Unassociated Document

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Kid Castle Educational Corporation

Condensed Consolidated Balance Sheets

(Unaudited)
(Expressed in US Dollars)

ASSETS	March 31, 2006		December 31, 2005

Current assets
Cash and bank balances	$	888,269	$	613,391
Bank fixed deposits - pledged (Note11)		75,450		120,813
Notes and accounts receivable, net (Notes 5)		2,537,982		2,593,276
Inventories, net (Note 6)		1,658,229		2,069,492
Other receivables (Notes 7)		317,049		223,063
Prepayments and other current assets (Note 8)		704,345		411,526
Pledged notes receivable (Note11)		992,274		849,704
Deferred income tax assets		77,630		72,992
Total current assets		7,251,228		6,954,257
Deferred income tax assets		71,059		46,382
Long-term investments (Note 9)		62,998		71,158
Property and equipment, net		1,798,411		1,808,411
Intangible assets, net of amortization (Note 11)		665,716		699,246
Long-term notes receivable		898,885		482,483
Pledged notes receivable (Note 12)		74,902		357,825
Other assets		368,983		563,175
Total assets	$	11,192,182	$	10,982,937
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Bank borrowings - short-term and maturing within one year (Note 12)	$	1,393,674	$	1,516,906
Notes and accounts payable		1,441,303		1,385,478
Accrued expenses		835,978		560,733
Amounts due to stockholders/officers (Note 10)		840,789		977,838
Other payables (Note 14)		914,320		1,057,161
Deposits received		837,673		462,007
Receipts in advance (Note13)		2,069,591		2,353,680
Income tax payable		195,561		122,481
Obligation under capital leases due within one year		8,010		—
Total current liabilities		8,536,899		8,436,284
Bank borrowings maturing after one year (Note 12)		1,307,211		1,640,391
Receipts in advance (Note13)		1,661,955		1,130,207
Obligation under capital leases		5,340		—
Deposits received		422,828		864,196
Deferred Liability		35,650		35,416
Accrued pension liabilities (Note 15)		173,203		174,387
Total liabilities		12,143,086		12,280,881

See accompanying notes to Condensed Consolidated Financial Statements.

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Kid Castle Educational Corporation

Condensed Consolidated Balance Sheets - Continued

(Unaudited)

(Expressed in US Dollars)

	March 31, 2006			December 31, 2005
Commitments and contingencies (Note 17)

Minority interest		47,823			28,627

Shareholders’ equity
Common stock, no par share :
25,000,000 shares authorized; 18,999,703 shares issued and outstanding at March 31, 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		(8,652,497	)		(9,010,356	)
Accumulated other comprehensive loss		(274,879	)		(244,864	)
Total shareholders’ equity		(998,727	)		(1,326,571	)
Total liabilities and shareholders’ equity	$	11,192,182		$	10,982,937

See accompanying notes to Condensed Consolidated Financial Statements.

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Kid Castle Educational Corporation

Condensed Consolidated Statements of Operations

(Expressed in US Dollars)

	Three months ended March 31,
	2006			2005
	(Unaudited)
Operating Revenue
Sales of goods	$	2,220,496		$	2,375,155
Franchising income		506,547			597,925
Other operating revenue		245,484			149,912
Total net operating revenue		2,972,527			3,122,992
Operating costs
Cost of goods sold		(807,487	)		(927,731	)
Cost of franchising		(80,125	)		(113,613	)
Other operating costs		(42,251	)		(74,196	)
Total operating costs		(929,863	)		(1,115,540	)
Gross profit		2,042,664			2,007,452
Advertising costs		(2,541	)		(33,363	)
Other operating expenses		(1,415,130	)		(1,785,500	)
Income from operations		624,993			188,589
Interest expenses, net		(33,373	)		(59,253	)
Share of income (loss) of investments		(8,594	)		12,483
Other non-operating income (loss), net		(37,735	)		(48,939	)
Income before income taxes		545,291			92,880
Benefit (provision) for taxes		(168,481	)		(143,453	)
(Loss) income after income taxes		376,810			(50,573	)
Minority interest income		(18,951	)		143
Net (loss) income	$	357,859		$	(50,430	)
(Loss) earnings per share - basic and diluted	$	0.019		$	(0.003	)
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.

