1,643  515  147  93  93  666 
Pension benefit  29  —  —  —  —  —  29 
Operating leases  1,644  305  248  222  208  135  526 
Total  4,830  1,948  763  369  301  228  1,221 
27
Bank Borrowing
     One of our financing sources is from bank borrowings. As of June 30, 2006 and 2005, the balances of bank borrowings, including current and non-current portions, were $2,394,085 and $4,026,406, respectively.

Pension Benefit
 As of July 1, 2005, the Group maintains two different retirement plans. Persuant to ROC Labor Standard Law, we have a non-contributory and funded defined contribution retirement plan (the “New Plan”) covering all regular employees of KCIT, our subsidiary in Taiwan, and we still maintains the benefit retirement plan (the “Old Plan”), which commenced in September 2003 and only applies to the regular employees of KCIT whom were employed before June 2005, as described in Note15 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 $29,969, respectively. We also make defined contributions to a retirement benefits plan for our employees in the PRC in accordance with local regulations. The contributions made by us for the six months ended June 30, 2006 and 2005 amounted to $16,403, and $40,880, respectively.
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 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 fourth 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 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 November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs (as amended) an amendment of ARB No. 43. This statement clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This statement requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal.” It is effective for all fiscal years beginning after June 15, 2005. The Company does not expect the implementation of this statement to have a material impact on its consolidated financial statements.

Non-GAAP Financial Measures
     None.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     We are exposed to market risk, including from changes in certain foreign currency exchange rates and interest rates. All of these market risks arise in the normal course of business, as we do not engage in speculative trading activities. We have not entered into derivative or hedging transactions to manage risk in connection with such fluctuations.
28
     The following analysis provides quantitative information regarding our exposure to foreign currency exchange risk and interest rate risk.
Interest rate exposurePROCEDURES

We are exposed to fluctuating interest rates related to variable rate bank borrowings. In analyzing the effect of interest rate fluctuations based on the average balances of our outstanding bank borrowings for fiscal year 2006, we have projected that, if interest rates were to increase by 1%, the result would be an annual increase in our interest expense of $24,057. 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 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 Dollars. The functional currency of 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 these entities in RMB. In the normal course of business, these operations are not exposed to fluctuations in currency values. We do not generally enter into derivative financial instruments in the normal course of business, nor do we use such instruments for speculative purposes. The translation from the applicable local currency assets and liabilities to the U.S. Dollar is performed using exchange rates in effect at the balance sheet date except for shareholders’ equity, which is translated at historical exchange rates. Revenue and expense accounts are translated using average exchange rates during the period. Gains and losses resulting from such translations are recorded as a cumulative translation adjustment, a separate component of shareholders’ equity.
ITEM 4.
CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

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

Based on deficiencies noted by our auditors, problems discovered relating to misuse of company funds by a company officer,our former CFO Yu En Chiu (are more fully described in the Company’s Form 8-K filed June 23, 2006 ), and other issues noted in our management’s evaluation, our conclusion is that as of DecemberMarch 31, 2005, our disclosure controls and procedures were ineffective. We are taking steps to improve our disclosure controls and procedures, instituting a new ERP system and engaging an outside accounting firm to advise the Company with respect to setting up internal auditing and other controls and procedures. The ERP system is expected to complete its trial run period by end of June 2007 and become independently and fully operational. The old system used by the Company would be phased out in the first six months of 2007. The phase out period involves the amalgamation of old data into the new ERP system, providing staff education and training of how to utilize the new ERP system as well as parallel running various functions and operations of the new ERP system along side the old system.
29


Management’s Report on Internal Control Over Financial ReportingPART II: OTHER INFORMATION
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the rules promulgated under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive, and financial accounting officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting.ITEM 6.EXHIBITS
 
We recognize that the internal controls and procedures adopted by the Company were inadequate and gave rise to misappropriation of funds as disclosed in our Current Report on Form 8-K filed on June 23, 2006. Among other improvements, we began implementing a comprehensive ERP system that would improve the Company’s internal controls. The ERP system is currently at trial and test-run stage. The required software and hardware input have been fully installed and the system is now running to detect bugs that may reside in the system. The system is expected to be fully operational in third fiscal quarter 2007. The Company believes that full implementation of its new ERP System will prevent misappropriation of funds by Company employees because the ERP system will perform the following functions:

·Maintain detailed records and produce comprehensive financial statements on a periodic basis allowing management to review and detect irregular financial activities.
·Place different check-points on the progression of ordinary monetary activities of the business.
·Delineate individual unit/departmental responsibilities and effectively separate respective departmental transactions so as to avoid intentional misappropriation of funds from taking place.

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

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

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

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

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

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

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

30

PART II OTHER INFORMATIONEXHIBIT INDEX 

ITEM 1.
LEGAL PROCEEDINGS

We have no material pending legal proceedings.

ITEM 1A.
RISK FACTORS

None.

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

None.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5.
OTHER INFORMATION

None.

ITEM 6.
EXHIBITS
A.Exhibit No. ExhibitsExhibit
31.1 Rule 13a-14(a) Certification of Principal Executive Officer
31.2 Rule 13a-14(a) Certification of Principal Financial Officer
32.1 Section 1350 Certification of Principal Executive Officer and Principal Financial Officer

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SIGNATURES 
 
In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Dated: May 8, 2007
   
Dated May 24, 2007BY:   By:/s/ Suang-Yi Pai  SUANG-YI PAI
 
Name: Suang-Yi Pai 
Title: Chief Financial Officer SUANG-YI PAI
CHIEF FINANCIAL OFFICER

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