KID CASTLE EDUCATIONAL CORP - Annual Report: 2006 (Form 10-K)

Unassociated Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 2006

	OR

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

Commission file number: 333-39629

KID CASTLE EDUCATIONAL

CORPORATION

(Exact name of registrant as specified in its Charter)

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

8th Floor, No. 98 Min Chuan Road
Hsien Tien, Taipei, Taiwan, Republic of China	N/A
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number including area code: (011) 886-2-2218-5996

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer x

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

Yes o No x

As of the last business day of the second fiscal quarter, June 30, 2006, the aggregate market value of the Registrant’s voting and non-voting stock held by non-affiliates of the Registrant was approximately $2,101,813 using the average bid and ask price on that day of $0.15.

The number of shares of common stock outstanding as of June 13, 2007 was 25,000,000.

DOCUMENTS INCORPORATED BY REFERENCE

None.

KID CASTLE EDUCATIONAL CORPORATION

FORM 10-K

TABLE OF CONTENTS

		Page
PART I
Item 1	Business	4
Item 1A	Risk Factors	15
Item 2	Properties	21
Item 3	Legal proceedings	21
Item 4	Submission of Matters to a Vote of Security Holders	21

PART II
Item 5	Market for Registrant’s Common Equity and Related Stockholder Matters	21
Item 6	Selected Financial Data	22
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operation	23
Item 8	Financial Statements and Supplementary Data	29
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	29
Item 9A	Controls and Procedures	29
Item 9B	Other Information	31

PART III
Item 10	Directors and Executive Officers of the Registrant	31
Item 11	Executive Compensation	32
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	35
Item 13	Certain Relationships and Related Transactions	35
Item 14	Principal Accountant Fees and Services	37

PART IV
Item 15	Exhibits and Financial Statement Schedules	37
Signatures		39
Exhibit Index		40

PART I

When we use the terms “Kid Castle,” “we,” “us,” “our,” and “the company,” we mean Kid Castle Educational Corporation, a Florida corporation, and its subsidiaries. Our principal subsidiaries are our wholly-owned subsidiary, Higoal Developments Limited (“Higoal”), and its wholly-owned subsidiaries, Kid Castle Internet Technologies Limited (“KCIT”), Kid Castle Educational Software Development Company Limited (“KCES”) and Shanghai Kid Castle Educational Info Constitution Company Limited (“KCEI”).

The information set forth in this Report on Form 10-K including, without limitation, that contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this report. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual future results will not be different from the expectations expressed in this report.

ITEM 1 BUSINESS

Overview

We are a leading provider in the People’s Republic of China ( “PRC” or “China”) and Republic of China (“ROC” or “Taiwan”) of English-language instruction and educational services to children for whom Chinese is the primary language. Our focus is on children between two and twelve years old. In 2006, we taught or provided educational materials for approximately 1,000,000 students at over 5,350 locations through our franchise and cooperative school operations.

We commenced operations in 1986 as an English-language school, and since then we have expanded our franchise operations to provide bilingual kindergarten instruction, computer training, and tutorial services. In September 1999, we began offering a variety of multimedia, including educational videos, textbooks, workbooks, and educational software, authored by us as fully functional, stand-alone products or as supplements to our classroom-based and Internet-based instruction.

English is the language of international business, and we believe a working knowledge of English has become increasingly important to long-term success throughout the world. Because English is becoming more prevalent around the world, we believe that there is growing demand for bilingual instruction in Chinese and English throughout a child’s educational process. As more parents and students seek such bilingual instruction for educational purposes, the English-language-instruction market will experience significant growth.

As part of our efforts to provide superior English-language instruction, we have worked with numerous universities to introduce foreign teachers into Taiwan from countries such as the United States, Canada, and England. We provide comprehensive training regimens and supportive plans for all of our teachers.

A significant part of our strategy is to design and market our innovative educational materials. These include English publications for students three to eight years old, supplemental English materials for students seven to eight years old, and children’s English materials for students seven to twelve years old. We have won awards relating to our products and services from major cities and educational bureaus including Taipei City, Taipei County, Taoyuan County, Taichung County, and Kaohsiung County.

Our Philosophy of Education

Teaching young children English is not simply language instruction; we must also consider the learning group’s social and language development. Kid Castle aims at cultivating a mature child, not just teaching a skill. We understand that language learning has close connections with all learning for young children.

Therefore, we have designed our teaching system following these significant principles:

We start with the respective skills and abilities that children already have because the teaching system must consider adaptability.

We encourage interaction because the ultimate goal of learning a language is to communicate with others.

We assist students’ comprehension with the language in various ways through conversation coordination—e.g., interactive games, activities, etc.

We encourage children to participate fully in the learning process through role-playing games.

We foster our students’ abilities to learn independently; our teaching focuses on guiding and inspiring a child’s self-learning abilities.

We create a relaxed, happy, and supportive learning environment so as to encourage children’s learning.

We use consistent testing and learning methods for children.

Our teaching materials and curriculum are specifically designed to suit different age-groups of children. Likewise, our teachers are specifically trained to work with children of different age groups. Listening, speaking, writing, and spelling skills form the basis of our primary curriculum.

Our Programs

Kid Castle After-School Education Program — Fostering Children’s Multiple Talents

Our After-School Education Program is becoming one of the most recognized and respected institutions of its kind in Taiwan. This program features professionally designed, in-depth research into curriculum and child development implemented by caring teachers. The guiding principle behind the program is to open up students’ minds to a more international worldview with a focus on information and technology.

The teaching materials of the After-School Education Program help our students learn basic conversational English through various themes and units. Beginning with the ABCs, by the time most students complete our program, they can speak and understand basic English. They have a foundation upon which they can build as they continue their studies. Fun activities that focus on speaking and listening are an integral part of each class.

Kid Castle recognizes that today’s children are the adults of tomorrow. To better prepare our students for the future, the program also includes a series of moral stories for students that teach them basic life skills and how to be better members of society.

Kid Castle Preschool — Establishing English Learning Networks

Preparing our students to be leaders has always been one of our missions. We teach our children a number of different subjects in order to expose them to the wonders of the world and to what their future holds. Established island-wide in Taiwan, the successful Kid Castle Pre-Schools are where children three to six years old can get their start.

We have incorporated into our preschool curriculum an interactive teaching method that helps children learn English more effectively. We believe that our interactive multi-media and computer materials, including CD ROMs, make learning more appealing and interesting to children. We recognize that going to preschool is the first step many young children will take in their education and that each student’s needs are unique. To aid our students in learning, Kid Castle incorporates a number of teaching features into the preschool curriculum, such as colorful pictorial displays in our text books, posters, and educational VCD and DVD, and audio sound effects in our audio tapes and CDs.

To aid our students in socialization, Kid Castle fosters interaction among all of the children in the class. We help them begin to establish interpersonal relations, gain self-confidence, and learn how to express themselves through English, Total Physical Response (“TPR”), arts and crafts, and other means.

Finally, Kid Castle places much emphasis on the interaction and relationship between children, parents, teachers, and administrators at the preschools. Regular academic and development reports and meetings between the various parties help keep parents informed of their children’s progress and assist the parents when supervising studies of their children after school.

Kid Castle Publishing — Bringing English to Your Children

Our specially designed educational materials are an essential part of our business. Kid Castle publishes a wide range of successful teaching and learning materials for children, including Chinese textbooks for kindergartens, English textbooks, workbooks, English magazines, and accompanying guides, music CDs, tapes, VCD and DVD, and other supplemental materials for kindergarten and elementary levels. Our market includes individuals, organizations, elementary schools, and third-party language schools. In addition to publications, Kid Castle provides relevant complimentary resources (including provision of note books and stationery) and services (including serving after-school snacks) to its customers.

Competitive Strengths

We are one of the leading English-language tutoring centers in Taiwan. We are in the process of establishing our market position in China, with far-reaching connections across both regions. We believe that our competitive strengths distinguish us from our competitors. Those strengths include:

Marketing advantages

Kid Castle has:

350 franchises; and

over 5,000 schools using our materials.

Superior Quality

We believe that we have created a successful corporate brand name. We have over 21 years of management experience in the education industry, and we have received recognition for our teaching materials from five local school districts in the ROC. We also have engaged highly-qualified English teachers from some of the finest learning institutions in the United States and England, including the University of California Los Angeles, Brown University, Cornell University, Cambridge University, the University of London, and Warwick University.