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Kid Castle Educational Corporation

Condensed Consolidated Statements of Stockholders’ Equity

(Expressed in US Dollars)

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

Balance, December 31, 2004		18,999,703	$	7,669,308	$	194,021	$	65,320	$	(7,312,074	)	$	(222,650	)	$	393,925
Net loss for 2005		-		-		-		-		(1,698,282	)		-			(1,698,282	)
Cumulative translation adjustment		-		-		-		-		-			(22,214	)		(22,214	)
Comprehensive loss																(1,720,496	)

Balance, December 31, 2005		18,999,703	$	7,669,308	$	194,021	$	65,320	$	(9,010,356	)	$	(244,864	)	$	(1,326,571	)
Net income for the three months ended March 31, 2006 (Unaudited)		-		-		-		-		357,859			-			357,859
Cumulative translation adjustment (Unaudited)		-		-		-		-		-			(30,015	)		(30,015	)
Comprehensive loss (Unaudited)																327,844

Balance, March 31, 2006 (Unaudited)		18,999,703	$	7,669,308	$	194,021	$	65,320	$	(8,652,497	)	$	(274,879	)	$	(998,727	)

See accompanying notes to Condensed Consolidated Financial Statements.

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Kid Castle Educational Corporation

Condensed Consolidated Statements of Cash Flows

(Expressed in US Dollars)

	Three months ended March 31,
	2006			2005
	(Unaudited)

Cash flows from operating activities
Net (loss) income	$	357,859		$	(50,430	)
Adjustments to reconcile net (loss) income to net cash provided by operating activities
Depreciation of property and equipment		48,094			66,681
Amortization of intangible assets		41,813			42,835
Allowance for sales returns		97,042			95,267
Allowance for doubtful debts		220,814			284,537
Provision (reversal) of allowance for loss on inventory obsolescence and slow-moving items		48,514			6,452
Loss (gain) on disposal of property and equipment		-—			(9,010	)
Minority interests		18,951			(143	)
Share of loss (gain) of investments		8,594			(12,483	)
(Increase)/decrease in:
Notes and accounts receivable		(1,052,873	)		(775,674	)
Inventories		388,817			4,514
Other receivables		315,763			(129,129	)
Prepayments and other current assets		(202,414	)		41,002
Deferred income tax assets		(28,074	)		(32,194	)
Other assets		201,692			46,591
Increase/(decrease) in:
Notes and accounts payable		40,016			60,036
Accrued expenses		284,644			148,876
Other payables		(426,355	)		124,933
Receipts in advance		208,438			(147,307	)
Income taxes payable		72,020			115,635
Deferred Liability		(181	)		—
Deposits received		388,235			67,207
Accrued pension liabilities		(15,599	)		29,115

Net cash provided by (used in) operating activities		1,015,810			(22,689	)

Cash flows from investing activities
Purchase of property and equipment		(17,050	)		(104,562	)
Proceeds from disposal of property and equipment		—			72,795
Amount due from stockholder/director		—			—
Prepayment of long-term investments		—			—
Acquisition of long-term investments		—			—
Bank fixed deposits - pledged		46,990			(58,629	)
Pledged notes receivable		155,067			29,990
Advances to ex-CFO		—			(544,244	)
Repayments of advances to ex-CFO		—			544,244

Net cash provided by (used in) investing activities		185,007			(60,406	)

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Kid Castle Educational Corporation

Condensed Consolidated Statements of Cash Flows - Continued

(Expressed in US Dollars)

	Three months ended March 31,
	2006			2005
	(Unaudited)
Cash flows from financing activities
Proceeds from bank borrowings	$	(40,370	)	$	795,968
Proceeds from loan from a stockholder		—			—
Proceeds from capital leases		—			57,089
Repayment of bank borrowings		(454,960	)		(781,513	)
Repayment of capital leases		13,415			(10,910	)
Repayment of loan from officers/stockholders		(423,336	)		—

Net cash provided by (used in) financing activities		(905,251	)		60,634

Net increase (decrease) in cash and cash equivalents		295,566			(22,461	)

Effect of exchange rate changes on cash and cash equivalents		(20,688	)		(17,934	)

Cash and cash equivalents at beginning of period		613,391			213,564

Cash and cash equivalents at end of period	$	888,269		$	173,169

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

Other payables	$	—		$	6,473

Receipts in advance	$	—		$	258,156

See accompanying notes to Condensed Consolidated Financial Statements.

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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. 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.

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NOTE 2 - BASIS OF PRESENTATION

The accompanying financial data as of March 31, 2006 and for the three months ended March 31, 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 March 31, 2006, the balance of accumulated deficit was $8,652,497. 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 3.1 - RESTATEMENT

During the three months ended 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 March 31, 2005. The Company’s condensed consolidated statement of cash flows for the three months ended March 31, 2005 will be restated to disclose the resulting cash flow impact on the Condensed Consolidated Statement of Cash Flows. For further information related to such transaction, please refer to 2004 Form 10-K/A and 2005 Form 10-K filed on March 8, 2007

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		ó			(544,244	)
Repayments of advances to ex-CFO		ó			544,244
Net cash (used in) provided by investing activities		(60,406	)		(60,406	)

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NOTE 3.2 - SUMMARY OF IMPORTANT ACCOUNTING POLICIES

REVENUE RECOGNITION

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

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

ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

INVENTORIES

Inventories are stated at the lower of cost or market. 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.

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INCOME TAXES

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

INTANGIBLE ASSETS

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

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 three months ended March 31, 2005 and 2004, 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

	March 31, 2006			December 31, 2005
	(Unaudited)

Notes and accounts receivable
- Third parties	$	3,216,678		$	2,944,574
- Related parties (NOTE 10)		396,755			401,184

Total		3,613,433			3,345,758
Allowance for doubtful accounts and sales returns		(1,075,451	)		(752,482	)

Notes and accounts receivable, net	$	2,537,982		$	2,593,276

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NOTE 6 - INVENTORIES

	March 31, 2006			December 31, 2005
	(Unaudited)

Work in process	$	109,263		$	127,001
Finished goods and other merchandises		2,360,409			2,696,942

		2,469,672			2,823,943
Less: Allowance for obsolete inventories and decline of market value		(811,443	)		(754,451	)

	$	1,658,229		$	2,069,492

NOTE 7 - OTHER RECEIVABLES

	March 31, 2006			December 31, 2005
	(Unaudited)
Other receivables - third parties:
Tax paid on behalf of landlord	$	—		$	2,013
Advances to staff		128,484			125,590
Grants from Market Information Center		—			—
Receivables from Shanghai Wonderland Educational Resources Co., Ltd. (“Shanghai Wonderland”) (Note (i))		370,915			368,528
Other receivables		154,594			86,141
Less : Allow for doubtful accounts		(370,915	)		(368,528	)

Sub-total		283,078			213,744
Other receivables - related parties (NOTE 10)		33,971			9,319
	$	317,049		$	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 and RMB$2,500,000 (approximately $310,000) for operations in December 2003, July 2004 and August 2005, respectively, The identified loans were unsecured and bore no interest. Shanghai Wonderland has fully repaid the loan of RMB$450,000 in December 2004 and January 2005. As of March 31, 2006, Shanghai Wonderland still owes the Group a balance of RMB$3,000,000(approximately $370,915). Such sum has now been itemized and recorded as "allowance for doubtful accounts" compared to its prior recognition as "Other receivables".

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NOTE 8 - PREPAYMENTS AND OTHER CURRENT ASSETS

	March 31, 2006		December 31, 2005
	(Unaudited)

Prepayments	$	669,820	$	399,659
Temporary payments		1,059		11,038
Tax recoverable		—		—
Prepaid interest		22,440		—
Others		11,026		829

	$	704,345	$	411,526

NOTE 9- INTEREST IN ASSOCIATES

	March 31, 2006			December 31, 2005
	(Unaudited)

21^st Century Kid Castle Language and Education Center (“Education Center”) (Note (i))
Investment cost	$	93,544		$	92,942
Share of loss		(38,512	)		(40,803	)

	$	55,032		$	52,139

Tianjin Kid Castle Educational Investment Consulting Co., Ltd. (“Tianjin Consulting”) (Note (ii))
Investment cost	$	87,308		$	86,746
Share of loss		(91,171	)		(80,360	)

	$	(3,863	)	$	6,386

Lanbeisi Education &Culture Industrial Co., Ltd (“Lanbeisi”) (Note (iii))
Investment cost	$	44,901		$	44,612
Share of loss		(33,072	)		(31,979	)

	$	11,829		$	12,633

Total	$	62,998		$	71,158

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Note:

(i)

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 three months ended March 31, 2006 and 2005, the Group recognized investment income accounted for under the equity method in Education Center of $2,549 and 33,084, respectively.