The English-language Education Market

Analysis of Preschool and Elementary School Markets in Taiwan

Preschool Educational Market. Among the 1.3 million children in Taiwan between the ages of two to six, we estimate that 45% (approximately 585,000 children) attend preschools and that approximately 70% (about 910,000 children) purchase English-learning materials (population data provided by the Taiwanese Ministry of the Interior - http://www.moi.gov.tw/stat/index.asp).

Elementary School English-language Materials. The Department of Education of ROC has issued a directive that, from the 2002 academic year onward, computer skills and English must be incorporated into the school curriculum for all students in third grade and above. As a result, we believe that, over the next decade, nearly 1.8 million students (the number of students in ROC public schools) will require English-language materials as study aids. Taiwanese schools have little experience in the new curriculum, proper teaching materials are inadequate, and qualified teaching personnel are in short supply.

After-School Education. We believe that children’s after-school education will move in the direction of diversification of products, increased dissemination of information, and additional education that complements the school curriculum with English and computer skills. We estimate that approximately 60% of Taiwan’s 1.8 million elementary students aged seven to twelve will participate in after-school courses over the next decade.

China Market Overview

According to the 2006 market survey by the National Bureau of Statistics of China (“NBSC”) (available at http://www.moe.edu.cn/edoas/website18/info20732.htm) the English-education market in China is comprised of 226 million children for the preschool market and 107 million elementary students for the after-school tutoring market.

Despite such a large market potential and business opportunity, it remains difficult to establish private child-education businesses in China. Foreign companies have difficulties operating in China due to differences in cultural background and teaching methods. We believe that we are an ideal candidate to operate in China because we operate successful education institutions in Taiwan, a country that shares similarities with China in terms of culture, teaching methods, and expectations for learning outcomes.

Over the past ten years, China has seen impressive economic growth. With this economic growth, consumers have greatly increased their expenditures. And with the government motto, “Children are our treasure,” parents are generously investing in their children’s education, including enrolling their children into premium kindergartens and after-school tutoring to improve English-language skills and computer literacy. Parents invest in their children’s education with the desire and expectation that their children will be qualified to enroll in prominent secondary schools and internationally recognized universities.

In 2002, China began to aggressively incorporate English into its elementary school curriculum. The teaching materials and methods of the state kindergartens are not able to satisfy the demand of parents searching for a high-quality, comprehensive learning environment. Chinese society has begun to demand that kindergarten curriculum be taught in English and Chinese. At 226 million preschoolers, we believe the current size of China’s preschool education market is still only at its nascent stages.

The belief that English language is a necessity to function in the modern world is being embedded in the minds and hearts of every household in China. That belief coincides with the following other factors that we believe will transform Chinese elementary education:

Hosting the 2008 Olympics has triggered country-wide modernization, investments in infrastructure, and policy changes that encourage economic growth in China. In particular, the service industry has enjoyed significant investment and modernization since the announcement of the 2008 Olympics. Because of that industry’s demand for employees with English-language skills, we believe that such modernization and growth will offer broader opportunities for private foreign business entities in general and English-language education providers in particular.

China’s preparations for the 2008 Olympics have encouraged broad scientific and cultural advancement. Such advancements further China’s emphasis on education and on its children. We believe that this will translate into an increased demand for English-language instruction.

Encouraging multi-lingual abilities and improving the quality of education are primary concerns for the PRC government. Consequently, the English-language instruction industry has seen a relaxation in government regulation that will allow KCEC to better realize its potential in China.

As a result of joining the World Trade Organization (“WTO”), China is transforming its education systems to match international standards, including English-language instruction.

Many college graduates leave China to continue their academic careers in foreign countries where fluency in the English language is a necessity.

Many foreign companies are establishing operations in China. The benefits of working for a foreign international company encourage parents to ensure their children have strong English-language skills that will qualify them for such employment.

China has a long-term plan to develop a more international orientation for its economy and its government. Such a plan requires a larger pool of workers with English-language skills. In 1996, then Premier Mr. Zhu Rongi stated that education is the key to promoting the PRC’s economy. This fundamental principle evolved into specific policies implemented by the PRC in 2001 and 2003. These policies relaxed entry restrictions to foreign investment in the education industry and made it easier for foreign education providers to operate in China. Article Three to the PRC Private Education Promotion Law stated that private education organizations are a beneficial and desirable attribute to society and should be highly encouraged and supported. The Chinese government has recently encouraged development of privately operated elementary schools and has launched a cooperative program aimed at improving Chinese educational systems using foreign knowledge and resources. We believe such government policy will greatly expand the private elementary school market and create enormous market potential.

On February 1, 2005, the PRC Government implemented the “Special Commercial Permit Management Regulation” (the “Management Rule”), which superseded the “Special Commercial Permit Management Regulation (Trial).” The Management Rule promotes predictability for private businesses in China’s mixed economy. It provides clear guidelines as to market entry requirements, disclosure mechanisms, and regulations that affect and regulate private businesses. The adoption of the Management Rule exemplifies the PRC Government’s determination to support foreign investment in private business; it increased transparency and set out clear guidelines that allow KCEC to better comply with regulations, which in turn led to better efficiency and operational performance. Because China needs foreign resources and know-how in the English-language education market, it has utilized its relaxed regulatory scheme to target companies like KCEC.

Strategy

From 2003 to 2006, we substantially increased our sales and marketing efforts in order to more aggressively market our franchises in China. Such expansion resulted in growth in the sales of our English-learning materials. While we expect to continue expanding our market share in China, we intend to do so by more efficiently utilizing our management and capital resources to more effectively manage our cost of goods sold and other operating expenses. We will continue to devote our resources to increasing the number of our franchises and expanding our publishing operations. On the other hand, we will cut nonessential operations to reduce our operating costs and improve our profitability.

We will plan our growth cautiously by carefully considering the choice of location for each of our franchise schools. We first consider whether a particular location is saturated with our franchise schools or other schools and potential development. In the process, we conduct market research, analysis, and surveys. Then, once we have identified a region, we begin a marketing campaign that includes attending school fairs and expositions, conducting seminars, and employing news print, media, and other marketing methods. The increase in the number of franchises may require us to hire more personnel, including managers and personnel who provide staff and teacher training, in order to ensure that each franchise has the proper oversight and that the quality of our franchised operations is maintained.

Operations

Our operations are divided between (1) delivery of classroom-based tutoring services through our own franchises and cooperating schools, (2) distribution and sale of our published materials, and (3) delivery of education services through the Internet.

Kid Castle has marketing advantages over its franchises and various schools as it actively controls the distributions channels of the franchises and various schools' teaching and learning curriculum. _

Kid Castle provide its franchises the following services:

Management guidelines specifically designed for individual regional districts to ensure that franchises are fully realizing their students’ potentials.

Teaching materials that can be applied in complete units and are not dependant on supplementary texts.

Support during the establishment of the Franchise.

Regularly scheduled conferences and seminars for head teachers and supervisors of franchise schools that provide updated educational and promotional strategies aimed at improving student enrollment and management of the franchises.

Combined promotional campaigns whereby the Company is responsible for planning and designing various print and broadcast advertisements.

Regularly scheduled education training, administration and management seminars for franchise.

The following table sets forth, for the period indicated, the principle categories of our consolidated operating revenue:

	2004		2005		2006
Sales of goods	$	6,822,420	$	7,020,532	$	6,774,260
Franchise income		2,442,746		2,289,655		2,080,551
Other operating revenue		463,947		922,147		856,772
Total operating revenue		9,729,113		10,232,334		9,711,583

Franchises and Cooperating Schools

Our classroom-based courses and tutoring services are provided through company-operated locations, cooperating schools, and our independent franchises. We believe there is significant potential for additional franchised schools to be established both in Taiwan and China, and we are actively seeking to expand franchises in these territories. Our franchisees provide Kid Castle courses and tutoring services under the “Kid Castle” brand name within a specified territory in accordance with a franchise agreement signed with us. The revenues from our franchises are comprised of annual licensing fees for using the Kid Castle brand name, consulting service fees, and purchase fees for purchase of Kid Castle teaching and learning materials. Our franchisees typically enter into exclusive agreements to purchase our course and marketing materials, which they use in conducting and promoting their classes.

Franchisees must obtain our approval for the location and design of a Kid Castle school and must operate the franchised school in accordance with certain methods, standards, and specifications developed by us. The franchisee is usually required to purchase from us all of its teaching materials, as well as student explanatory and promotional brochures. Franchisees also have to purchase from us, or through a channel that we provide, other items necessary for the operation of a franchise school, such as computers, instructional materials, and furniture.