(ii)

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

For the three months ended March 31, 2006 and 2005, the Group recognized an investment loss of $10,262 and $15,649 respectively, accounted for under the equity method, in Tianjin Consulting.

(iii)

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

For the three months ended March 31, 2006 and 2005, the Group recognized an investment loss of $844 and $4,952 respectively, accounted for under the equity method, in Lanbeisi.

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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, shareholder and in October 2005 resigned as chairman of the board of directors, president and chief executive officer of the Company. On October 18, 2006 resigned as director of the board of directors.

Mr. Yu-En Chiu		He is a director, shareholder and on June 1, 2006 resigned as chief financial officer and director of the board of directors. Mr. Chiu remained the Chairman of PRC operation until February 28, 2007,

Mr. Min-Tan Yang		Director and chief executive officer of the Company since November 2, 2005

Mr. Suang-Yi Pai		Director and appointed as chairman of the board since November 2, 2005.

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. Yu-En Chiu

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

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 director is Mr. Yu-En Chiu

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Taipei Country Private Kid’s Castle Yin Cyun Pre-school(“TCP Yin Cyun”)		Its chairman is Mr. Min-Tan Yang

Taipei Country Private Yin Tzu Preschool (“TCP Yin Tzu”)		Its chairman is Mr. Min-Tan Yang

Private Kuan Lung Short Term Language Cram School (“Kuan Lung Language”)		Its chairman is Mr. Min-Tan Yang

Taipei City Private Chu Sheng Preschool (“TCP Chu Sheng”)		Its chairman is Mr. Min-Tan Yang

Taipei Country Private Chu Yao Preschool (“TCP Chu Yao”)		Its chairman is Mr. Min-Tan Yang

Private Liang Yu Language & Computer School ("Liang Yu Language")		Its chairman 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

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

	Three months ended March 31,
	2006		2005
	(Unaudited)
(i) Sales to:
- PKC Language	$	-	$	3,030
- TCP PKC		-		3,030
- TCP Chevady		1,729		7,614
- TCP Chung-hua		1,729		7,614
- TCP Wonderland		-		5,349
- TCP Kid Castle		-		4,996
- Kuan Lung Language		5,416		-
- TCP Chu Yao		8,035		-
- TCP Chu Sheng		3,816		-
- TCP Yin Cyun		8,957		-
- TCP Yin Tzu		3,425		-
- Liang Yu Language		16,502		-
- English School		5,233		6,034
- Tianjin Consulting		9,984		4,589
- Lanbeisi		6,920		26,793

	$	71,746	$	69,049

-16-


(ii) Rental income from:
- CCE	$	-	$	476

	$	-	$	476

(iii) Franchising income from:
- PKC Language	$	-	$	136
- TCP PKC		-		136
- TCP Kid Castle		-		1,854
- TCP Chung-Hua		-		-
- TCP Chevady		-		927
- TCP Wonderland		-		927
- TCP Chu Sheng		1,763		-
- TCP Chu Yao		1,764		-
- TCP Yin Cyun		637		-
- TCP Yin Tzu		3,400		-

	$	7,564	$	3,980

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

(v)	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.

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.

(vi)	Accounts and notes receivable - related parties:

	March 31,		December 31,
Name of related parties	2006		2005
	(Unaudited)

- PKC Language	$	38,934	$	26,147
- TCP PKC		38,934		52,294
- TCP Chung-hua		51,350		53,665
- TCP Chevady		48,199		48,685
- TCP Wonderland		48,199		48,685
- TCP Kid Castle		56,425		58,172
- TCP Yin Cyun		19,485		33,585
- Kuan Lung Language		170		─
- TCP Chu Yao		18,540		─
- TCP Chu Sheng		18,333		─
- TCP Yin Tzu		13,950		29,062
- Liang Yu Language		5,718		12,071
- Education Center		39		ó
- Tianjin Consulting		17,023		20,826
- Lanbeisi		21,456		17,992

	$	396,755	$	401,184

-17-

(vii)

Other receivables - related parties:

	March 31,		December 31,
Name of related parties	2006		2005
	(Unaudited)

Amount due from Publishing House (Note 1)	$	─	$	─
Amount due from Education Center (Note 2)		277		─
Amount due from Tianjin Consulting (Note 3)		633		15
Amount due from Lanbeisi (Note 4)		33,061		9,304

	$	33,971	$	9,319

Note:

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.