We actively manage our franchise system. We require franchisees and their employees to attend initial training seminars in franchise-school operations and Kid Castle educational programs. We also offer our franchisees and their employees training seminars each year. Franchise training seminars are designed for each type of school and may include:

Preschool English Teaching Seminar;

Children’s English Teaching Seminar;

Caretaking English Teaching Seminar; and

English Kindergarten Teaching Seminar.

The initial training seminar is designed to familiarize teachers with the three Kid Castle teaching methods (Audio-Lingual, Total Physical Response, and Communicative Language Teaching); to introduce our materials; and to help teachers incorporate our three teaching methods into the daily teaching plan. We employ division directors who act as consultants to assist franchises in technology implementation, business development, marketing, education, and operations. These employees also facilitate regular communications between franchisees and Kid Castle.

Unlike franchise schools, our cooperating schools are not affiliated with our company, but have entered into contracts with us to use our teaching and learning materials. Unlike the franchises, the cooperating schools are not required to exclusively use our materials or participate in our training seminars.

Cooperating caretaking schools are our third type of school. These schools serve preschool and elementary school children in both a caretaker and educational role. These schools are not affiliated with our company, but enter into contracts with us to use our teaching and learning materials.

Currently, there are approximately 220 and 130 Kid Castle franchises in Taiwan and in China, respectively, and approximately 5,000 cooperating schools in the two countries. The cooperating schools include Kid Castle Kindergarten, Kid Castle Computer School, and Kid Castle Remedial School. The following table shows the number of our franchises and cooperating schools, and cooperating caretaking schools included as of the dates indicated:

	December 31, 2005		December 31, 2006
Franchises		350		350
Cooperating schools*		4,500		5,000

* includes caretaking schools

Publishing

Our years of experience in the education field have enabled us to carefully develop what we believe to be superior teaching products that incorporate diverse and innovative content. Our educational products feature a wide range of technology, including multimedia and audio publications and the Internet. In addition, we are developing interactive educational programs that utilize a child’s senses of hearing, sight, and touch.

Published materials make up approximately 70% of our revenue. The three main channels that purchase our published teaching materials are franchise schools, kindergartens, and elementary schools. Our franchise schools are obligated to exclusively use Kid Castle teaching and learning materials. Based on data from the NBSC, as of December 31, 2006 there were approximately 124,400 kindergartens and 366,200 public and private elementary schools in China, all of which are potential customers.

Teaching Features and Curriculum

Our children’s English curriculum is summarized as follows:

Category	Class	Student	Levels	Period
Preschool Learning	Preschool children	Ages 3-6	A total of six levels	Six months
Language Learning	Young children	Ages 7-9	A total of fourteen levels	Six months
Language Learning	Older children	Ages 10-12	A total of fourteen levels	Three months

Kid Castle's Young Children Teaching Materials incorporate the following features:

full conformity with natural language-development patterns for listening, speaking, reading, and writing;

design and development based on the unique factors of individual students, such as age, learning habits, and cognitive ability;

contemporary topics that capture and reflect students’ interests and needs;

practical scenarios purposely designed to cater to daily life so as to increase the relevance of language usage;

emphasis on oral communication;

games and activities that give students an opportunity to practice language skills and increase interest in learning English;

categorization of curriculum from easy to difficult with subjects that correspond to the subsequent levels; and

diverse subjects and content.

Sales and Marketing

The majority of our students’ parents choose our education programs and materials based on the recommendations of other parents and teachers. We also build awareness of our brand and promote our products through our franchises and relationships with the cooperating schools. Kid Castle also maintains an internal sales force and engages in national and local advertising through print and broadcast media and through direct sales to targeted demographics. Advertising is centrally monitored and is directed primarily at local markets in which a kindergarten is located. All marketing activity is tracked to measure effectiveness and to provide information for future activities. All responses to advertising are analyzed to provide data and references for future marketing efforts.

Individual franchises have their own marketing methodologies for students. However, we monitor and provide general marketing strategies to facilitate the franchises’ promotional campaigns. Policies, standards, and procedures for new franchises and cooperating schools are established centrally, but are implemented at the local level through an employee in the marketing department. Cooperating schools also increase our company exposure. As these schools use our teaching and learning materials, we believe parents and children will grow more familiar with the “Kid Castle” brand name and the after-school education we provide through our caretaking schools.

Competition

The English-language teaching and educational services industry in Asia is highly fragmented, varying significantly among different geographic locations and types of consumers. Our ability to compete depends on our ability to improve existing or create new English-language learning materials and courses to distinguish our company from our competitors. Other providers of English-language instruction include individual tutors, small language schools operated by individuals, public institutions, and franchises or branches of larger language teaching companies, some of which operate internationally. The smaller operations typically offer large-group teaching and self-teaching materials for home study, while some larger competitors concentrate on the higher-priced, business-oriented segment by offering intensive, individualized programs.

The following table sets forth our competitors in Taiwan:

COMPETITOR ANALYSIS IN TAIWAN

Company

Year Established

Internet Learning

Number of Schools

In House R&D

Interest Administration Platform

Automatic Speech Analysis System

Magazine Publication

Training Program for Teachers

Kid Castle

1986

250

Giraffe Language School

1986

450

Joy Enterprise Organization

1981

230

Jordan’s Language School

1982

182

Gram English

1981

Sesame English Franchised Schools

1987

Ha Po Computer English School

1996

150

Hess Educational Organization

1983

The following table sets forth our competitors in China:

COMPETITOR ANALYSIS IN CHINA

Company

Year Established

Internet Learning

Number of Schools

In House R&D

Interest Administration Platform

Automatic Speech Analysis System

Magazine Publication

Training Program for Teachers

Kid Castle

2001

137

English First

1993

New Oriental

1993

100

DD Dragon

1997

Onlyedu

2004

403

BRIEF SUMMARY OF COMPETITORS IN TAIWAN
Company Name		Description
Joy Enterprise Organization (“JEO”)		JEO was established in 1981. Its operation focuses on English learning schools and kindergartens. JEO is also engaged in the language education publishing business. Currently JEO owns approximately 230 schools in Taiwan.

Gram English (“Gram”)		Gram was established in 1981. Gram focuses on English education for elementary and high school children and for adults and is not present in the kindergarten market. Currently, Gram has 56 schools in Taiwan.

Jordan’s Language School (“Jordan”)		Jordan was established in 1982 and currently has 182 schools in Taiwan. In addition to English education, it is also engaged in teaching mathematics and computer skills to children. In 2001, Jordan entered the market in mainland China.

Giraffe Language School (“Giraffe”)		Giraffe was established in 1986. Giraffe currently has 450 English schools in Taiwan, which is more than other competitors in Taiwan. Giraffe’s operations include English schools and kindergarten.

Ha Po Computer English School (“Ha Po”)		Ha Po was established in 1996. It currently has 150 schools in Taiwan, where it offers both computer and English education.

Sesame English Franchised Schools, Taiwan (“Sesame”)		Sesame was established in 1987 in Taiwan. It is a franchise of an international English educational institution. Currently it has 50 schools in Taiwan.

Hess Educational Organization (“Hess”)		Hess was established in 1983 and currently has 40 English schools in Taiwan. Hess also operates kindergartens.

BRIEF SUMMARY OF COMPETITORS IN CHINA
Company Name		Description
Onlyedu Education Group (“Onlyedu”)		Onlyedu was established in 2004. It currently has over 430 franchise schools located in 18 provinces of China.

English First		English First began its development in China in 1993 and currently has 80 kindergarten schools. Its franchise fee and its tuition are higher than the market average, which poses a significant entry barrier for potential franchises. English First has not been established long enough to be well known.

DD Dragon Education Organization (“DDDEO”)		DDDEO was established in 1997. It currently has over 20 franchise schools in the PRC.

New Oriental Educational & Technology Group (“New Oriental”)		New Oriental entered the Shanghai market in 1993 and caters to adult students rather than to children. It currently has over 100 schools.

Employees

As of December 31, 2006, we had a total of 159 full-time employees and four part-time employees for the ROC and PRC operations. We intend to hire additional employees on a part-time or independent contractor basis in connection with certain projects in China. We do not intend to hire U.S.-based employees in the foreseeable future. None of our employees are represented by a labor union, and we consider our relationships with our employees to be good.

Regulatory Environment

Taiwan

The Ministry of Education of Taiwan (“MOE”) requires that teaching and learning materials that are to be used by elementary schools and junior high schools for compulsory education first be submitted to the MOE for review. The material submission process is as follows:

Following the submission of materials, the MOE will review the materials and submit a decision within 90 days, subject to an extension of 30 days.

If the MOE approves the materials, the applicant must send three copies of the final version to the MOE. The MOE performs a final review and makes a final decision within 60 days.