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.

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

1. Amount due to officers/directors:

Name of Related Parties	March 31, 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

	$	840,789	$	977,838

Note1 :

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

NOTE 11 - INTANGIBLE ASSETS

	March 31, 2006			December 31, 2005
	(Unaudited)

Gross carrying amount
Franchise	$	1,048,148		$	1,036,178
Copyrights		616,143			609,106

		1,664,291			1,645,284
Less: Accumulated amortization
Franchise		(628,889	)		(595,802	)
Copyrights		(369,686	)		(350,236	)

		(998,575	)		(946,038	)

Net	$	665,716		$	699,246

Amortization charged to operations was $41,813 and $42,835 for the three months ended March 31, 2006 and 2005, respectively.

-19-

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

2007	$	164,528
2008		164,528
2009		164,528
2010		41,138

	$	534,722

NOTE 12 - BANK BORROWINGS

	Notes		March 31, 2006		December 31, 2005
			(Unaudited)

Bank term loans		(i)	$	443,787	$	564,704
Short-term unsecured bank loans		(ii)		521,840		539,583
Mid-term loan		(iii)		313,840		586,436
Mid-term secured bank loan		(iv)		1,421,418		1,466,574

				2,700,885		3,157,297
Less: Balances maturing within one year included in current liabilities
Bank term loans				308,112		145,042
Short-term unsecured bank loans				521,840		539,583
Mid-term loan				313,841		586,436
Mid-term secured bank loan				249,881		245,845

				1,393,674		1,516,906

Bank borrowings maturing after one year			$	1,307,211	$	1,640,391

Note:

(i)

This line item represents bank loans that have been secured by a pledge of post-dated checks amounting to $883,303 and $873,215 that we have received from franchisees and the Group’s bank deposits of $13,834 and $46,456 as of March 31, 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, and was extended on March 21, 2005. The weighted average interest rates were 5.83% and 5.88% per annum as of March 31, 2006 and 2005, respectively. For the three months ended March 31, 2006 and 2005, the interest expenses charged to operations amounted to $7,301 and $14,758, respectively.

(ii)

In August 2005, KCIT obtained an unsecured short-term loan to finance the Group’s operations in the amount of $304,553, which was extended on February 2006, collateralized by 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. The loan bears interest at the lending bank’s basic fixed deposit rate plus 3.29% per annum and is due and payable in August 2006. The applicable interest rate is approximately 5.3% per annum as of March 31, 2006.

-20-

In March 2005, KCIT obtained an unsecured short-term loan to finance the Group’s operations in the amount of $304,553, which was extended on April 7, 2006, guaranteed by two directors and stockholders of the Group. The loan bears interest at the Taiwan basic borrowing rate plus 1.65% per annum and was fully settled in September 2006.

For the three months ended March 31, 2006 and 2005, the interest expense charged to operations from the above three unsecured short-term loans amounted to $7,192 and $11,840 respectively.

(iii)

In June 2005, KCIT obtained from a financial institution a loan, which bore interest at 5% per annum and was repayable in 18 equal monthly installments, to finance the Group’s operations in the amount of $609,106. The last installment was due on December 13, 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 $302,303.

For the three months ended March 31, 2006 and 2005, the interest expenses charged to operations from the aforementioned loan amounted to $5,061 and $19,550, 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% per annum for the year 2005 to 2007, and plus 1.69% per annum for the year 2008. On August 10, 2005, the bank extended the term of the loan and it is now repayable in 84 equal monthly installments starting on August 10, 2012. As of March 31, 2006, the applicable interest rate is approximately 2.7% and the Group has repaid $30,934

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 March 31, 2006, the Group repaid $158,166.

In August 2005, KCIT obtained a new bank loan of $213,187, which bears interest at 3.8% 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 March 31, 2006, the Group repaid $23,308

For the three months ended March 31, 2006 and 2005, the interest expenses charged to operations amounted to $12,860 and $14,335, respectively.