If the MOE does not approve the initial submission, the applicant has 45 days to resubmit the materials with any corrections that the MOE deems necessary.

The MOE reviews the resubmitted materials and makes its decision within 45 days.

If the materials are not approved, or the corrections are not satisfactory to the MOE, the applicant has 30 days to make additional corrections and submit the corrected materials to the MOE. The MOE will then return its decision within 30 days.

If the MOE does not approve the corrections on the third resubmission, the applicant may appeal within 30 days and the MOE will review the appeal and make a decision within 30 days after its receipt of the appeal.

If the appeal is rejected by the MOE, the applicant must start the approval process over.

The Employment Service Act of Taiwan and relevant regulations require all foreign supplementary education instructor applicants to be 20 years of age or older. In addition, it is our company policy to hire candidates with university bachelor degrees and to have each foreign employee teach the national language of the country issuing his or her passport.

China

According to the China-Foreign School Cooperation Regulation (“CFSCR”) effective September 2003, foreign companies cannot operate educational franchises through wholly-owned entities, but must do so in cooperation with local Chinese investors. These cooperative arrangements must be approved by the Chinese government. The CFSCR limits the number of seats on the board of directors (or any controlling board or committee) that may be offered to foreign investors or their nominees to no more than half of the total number of seats. The director of the school, as well as the chairman of the board, can be foreign individuals; however, the principal or the person responsible for administration must be reviewed by the government.

The China Ministry of Education (“CMOE”) has general guidelines for every province and major city. In addition, each province and some major cities, such as Shanghai and Beijing, have their own administrative body for education and their own regulations and requirements. All of our educational materials must comply with the national curriculum guideline as set out by the central government. Depending on the administrative procedures of the individual provincial governments, our educational materials may have to also be recorded with local governments.

The CMOE, under the Kindergarten Operation and Management Regulation, requires the following:

the location of the kindergarten must be in accordance with the safety standards set by the CMOE;

schoolmasters, principals, and teachers must have a diploma from a teachers’ college or higher and a background in children’s education;

school staff must have the equivalent of a junior high education or diploma; and

nurses and similar positions must have a high school education or diploma.

The following violations will result in penalties, including reorganization or correction to be completed by a certain deadline, suspension of student enrollment, and suspension of operation:

unlicensed operation, where the location and environment are unsatisfactory to government standards; and

distributing materials that are inappropriate for children or materials that violate the Educational Standards set by the CMOE.

More severe violations, such as illegal controlled substance usage, possession of dangerous instruments, corporal punishment, or embezzlement of school funds or property will result in punishment and sanctions in accordance with the degree of violation.

Intellectual Property and Property Rights

The name “Kid Castle” and various drawings used in our materials are trademarked and registered to us in Taiwan and PRC. Our copyrights, trademarks, service marks, trade secrets, proprietary technology, and other intellectual property rights distinguish our products and services from those of our competitors and contribute to our competitive advantage in our target markets. To protect our brand, products, and services and the systems that deliver those products and services to our customers, we rely on a combination of copyright, trademark, and trade secret laws as well as confidentiality agreements and licensing arrangements with our employees, customers, independent contractors, sponsors, and others.

Corporate History

We are a Florida corporation that was incorporated on July 19, 1985 as Omni Doors, Inc. From inception through June 30, 1998, our primary business was the assembly and distribution of industrial doors for sale to building contractors in the South Florida market. Until April 6, 1998, we were a wholly-owned subsidiary of Millennia, Inc., a publicly-owned Delaware corporation. On April 6, 1998, the Board of Directors of Millennia declared the payment of a stock dividend to Millennia’s stockholders. Millennia stockholders received one share of our common stock for each four shares of Millennia common stock. This distribution of approximately 570,000 shares of our company represented approximately 5% of the total issued and outstanding shares of our common stock.

Pursuant to a contract dated July 14, 1998, Millennia sold 10,260,000 shares (representing 90% of the total outstanding shares) of our common stock to an unrelated firm, China Economic Growth Investment Corp., LLC, which then distributed the shares to its three members, Yong Chen, Zuxiang Huang, and Zheng Yao.

On April 6, 2001, pursuant to a stock purchase agreement dated April 2, 2001, Halter Capital Corporation, a privately-owned Texas corporation, purchased 6,822,900 shares of our common stock from Zheng Yao, representing approximately 60 % of our issued and outstanding shares of common stock. Simultaneously with this change -in -control transaction, Sophia Yao, our then sole officer and director, resigned. Kevin B. Halter, Sr., as President and director, and Kevin B. Halter, Jr., as Secretary-Treasurer and director, were elected to replace her.

On June 19, 2002, pursuant to a stock purchase agreement dated June 6, 2002, Powerlink International Finance, Inc., a British Virgin Islands corporation (“Powerlink”), purchased 2,830,926 shares of our common stock from Halter Capital Corporation, representing approximately 57% of our issued and outstanding shares of common stock. Simultaneously with the purchase, the officers and directors of the Company resigned. Chin-Chung Hsu, President, Treasurer, and Director; Wen-Hao Hsu, Secretary and Director; and Chien-Hwa Liu, Director, were elected to replace them.

On June 25, 2002, we changed our name to King Ball International Technology Corporation and, on August 22, 2002, we changed our name again to Kid Castle Educational Corporation. On October 1, 2002, we acquired all of the issued and outstanding stock of Higoal Developments Limited (“Higoal”), a Cayman Islands company, pursuant to an Exchange Agreement dated as of October 1, 2002 (the “Exchange Agreement”). The Exchange Agreement was among Higoal, the shareholders of Higoal, Kuo-An Wang, and Kid Castle. Higoal, which is based in Taipei, Taiwan, is the parent company of Kid Castle Internet Technologies Limited and Kid Castle Educational Software Development Company Limited. Pursuant to the Exchange Agreement, Higoal became our wholly-owned subsidiary. In exchange for 100% of the issued and fully paid-up capital of Higoal, we issued 11,880,000 shares of our common stock to the shareholders of Higoal. As a result of the share exchange, the former shareholders of Higoal hold a majority of our outstanding capital stock.

On September 26, 2005, Mr. and Mrs. Pai purchased 806,960 and693,040 shares of the common stock of the Company, respectively. On December 28, 2006, pursuant to the loan settlement and conversion agreement, Mr. Pai received an additional 2,000,297 shares of the common stock. As of December 31, 2006, Mr. Pai, his spouse, and direct next of kin together controlled 4,841,377 shares or 19.36% of the total outstanding common stock of the Company. Mr. and Mrs. Yang purchased 1,641,538 and 500,000 shares of the common stock of the Company in 2005, respectively. On September 26, 2006, Mr. Yang purchased 3,024,000 shares of the common stock and on December 28, 2006, pursuant to the loan settlement and conversion agreement, Mr. Yang received an additional 4,000,000 shares of the common stock, As of December 31, 2006, Mr. Yang and his wife together controlled 9,165,538 shares or 36.66 % of the total outstanding common stock of the Company.

On December 27, 2006, we established a wholly-owned subsidiary, Shanghai Kid Castle Educational Info Constitution Company Ltd., (“KCEI”) with registered total capital of RMB$1,200,000.

Company Organization Chart

Where You Can Find More Information

We file annual, quarterly, and special reports, proxy statements, and other information with the Securities and Exchange Commission (“SEC”). Our SEC filings are available to the public over the Internet from the SEC’s website at http://www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our website address is http://www.kidcastle.com.

ITEM 1A. RISK FACTORS

Risks Relating to Our Business

We have a history of operating losses and we anticipate losses to continue for the foreseeable future despite the actual results that reflect that the extent of loss has been improving.

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 in Taiwan and the PRC. We may be unable to achieve and maintain profitability if we fail to do any of the following:

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

compete effectively with existing and potential competitors;

further develop our business activities;

manage expanding operations; or

attract and retain qualified personnel.

We have incurred operating losses since inception. As a result, as of December 31, 2006, we had an accumulated deficit of $9,056,567. We incurred net losses of $1,254,592, $1,698,282, and $46,211 for the years ended December 31, 2004, 2005, and 2006, respectively. We had cash flow from operations of ($1,544,902), ($1,295,250) and $1,773,267 for the years ended December 31, 2004, 2005, and 2006, respectively. The accumulated deficit has improved since Messrs. Pai and Yang have assumed their respective management roles, and we anticipate that the accumulated deficit can be continually improved for the foreseeable future.