NOTE 13 - RECEIPTS IN ADVANCE

The balance comprises:

	Notes		March 31, 2006		December 31, 2005
			(Unaudited)

Current liabilities:
Sales deposits received		(i)	$	420,398	$	682,553
Franchising income received		(ii)		1,399,542		1,391,625
Subscription fees received		(iii)		237,044		234,342
Others				12,607		45,160
				2,069,591		2,353,680

Long-term liabilities:
Franchising income received		(ii)		1,661,955		1,130,207

			$	3,731,546	$	3,483,887

-21-

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 March 31, 2006, the balance of other payables was $914,320, 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.

NOTE 15 - RETIREMENT PLANS

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

-22-

The net periodic pension cost is as follows:


	Three months ended March 31,
	2006			2005
	(Unaudited)

Service cost	$	-		$	25,500
Interest cost		3,081			4,884
Expected return on assets		(612	)		(1,697	)
Amortization of unrecognized loss		746			428


Net periodic pension cost	$	3,215		$	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:

	Taiwan				The PRC					Total				Corporate						Eliminations					Consolidated
	Three months ended March 31, 2006		Three months ended March 31, 2005		Three months ended March 31, 2006		Three months ended March 31, 2005			Three months ended March 31, 2006		Three months ended March 31, 2005		Three months ended March 31, 2006			Three months ended March 31, 2005			Three months ended March 31, 2006		Three months ended March 31, 2005			Three months ended March 31, 2006		Three months ended March 31, 2005

Revenue
External revenue	$	1,948,125	$	2,313,293	$	1,024,402	$	805,513		$	2,972,527	$	3,118,806	$	—		$	4,186		$	—	$	—		$	2,972,527	$	3,122,992
Inter-segment revenue		—		522		—		—			—		522		—			—			—		(522	)		—		—

	$	1,948,125	$	2,313,815	$	1,024,402	$	805,513		$	2,972,527	$	3,119,328	$	—		$	4,186		$	—	$	(522	)	$	2,972,527	$	3,122,992

Profit (loss) from Operations	$	678,738	$	452,556	$	66,338	$	(206,377	)	$	745,076	$	246,178	$	(120,083	)	$	(57,590	)	$	—	$	—		$	624,993	$	188,589

Capital expenditures	$	18,669	$	11,475	$	1,619	$	3,208		$	20,288	$	14,683	$	—		$	—		$	—	$	—		$	20,288	$	14,683

	March 31, 2006		December 31, 2005		March 31, 2006		December 31, 2005		March 31, 2006		December 31, 2005		March 31, 2006		December 31, 2005		March 31, 2006			December 31, 2005			March 31, 2006		December 31, 2005

Total assets	$	9,015,906	$	8,503,513	$	2,555,267	$	2,311,798	$	11,571,173	$	10,815,311	$	79,389	$	299,141	$	(458,380	)	$	(131,515	)	$	11,192,182	$	10,982,937

NOTE 17 - COMMITMENT AND CONTINGENCIES

A. Lease Commitment

As of March 31, 2006, the Company’s future minimum lease payments under non-cancelable operating lease expiring in excess of one year are as follows:


Years ending December 31,
2007	$	244,127
2008		61,300
2009		20,433
2010		ó
2011		ó

	$	325,860

-23-

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

The Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005 filed with the Securities and Exchange Commission on May 20, 2005 will be filed to restate Kid Castle's condensed consolidated statement of cash flows for the three months ended 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 three month period ended March 31, 2005. The impact of the restatement is described in detail in Note 3.1 to the accompanying restated condensed consolidated financial statements. Additionally, Kid Castle has also revised the discussion under Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This report contains certain forward-looking statements and information relating to us that are based on the beliefs and assumptions made by our management as well as information currently available to the management. When used in this document, the words “anticipate,” “believe,” “estimate,” and “expect” and similar expressions, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. Certain of these risks and uncertainties are discussed under the caption “Factors That May Affect Our Future Results And Financial Condition” contained herein and other factors disclosed in our filings with the Securities and Exchange Commission including, but not limited to our Annual Report on Form 10-K for the year ended December 31, 2005. 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. 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.

-24-

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

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

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

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

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

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

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

-25-

As of March 31, 2006, the balance of our amortizable intangible assets was $665,716, including franchise-related intangible assets of $419,259 and copyrights of $246,457. 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 March 31, 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 $150,465, or4.8%, to $2,972,527 for the three months ended March 31, 2006 from $3,122,992 for the three months ended March 31, 2005, including the decrease in sales of goods of $154,659 and the franchising income of $91,378 and the increase in other operating revenues of $95,572.

Sales of goods. The decrease in sales of goods, from $2,375,155 for the three months ended March 31, 2005 to $2,220,496 for the three months ended March 31, 2006, or 6.5%, was mainly due to the decrease in net sales of goods from our Taiwan operations of $318,090, or18%, to $1,458,080 for the three months ended March 31, 2006 from $1,776,170 for the three months ended March 31, 2005.

Franchising income. The decrease in franchising income, from $597,925 for the three months ended March 31, 2005 to $506,547 for the three months ended March 31, 2006, or 15%, was mainly due to the decrease in franchising income from certain schools that exceeded the decreases in franchising income from Taiwan.

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 increased by $95,572, or 64%, to $245,484 for the three months ended March 31, 2006 from $149,912 for the three months ended March 31, 2005. The increase was mainly due to revenue generated from our services rendered in connection with the construction and design layout of our franchised schools and sales of education-related equipment to our franchised schools.

Gross Profit. Gross profit increased by $35,212, or 2%, to $2,042,664 for the three months ended March 31, 2006 from $2,007,452 for the three months ended March 31, 2005. The increase in gross profit was attributable to the fact that the rate of decrease in our franchising costs and other operating costs from March 31, 2005 to March 31, 2006 was higher than the rate of decrease in our franchising income and other operating income for the same period.

Total Operating Expenses. Total operating expenses decreased by $401,192, or 22%, to $1,417,671 for the three months ended March 31, 2006 from $1,818,863 for the three months ended March 31, 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 $370,370, or 21%, to $1,415,130 for the three months ended March 31, 2006 from $1,785,500 for the three months ended March 31, 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 decreased by $25,880, or 44%, to $33,373 for the three months ended March 31, 2006 from $59,253 for the three months ended March 31, 2005, primarily due to the decrease of the borrowings during the three months ended March 31, 2006 comparing to the three months ended March 31, 2005 (please refer to Note 12 to our Condensed Consolidated Financial Statements for more information).

Provision for Taxes. Provision for taxes for the three months ended March 31, 2006 and 2005 were $168,481 and $143,453, respectively. These provisions for income taxes relate to income taxes resulting from our operations in Taiwan.

LIQUIDITY AND CAPITAL RESOURCES

Comparison of Fiscal Years 2006 and 2005

As of March 31, 2006, our principal sources of liquidity included cash and bank balances of $888,269 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 $1,015,810 and ($22,689) during the three months ended March 31, 2006 and 2005, respectively. Net cash used in operating activities during the three months ended March 31, 2006 was primarily attributed to net incomes.

Net cash (used in) provided by investing activities were $185,007 and ($60,406) during the three months ended March 31, 2006 and 2005, respectively. The $245,413 difference was primarily attributable to (i) less cash used in the purchase of property and equipment ($17,050) during the three months ended March 31, 2006, compared to that of ($104,562) during the three months ended March 31, 2005, {ii}cash provided by pledged bank fixed deposits of $46,990 during the three months ended March 31, 2006, compared to cash used of ($58,629) during the three months ended March 31, 2005 and (iii) a increase of $125,077 in cash provided by Pledged notes receivable.

Net cash (used in) provided by financing activities during the three months ended March 31, 2006 was ($905,251) as compared to $60,634 during the three months ended March 31, 2005. The $965,885 difference was primarily attributable to the decrease in net proceeds from bank borrowings during the three months ended March 31, 2006.

Off-Balance Sheet Arrangements

As of March 31, 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.

Bank Borrowing

One of our financing sources is from bank borrowings. As of March 31, 2006 and 2005, the balances of bank borrowings, including current and non-current portions, were $2,700,885 and $4,320,982, respectively.