Our inability to achieve or maintain profitability could result in disappointing financial results, impede implementation of our growth strategy, or cause the market price of our common stock to decrease. Therefore, we have to effectively maintain, improve, and develop our products and services and be able to recover our fixed costs or otherwise turn profitable.

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

The market for English-language instruction and education is growing rapidly. 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 franchises, the failure of our franchises could adversely affect our operating results.

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

There can be no assurance that our franchises will operate schools successfully. While no individual franchise represents more than 1% of our franchise revenues, a significant failure of our franchises to operate successfully could adversely affect our operating results. The resolution of certain franchise 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 potential claims by franchises that 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 market is new, rapidly evolving and highly competitive. We expect this competition to persist and intensify in the future. This increase in competition could impact our business as it leads to price reductions, increases in the Company’s overhead expenses, under-utilization of employees, andincreases in operation costs.

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 cannot guarantee future profits.

Our primary competitors include Giraffe, Jordan’s Language School, Ha Po Computer English and Hess Educational Organization in Taiwan; JEO in Taiwan and the PRC;and Onlyedu Education Group and English First in the PRC. Our primary competitors have significant financial, technical, and marketing resources, and established brand recognition. Some of these competitors have a longer operating history and greater overall resources than we do. These companies also have established customer support and professional services organizations. As a result, in the ROC market, we need to increase our service quality or decrease our fees to maintain our customer level. In the PRC, we have to assertively develop the market and increase our reputation as well as our market share. In performing the aforementioned in the respective markets, we may incur increased operational cost and or reduce our profit and therefore we cannot guarantee future profits.

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 franchises and affiliates.

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

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

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

In addition, laws in the PRC have traditionally been less protective of intellectual property rights and enforcement of those laws has been sporadic at best. Any further reduction in the legal protections granted to 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, these measures may not be adequate to prevent others from claiming that we violated their copyrights, 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 or modify our products.

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

As of December 31, 2004, 2005, and 2006, our bank loans and loans from financial institutions were $4,284,807, $3,157, 297, and $1,787,360, respectively. As of December 31, 2006, outstanding loans from our shareholders were $0.3 million. Although we had an accumulated deficit, as of December 31, 2006, we had a positive cash flow from operations. Barring significant, unforeseen developments in the PRC, our management expects that we can continue to decrease our reliance on loans from shareholders and banks to meet our funding requirements. Despite our decreased reliance on loans, we may again be required to seek loans to meet our funding requirements and no assurances can be given that bank loans or loans from shareholders will be available in the future. If we are unable to secure sufficient financing, 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

conditions in the financial markets

investor confidence in us

economic, political and other conditions in Taiwan and the PRC

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

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

Our transactions with suppliers and customers are effected in New Taiwan dollars, the functional currency of our Taiwanese subsidiary, Kid Castle Internet Technologies Limited (KCIT). As a result of our expansion in the PRC, our transactions are also effected in RMB, the functional currency of our PRC subsidiary, Kid Castle Educational Software Development Company Limited (KCES) and Shanghai Kid Castle Educational Info Constitution Company Limited (KCEI). 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 material 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 companies formed under the laws of Taiwan and the People’s Republic of China, 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 both our business and our officers and directors are located outside the United States. As a result, it may be difficult for investors to affect service of process upon such persons, or to enforce court judgments obtained against such persons in United States courts, when their claims are predicated upon the civil liability provisions of the Securities Act.

Our internal controls and management systems are currently not consistent with international practices, and we are in the process of improving these controls to enable us to certify their effectiveness in accordance with 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 meet 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 related rules and regulations, we are required, within certain deadlines established by the SEC, to evaluate our internal controls over financial reporting and to file an assessment of its effectiveness with the U.S. Securities and Exchange Commission. Our external auditors are required to attest to such evaluation. 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.

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

Moreover, our growth and success depend on our ability to attract, hire, and retain additional highly-qualified educators and management, and 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 currently falls within the definition of penny stock and may 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 and current quotations for the securities to both the broker-dealer and the registered representative. 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, 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. Despite the fact that the exposure to this risk may decrease in the future as the Chinese economy globalizes and regulation relaxes, there is no assurance 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. (“KC Culture Media”) and 21^st Century Kid Castle Language and Education Center (“KC Education Center”), and to establish a wholly-owned subsidiary, Shanghai Kid Castle Educational Institution Info Ltd. (“KCEI”). KC Culture Media and KC Education Center primarily publish and distribute English-language education materials, enter into franchise and consulting relationships with kindergarten and language schools, and provide services to cooperative schools in China. KCEI has entered into a direct-owned school in the PRC. We intend to use them as one of our primary vehicles for our expansion into the PRC market. Although we receaved, on January 19, 2004, and October 31, 2003, licenses from the applicable government authorities to conduct the business of KC Culture Media and KC Education Center in the PRC, there exist various factors that render the regulatory environment volatile and uncertain. Therefore, it could only be concluded that the PRC market would eventually be more transparent and less uncertain as it gradually opens up to foreign investors.

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 2. PROPERTIES

We lease many of our facilities, consisting principally of administrative office space, warehouse space, and sales offices. In addition, we lease housing accommodations for our employees in China. Our principal executive offices consist of 530 square meters of office space, which we own, located on the 8th Floor, No. 98, Min Chuan Road, Hsien Tien, Taipei, Taiwan, Republic of China. We believe that our current space is adequate for our needs for the foreseeable future.

The following table sets forth the location and size of the material facilities of our subsidiaries, Kid Castle Internet Technologies Limited and Kid Castle Educational Software Development Company Limited:

Kid Castle Internet Technologies Limited

Nature	Location	Floor Space (m²)
Registration area	No. 148, Jianguo Road, Hsien Tien, Taipei, Taiwan, ROC	48
Administrative office	8^th Floor, No. 98, Min Chuan Road, Hsien Tien, Taipei, Taiwan, ROC	534
Administrative office	8th Floor, No. 100, Min Chuan Road, Hsien Tien, Taipei, Taiwan, R.O.C.	375
Administrative office	Room 5, 8th Floor, No. 251, Min Chuan 1st Road, Kaohsiung, Taiwan, R.O.C.	312
Warehouse	No. 459, Sec. 2, Zhongshan Rd., Huatan Shiang, Changhua County 503, Taiwan, ROC	5,000

Kid Castle Education Software Development Limited

Nature	Location	Floor Space (m²)
Administration office	4^th Floor, No. 1277, Beijing West Road, Shanghai, PRC	1092
Warehouse	No. 305, Lane 2638, Hongmei South Road, Shanghai, PRC	800

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings of a material nature.

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

None.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

On May 4, 1998, the Company’s common stock was approved for quotation on the NASD Over-the-Counter Bulletin Board under the trading symbol “OMDO.” On June 28, 2002, the trading symbol was changed to “OMDR.” On August 22, 2002, the trading symbol was changed to “KDCE.” The high and low bid quotations for the Company’s common stock were as follows for the periods below (as reported by OTCBB). The quotations below reflect inter-dealer prices without retail markup, markdown, or commission, and may not represent actual transactions:

Fiscal Year Ended on December 31, 2006	High Bid		Low Bid
1st Quarter		0.25		0.12
2^nd Quarter		0.15		0.12
3^rd Quarter		0.35		0.15
4^th Quarter		0.15		0.10

Fiscal Year Ended on December 31, 2005	High Bid	Low Bid
1st Quarter	1.29	0.88
2^nd Quarter	0.88	0.51
3^rd Quarter	0.51	0.37
4^th Quarter	0.54	0.25

As of December 31, 2006, the Company had approximately 2,600 shareholders of record. The Company has never paid any dividends on its common stock and does not have any plans to pay any dividends in the foreseeable future.

Recent Sale of Unregistered Securities; Use of Proceeds from Registered Securities

Not applicable.

Purchases of Equity Securities by Registrant and Affiliated Purchasers

Not applicable.

ITEM 6. SELECTED FINANCIAL DATA

Five-Year Selected Financial Data

	Years Ended on December 31,
	2006			2005			2004		2003		2002
Statement of Operations Data:
Operating Revenue	$	9,711,583		$	10,232,334		$	9,729,113	$	8,591,383	$	6,572,974
Operating Costs		3,638,738			3,811,044			3,433,558		3,022,364		2,895,568
Net loss		46,211			1,698,282			1,254,592		1,940,591		1,906,996
Loss per share—basic and diluted		0.002			0.089			0.066		0.115		0.150
Balance Sheet Data:
Current assets	$	5,936,771		$	6,954,257		$	8,143,067	$	8,129,906	$	5,373,309
Total assets		9,373,223			10,982,937			12,781,424		12,542,216		9,772,872
Current liabilities		6,745,302			8,436,284			8,726,637		7,457,171		6,365,639
Total liabilities		9,953,415			12,280,881			12,353,708		10,834,219		9,136,306
Total shareholders’ equity		(634,753	)		(1,326,571	)		393,925		1,707,997		636,566
	$	9,373,223		$	10,982,937		$	12,781,424	$	12,542,216	$	9,772,782

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

This report contains certain forward-looking statements and information relating to us that are based on the beliefs and assumptions made by our management as well as information currently available to the management. When used in this document, the words “anticipate,” “believe,” “estimate, “ “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.

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 business originally started in Taiwan, and, in 2001, we began expanding our business into 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 magazines to provide children ranging from two to twelve years of age a chance to learn exceptional English-language and computer skills.

Critical Accounting Policies, Judgment, 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 we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

Revenue Recognition.

We recognize sales of teaching materials, educational tools, and equipment as revenue when title of the product and risk of ownership are transferred to the customer. Title of the product and risk of ownership are transferred to the customer at the time of delivery or when the goods arrive at the customer’s designated location, depending on the associated shipping terms. Additionally, we deliver products sold by our distributors directly to the distributors’ customers. We recognize the delivered goods 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 in revenues.

If market conditions were to decline, we may take actions to increase sales discounts, possibly resulting in an incremental reduction in 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. They could also result in an inability to recover the carrying value of the investments, an inability 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 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. We measure recoverability of assets to be held and used by comparing 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 is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The estimate of fair value is generally based on quoted market prices or on the best available information, including prices for similar assets and the results of using other valuation techniques.

As of December 31, 2006, the balance of our amortizable intangible assets was $538,638, including franchise-related intangible assets of $339,227 and copyrights of $199,411. 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 that 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 reliability. Actual results may differ significantly from management’s estimate.

Currency Risk.

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

Results of Operations

Comparison of Fiscal Years 2006 and 2005

Total Net Operating Revenue. Total net operating revenue consists of sales of goods, franchise income and other operating revenue. Total net operating revenues decreased by $520,751, or 5%, to $9,711,583 for the year ended December 31, 2006 from $10,232,334 for the year ended December 31, 2005, including the decrease in sales of goods of $246,272 and franchise income of $209,104 and other operating revenues of $65,375.

Sales of goods. The decrease in sales of goods, from $7,020,532 for fiscal year 2005 to $6,774,260 for fiscal year 2005, or 4%, was mainly due to the decrease in net sales of goods generated from our Taiwan operations of $398,278, or 8%, to $4,695,786 for fiscal year 2006 from $5,094,064 for fiscal year 2005.

Franchise income. The decrease in franchise income, from $2,289,655 for fiscal year 2005 to $2,080,551 for fiscal year 2006, or 9%, was mainly due to the decrease in the number of our franchised schools in Taiwan and the decrease in franchise income in Shanghai operations despite an increase in the number of franchised schools. Franchise income for Taiwan decreased by $93,290 from $1,465,721 for fiscal year 2005 to $1,372,431 for fiscal year 2006 and for Shanghai decreased by $115,814 from $823,934 for fiscal year 2005 to $708,120 for fiscal year 2006.

Other operating revenue. Our other operating revenues represents revenue from other activities and services such as training of teachers, arranging for personal English-language tutors, organizing field trips and educational fairs, and collecting fees for designing the school layout of our franchised schools. Other operating revenue decreased by $65,375, or 7%, to $856,772 for fiscal year 2006 from $922,147 for fiscal year 2005. The decrease was mainly due to a decrease in revenue generated from services rendered in connection with the construction and design layout of our franchised schools and sales of education-related equipment to our franchised schools in our Taiwan operations.

Gross Profit. Gross profit decreased by $348,445, or 5%, to $6,072,845 for fiscal year 2006 from $6,421,290 for fiscal year 2005. The decrease in gross profit was attributable to decrease in operating revenue.

Total Operating Costs. Total operating costs decreased by $172,306, or 5%, to $3,638,738 for fiscal year 2006 from $3,811,044 for fiscal year 2005. This decrease was mainly due to decreases in operating revenue.

Other Operating Expenses. Other operating expenses decreased by $1,062,605, or 16%, to $5,526,318 for fiscal year 2006 from $6,588,923 for fiscal year 2005, principally due to decreases in salary expenditures resulting from a reduction in employee headcount in our Shanghai operations.

Interest Expenses, Net. Net interest expenses decreased by $57,063, or 24%, to $179,825 for fiscal year 2006 from $236,888 for fiscal year 2005, primarily due to the reduction of loans due to officers and decreases in bank loans in 2006. Please refer to Note 12 in our Consolidated Financial Statements for more information.

Provision for Taxes. Provision for taxes for fiscal years 2006 and 2005 were $173,325 and $477,297, respectively. These provisions for income taxes mainly represent the use of net operating loss carry-forwards to offset the income generated for our operations in Taiwan and an increase in the valuation allowance charged against deferred tax assets generated from our PRC operations in order to reduce the deferred tax assets to the extent that the tax benefit is more likely than not to be realized.

Comparison of Fiscal Years 2005 and 2004

Total Net Operating Revenue. Total net operating revenue consists of sales of goods, franchise income, and other operating revenue. Total net operating revenues increased by $503,221, or 5%, to $10,232,334 for the year ended December 31, 2005 (fiscal year 2005) from $9,729,113 for the year ended December 31, 2004 (fiscal year 2004). This increase included an increase in sales of goods in the amount of $198,112, a decrease in franchise income in the amount of $153,091, and an increase in other operating revenues in the amount of $458,200.

Sales of goods. The increase in sales of goods, from $6,822,420 for fiscal year 2004 to $7,020,532 for fiscal year 2005, or 2.9%, was mainly due to the increase in net sales of goods generated from our Shanghai operations of $430,196, or 28.9%, to $1,917,229 for fiscal year 2005 from $1,487,033 for fiscal year 2004.

Franchise income. The decrease in franchise income, from $2,442,746 for fiscal year 2004 to $2,289,655 for fiscal year 2005, or 6.27%, was attributable to a decrease in franchise income from Taiwan.

Other operating revenue. Our other operating revenues represents revenue from other activities and services such as training of teachers, arranging for personal English-language tutors, organizing field trips and educational fairs, and collecting fees for designing the school layout of our franchised schools. Other operating revenue increased by $458,200, or 98.76%, to $922,147 for fiscal year 2005 from $463,947 for fiscal year 2004. 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 $125,735, or 2%, to $6,421,290 for fiscal year 2005 from $6,295,555 for fiscal year 2004. The increase in gross profit was attributable to the increase in sales of goods.

Total Operating Costs. Total operating costs increased by $377,486, or 11%, to $3,811,044 for fiscal year 2005 from $3,433,558 for fiscal year 2004. This increase was mainly due to increase in sales of goods and other operating revenue.

Other Operating Expenses. Other operating expenses increased by $42,079, or 0.6%, to $6,588,923 for fiscal year 2005 from $6,546,844 for fiscal year 2004, principally due to increases in our Shanghai operations.

Interest Expense, Net. Net interest expenses increased by $86,184, or 57.19%, to $236,888 for fiscal year 2005 from $150,704 for fiscal year 2004, primarily due to an increased loan during 2005.

Provision for Taxes. Provision for taxes for fiscal years 2005 and 2004 were $ 477,297 and $430,729, respectively. These provisions for income taxes mainly represent the use of net operating loss carry-forwards to offset the income generated for our operations in Taiwan and an increase in the valuation allowance charged against deferred tax assets generated from our PRC operations in order to reduce the deferred tax assets to the extent that the tax benefit is more likely than not to be realized.

Liquidity and Capital Resources

Comparison of Fiscal Years 2006 and 2005

As of December 31, 2006, our principal sources of liquidity included cash and bank balances of $1,419,873, which increased from $613,391 at December 31, 2005. The increase was mainly due to reductions in expenses in our Shanghai operations .

Net cash provided by (used in) operating activities was $1,773,267 and ($1,295,250) during fiscal years 2006 and 2005, respectively. Net cash provided by operating activities during fiscal year 2006 was primarily attributed to the decrease in net loss.

Net cash provided by investing activities was $671,018 and $1,514,264 during fiscal years 2006 and 2005, respectively. The $843,246 decrease is due to the change in the amount due from a shareholder/director of $977,838 during fiscal year 2005.

Net cash provided by (used in) financing activities during fiscal year 2006 was ($1,583,939) as compared to $262,196 during fiscal year 2005. The $1,846,135 decrease was primarily attributable to proceeds from bank borrowings of $213,357 during fiscal year 2006, as compared to that of $3,067,111 during fiscal year 2005.