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Pension Benefit

As of July 1, 2005, the Group maintains two different retirement plans, according to ROC Labor Standard Law, a non-contributory and funded defined contribution retirement plan (the “New Plan”) covering all regular employees of KCIT, our subsidiary in Taiwan, and the benefit retirement plan (the “Old Plan”) which commenced in September 2003, and only applies to the regular employees of KCIT 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 three months ended March 31, 2006 and 2005 amounted to $12,751, and $11,497, 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 Note12 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 (please refer to Note12 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 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.

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:

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·	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; or

·	attract and retain qualified personnel.

We have incurred operating losses since inception. As a result, as of March 31, 2006, we had an accumulated deficit of $8,652,497. We incurred net losses of$1,940,591, $1,254,592 and $1,698,282 for the years ended December 31, 2003, 2004 and 2005, respectively, and had cash flow from operations of ($2,689,688), ($1,544,902) and ($1,295,250) for the years ended December 31, 2003, 2004 and 2005, 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

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 operated 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.

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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 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 number of 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, 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. This 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 and learning products and services, which could result in reducing our market share.

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.

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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 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 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, 2003, 2004 and 2005, our bank loans and loans from financial institutions were $2,484,471, $4,284,807 and 3,157,297, respectively. Although, in our 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.

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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 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, and our operating subsidiaries are Taiwan and People’s Republic of China companies, you may be unable to enforce judgments under the Securities Act.

Our operating subsidiaries are a Taiwanese company and a 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 obtained against such persons in the United States courts and predicated upon the civil liability provisions of the Securities Act.

Our internal controls and management systems are not currently consistent with international practices in certain respects and we 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 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 certify the management’s assertion of the effectiveness of our internal controls as required under the Sarbanes-Oxley Act of 2002. This could subject us to regulatory scrutiny and result in a loss of public confidence in our management, which could, among other things, adversely affect our stock price.

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If we lose key management or other personnel, we may experience delays in our product development and other negative effects on our business.

Our success is dependent upon the personal efforts and abilities of our executive officers, Min-Tan Yang, our Chief Executive Officer, and Suang-Yi Pai, our Chief Financial Officer. If these key officerscease 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.

“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 spouses).

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.

Risks Relating to The People’s Republic of China

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.

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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

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

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

Interest rate exposure

We are exposed to fluctuating interest rates related to variable rate bank borrowings. In analyzing the effect of interest rate fluctuations based on the average balances of our outstanding bank borrowings for fiscal year 2006, we have projected that, if interest rates were to increase by 1 percent, the result would be an annual increase in our interest expense of $27,143. 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.

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ITEM 4. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

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

Based on deficiencies noted by our auditors, problems discovered relating to misuse of company funds by a company officer, and other issues noted in our management’s evaluation, our conclusion is that as of December 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.

Management’s Report on Internal Control Over Financial Reporting

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

We recognize that the internal controls and procedures adopted by the Company were inadequate and gave rise to misappropriation of funds as disclosed in our Current Report on Form 8-K filed 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.

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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.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We have no material pending legal proceedings.

ITEM 2. CHANGES IN SECURITIES

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS


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

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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: April 25, 2007



By:	/s/ Suang-Yi Pai
	Name:	Suang-Yi Pai
	Title:	Chief Financial Officer

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

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)

		Page
PART I	FINANCIAL INFORMATION
	Item 1. Unaudited Condensed Consolidated Financial Statements	2
	a) Condensed Consolidated Balance Sheet as of March 31, 2006 and December 31, 2005	2-3
	b) Condensed Consolidated Statements of Operations for the three months ended March 31, 2006 and March 31, 2005	4
	c) Condensed Consolidated Statements of Stockholders’ Equity	5
	d) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and March 31, 2005	6-7
	e) Notes to Condensed Consolidated Financial Statements	8-24
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	34
	Item 4. Controls and Procedures	35
PART II.	OTHER INFORMATION
	Item 1. Legal Proceedings	36
	Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	36
	Item 3. Defaults upon Senior Securities	36
	Item 4. Submission of Matters to a Vote of Security Holders	36
	Item 5. Other Information	36
	Item 6 Exhibits and Reports on Form 8-K	37
SIGNATURES


DATE: April 25, 2007	BY:	/s/ MIN TAN YANG
		MIN TAN YANG
		CHIEF EXECUTIVE OFFICER


DATE: April 25, 2007	BY:	/s/ SUANG-YI PAI
		SUANG-YI PAI
		CHIEF FINANCIAL OFFICER

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