Comparison of Fiscal Years 2005 and 2004

As of December 31, 2005, our principal sources of liquidity included cash and bank balances of $613,391, which increased from $213,564 at December 31, 2004. The change was primarily the result of an increase in revenues from our operations in Shanghai during 2005.

Net cash used in operating activities was $1,295,250 and $1,544,902 during fiscal years 2005 and 2004, respectively. Net cash used in operating activities during fiscal year 2005 was primarily attributed to net loss and an increase of notes and accounts receivable.

Net cash (used in) provided by investing activities were $1,514,264 and ($354,073) during fiscal years 2005 and 2004, respectively. The $1,868,337 difference was primarily attributable to cash provided by pledged notes receivable of $369,807, an amount due from a shareholder and director of $977,838, and disposal of property and equipment of $202,822 during fiscal year 2005, as compared to that of $15,760, $0, and $70,062, respectively, for the same category during fiscal year 2004.

Net cash (used in) provided by financing activities during fiscal year 2005 was $262,196 as compared to $914,229 during fiscal year 2004. The $652,033 difference was primarily attributable to cash provided by borrowings from officers/shareholders of $1,271,800 during fiscal year 2005, as compared to that of ($585,006) during fiscal year 2004, and the repayment of bank borrowings of ($4,068,179) during fiscal year 2005.

Off-Balance Sheet Arrangements

As of December 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.

Contractual Obligations

The Company, Higoal and its subsidiaries are collectively referred to as the “Group.” The following table represents the Group’s contractual obligations:

	Payments Due by Period
	Total		2007		2008		2009		2010		2011		Thereafter
	(Thousand dollars)
Contractual obligations
Bank borrowing		1,787		604		335		102		89		60		597
Pension benefit		87		—		—		—		—		17		70
Operating leases		597		346		197		54		—		—		—
Total		2,471		950		532		156		89		77		667

Bank Borrowing. One of our financing sources is from bank borrowings. As of December 31, 2006 and December 31, 2005, the balances of bank borrowings, including current and non-current portions, were $1,787,360 and $3,157,297, respectively.

New Subsidiary Investment. On December 27, 2006, the Group established a wholly -owned subsidiary, Shanghai Kid Castle Educational Info Constitution Company Ltd. with registered total capital of RMB$1,200,000, in order to operate direct-owned schools beginning in 2007 in the PRC. We hope to increase the profit margin of the Group as a result of the formation of KCEI.

Pension Benefit. In accordance with the ROC Labor Standard Law, the Group maintains two different retirement plans: 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. For further information, please refer to Note 15 to our 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. We have a non-contributory and funded defined-benefit retirement plan (the “Plan”) covering all regular employees of KCIT, our subsidiary in Taiwan, as described in Note 15 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 fiscal years 2006, 2005, and 2004 amounted to $77,750, $51,007 and $83,176, respectively.

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

Going Concern

The accompanying financial statements have been prepared assuming the Group will continue as a going concern. The Group has been aggressively expanding its business in the PRC, and the Shanghai operations were profitable as of December 31, 2006. We anticipate continued expansion of the market for its learning materials and an increase in the number of franchise schools. Furthermore, we foresee better utilization of capital and funds as we identify and implement alternatives for restructuring and refinancing In order to increase its profit margin, the Group plans to operate direct-owned schools beginning in 2007. Because of the rapid expansion in Shanghai, the Group foresees needing additional funds in the near future to facilitate its expansion plans during 2007. As discussed in Note 12 to our Consolidated Financial Statements, the majority of the Group’s existing loans were guaranteed by two directors of the Group who have expressed their willingness to continue to support the Group until other sources of funds have been obtained. Moreover, 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 July 2006, the Financial Accounting Standards Board (the “FASB”) released Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement 109.” Effective for fiscal years beginning after December 15, 2006, this interpretation provides guidance on the financial statement recognition and measurement for income tax positions that we have taken or expect to take in our income tax returns. It also provides related guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have adopted this standard as of January 1, 2007. The adoption did not have a significant impact on our financial statements.

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

In September 2006, the Staff of the Securities and Exchange Commission issued SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108 was issued to address diversity in practice in quantifying financial statement misstatements and the potential under current practice for the build up of improper amounts on the balance sheet, and to provide consistency between how registrants quantify financial statement misstatements. The standard requires us to use a dual approach for quantification of errors using both the “rollover” method, which assesses only the misstatement originating in the current year, and the “iron curtain” method, in which the cumulative misstatement is assessed, irrespective of when it originated. We have adopted the standard effective for our fiscal year ended December 31, 2006. The adoption did not have any impact on our financial statements.

Non-GAAP Financial Measures

None.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk, including 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%, the result would be an annual increase in our interest expense of $17,914. 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 21^st Century Kid Castle Culture Media Co. Ltd. and Shanghai Kid Castle Educational Info Constitution Company Ltd., is Renminbi (“RMB”), and the financial records are maintained and the financial statements are prepared for these entities in RMB. In the normal course of business, these operations are not exposed to fluctuations in currency values. We do not generally enter into derivative financial instruments in the normal course of business, nor do we use such instruments for speculative purposes. The translation from the applicable local currency assets and liabilities to the U.S. Dollar is performed using exchange rates in effect at the balance sheet date except for shareholders’ equity, which is translated at historical exchange rates. Revenue and expense accounts are translated using average exchange rates during the period. Gains and losses resulting from such translations are recorded as a cumulative translation adjustment, a separate component of shareholders’ equity.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of Kid Castle Educational Corporation and its subsidiaries including the notes thereto, together with the report thereon of Brock, Schechter & Polakoff, LLP, are presented beginning at page F1 and are incorporated by reference herein.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On July 28, 2006, we engaged Brock, Schechter & Polakoff, LLP as our principal accountant and to audit our consolidated financial statements for the years ended December 31, 2005 and 2006.

ITEM 9A. 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, 2006 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 the end of June 2007 and become fully operational thereafter. The old system used by the Company will then be phased out. The phase out period will involve the amalgamation of old data into the new ERP system, and training for staff on how to use the new ERP system. During the phase-out period, various functions and operations of the new ERP system will be run in parallel on 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 will 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 the third fiscal quarter 2007. The Company believes that full implementation of its new ERP System will prevent misappropriation of funds by Company employees because the ERP system will perform the following functions:

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

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

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

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

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

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

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

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

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

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

The Company recognizes that its 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.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Name	Age*	Position with the Company
Suang Yi Pai	46	Chairman, Director and Acting Chief Financial Officer
Min Tan Yang	41	Chief Executive Officer and Director
Chin Chen Huang	39	President of Shanghai Operations and Director
Ming Tsung Shih	38	Director
Robert Theng	45	Director

*Age as at December 31, 2006.

Mr. Pai was elected to replace Mr. Kuo An Wang as the chairman of the board on November 2, 2005. Mr. Pai has served as a director of the company since October 2002. Since 1998, Mr. Pai has served as the general manager of Chin Yi Fung Enterprises Co., Ltd., a privately held company engaged in the manufacture of sandals.

Mr. Yang was elected by the board of directors to fill an existing vacancy and appointed chief executive officer on November 2, 2005. He has a master’s degree from the Department of Business Administration of Da-Yeh University. Mr. Yang has served as a director of Shanghai Taiwan Businessmen Elementary School since January 2005 and as a director of Global International Education Ltd since July 2001. In 2002, Mr. Yang was appointed as the chairman of two of the Company’s schools in Taiwan and, currently, he is the chairman of four of the Company schools.

Mrs. Huang has served as a director since October 2002 and as the President of Shanghai Operations since July 20, 2005. Prior to becoming the President of Shanghai Operations, she was our Vice President of Taiwan Operations.

Mr. Shih has served as a director since 2003. He is currently employed by Sunspring Metal Corporation as a Financial Manager and part-time lecturer in Tunghai University.

Mr. Theng has served as a director since 2003, and he is currently a full-time professor at Dayeh University of Taiwan and the Vice President of Strategic Planning and Control of CV Sinar Jaya, Indonesia, a general contractor and real estate developer.

None of our directors are related to any of our other directors and none have any pending legal claims or litigation against them.

Section 16(a) Beneficial Reporting Compliance

None

Audit Committee Financial Expert

Mr. Shih qualifies as an audit committee financial expert according to the standard set forth in Regulation S-K, item 407. While the entire Board of Directors served as the Company's Audit Committee and assumed responsibility for reviewing the Company's financial statements with the Company's auditors during the fiscal year ended December 31, 2006, the two independent directors, Messrs. Shih and Theng, had separate reviewing sessions with the Company's auditors to discuss and ensure the accuracy and reliability of the Company's financial statements in addition to those sessions conducted with the full Board of Directors.

Code of Ethics

We have adopted a corporate code of ethics. We believe our code of ethics is reasonably designed to deter wrongdoing and promote honest and ethical conduct; provide full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of code violations; and provide accountability for adherence to the code. Please refer to Exhibit 14 for a copy of the translation of Code of Ethics. We will provide a copy of our Code of Ethics, without charge, to any person who requests in writing to our secretary.

ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Compensation Committee Interlocks and Insider Participation

As the Board of Directors does not have a Compensation Committee, the independent directors of the Board oversee the Company’s executive compensation program. In this capacity, the individual directors review compensation levels of executive officers, evaluate performance of executive officers, and consider management succession and related matters. At times, the non-independent directors, excluding Mr. Yang, the Company’s chief executive officer, have participated in discussions involving Mr. Yang’s compensation. The Board of Directors, excluding Mr. Yang, believes that Mr. Yang’s salary is consistent with the Company’s performance and comparable to similarly executives. None of our executive officers serve as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our Board of Directors.

Elements to Executive Compensation

The Company’s executive compensation program is designed to attract and retain executives responsible for the Company’s long-term success, to reward executives for achieving both financial and strategic company goals and to provide a compensation package that recognizes individual contributions as well as overall business results. The Company’s executive compensation program also takes into account the compensation practices of companies with whom Kid Castle competes for executive talent.

The two key components of the Company’s executive compensation program are base salary and variable incentive compensation. Overall compensation is intended to be competitive for comparable positions at the peer companies.

Objectives. The objectives of the Company's executive compensation policies are to attract and retain highly qualified executives by designing the total compensation package to be in line with our competitive reference points; to motivate executives to provide excellent leadership and achieve Company goals by providing incentives to the achievement of specific annual goals; to align the interests of executives, employees, and stockholders by establishing cohesive management, financial, operation and marketing goals that reflect the Company's strategic growth plan; and to provide executives with reasonable security, through retirement plans and performance-based incentives that motivate them to continue employment with the Company and achieve goals that will make the Company thrive and remain competitive in the long run.

Competitive Reference Points. To ensure that its overall compensation is competitive, the Company periodically reviews executive compensation for a range of other companies that may include:

Linkage between compensation programs and Company objective and values. We link executive compensation closely with the Company objectives, which include employee engagement, operational excellence, cost management and profitability. Executives' annual performance evaluations are based in part on their achievement of specific goals as established by the Board of the Company.

The roles of various elements of compensation. Executive compensation includes base salary, other annual compensation granted under the non-contributory defined benefit retirement plan. Collectively, the Board's objective is to ensure a total pay package that is in line with the executive's competitive reference points.

Governance practices concerning compensation. The Board of Directors supervises many of the procedures that the Board follows to ensure good governance. These include setting CEO salary and reviewing and approving elected vice president salaries, setting annual goals for the Company, reviewing proposals for stock incentive plans, exercising fiduciary responsibilities over retirement plans, overseeing management development and succession planning, and keeping adequate records of its activities.

Base Salary

Each executive’s base salary is initially determined with reference to competitive pay practices and is dependent upon the executive’s level of responsibility and experience. The Board uses its discretion, rather than a formal weighting system, to evaluate these factors and to determine individual base salary levels. Thereafter, base salaries are reviewed periodically, and increases are made based on the Board’s subjective assessment of individual performance, as well as the factors discussed above. In light of the financial distress of the Company in 2005, Mr. Pai and Yang volunteered to receive no salary payments from the Company. In 2006, Mr. Pai and Mr. Yang were awarded $18,190 and $18,509 annual salary packages, respectively.

Variable Incentive Compensation

In past years the company has paid variable incentive compensation to its executives, however, due to the Company’s overall performance in 2006, the Company’s executive officers were not awarded bonuses.

Summary Compensation Table

The following table sets forth information about the compensation paid or accrued by the Company to the Company’s chief executive officer, chief financial officer and the most highly compensated executive officer:

Annual Compensation

Long-Term Compensation

Awards

Payouts

Name and Principle Position

Year

Salary (US$)

Bonus (US$)

Other

Annual Compen-sation

(US$)

Restricted

Stock

Awards

Securities Under-Lying Options/

SARs (#)

LTIP

Payouts

(U.S. $)

All Other Compen-sation

Min-Tan Yang

Chief Executive Officer

2006

18,509

Suang-Yi Pai

Chief Financial Officer and Secretary

2006

18,190

—

Chin-Chen Huang

President of Shanghai Operation

2006

70,565

3,746(i

)

(i)Estimated annual retirement benefits of Mrs. Huang under the Company’s non-contributory defined benefit retirement plan, includes health, accident, and labor insurance premiums in the aggregate amount of $2,160, accrued retirement benefits under the Company’s non-contributory defined benefit retirement plan in the amount of $1,586.

Stock Option Grants in the Last Fiscal Year; Exercises of Stock Options

There were no grants of stock options during the fiscal year ended December 31, 2006. The Company has never granted any stock options.

Pension Plans

The Group maintains tax-qualified defined contribution and benefit retirement plan for its employees in accordance with 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 defined the new contribution retirement plan (the ‘New Plan”) covering all regular employees in KCIT, and KCIT contributes monthly an amount equal to 6% of its employees’ basic 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 employees of KCIT who were employed before June 30, 2005, and KCIT contributes monthly an amount equal to 2% of its 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. Contribution amounts are determined in accordance with the advice of professionally qualified actuaries in Taiwan. Under the plan, the employees are entitled to receive retirement benefits upon retirement in the manner stipulated by the relevant labor laws in Taiwan. The benefits under the plan are based on various factors such as years of service and the final base salary preceding retirement.

PENSION BENEFITS

Name	Plan Name (i)			Number of Years Credited Service (#)		Present Value of Accumulated Benefit ($)			Payments During Last Fiscal Year ($)
CEO/PEO-Min-Tan Yang		—			—		—			—
CFO/PFO Suang-Yi Pai		—			—		—			—
Senior Vice President Chin-Chen Huang		Old and New (i	)		4		(ii	)		—

(i)	Former retirement plan ("Old Plan") calculation of pension benefits is applied prior to July 1, 2005 and existing retirement plan ("New Plan") calculation of pension benefits is applied after July 1, 2005.

(ii)	The fair value of plan assets as of December 31, 2006 was $84,312.

Compensation Committee Report

As we do not have a compensation committee, the entire board of directors reviewed and discussed the Compensation Discussion and Analysis set forth above and agrees to its inclusion in this annual report on form 10-K.

Suang Yi Pai

Min Tan Yang

Chin Chen Huang

Ming Tsung Shih

Robert Theng

Director Compensation

The Company’s Bylaws provide that the Company’s directors may be paid their expenses and a fixed sum for attendance at meetings of the Board of Directors, may be paid a stated salary as a director, and no such payment shall preclude any director from serving the Company in any other capacity and receiving compensation therefore. Currently, each independent director is paid US$615(NT$20,000) for his attendance at each regular Board meeting.

DIRECTOR COMPENSATION

Name (a)	Fees Earned or Paid in Cash ($) (b)		Stock Awards ($) (c)		Option Awards ($) (d)		Non-Equity Incentive Plan Compensation ($) (e)		Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) (f)		All Other Compensation ($) (g)		Total ($) (j)
Ming Tsung Shih		—		—		—		—		—	$	615	$	615
Robert Theng		—		—		—		—		—	$	615	$	615
Kuo An Wang		—		—		—		—		—		—		—

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth the beneficial ownership of shares of our common stock by (i) each person who is known to us to be the beneficial owner of more than 5% of our common stock; (ii) each director and named executive officer (defined above) individually; and (iii) all directors and executive officers as a group. Beneficial ownership of common stock has been determined for this purpose in accordance with Rules 13d-3 and 13d-5 of the Securities and Exchange Commission, under the Securities Exchange Act of 1934, as amended. These rules provide, among other things, that a person is deemed to be the beneficial owner of common stock if such person, directly or indirectly, has or shares voting power or investment power with respect to the common stock or has the right to acquire such ownership within sixty days after the date of this registration statement.

Name and Address of Beneficial Owner(1)	Number of Shares		Percent of Class(2)
Suang-Yi Pai / 3F, No. 10, Lane 31, Chelutou St., Sanchong City, Taipei County 241, Taiwan, R.O.C.		4,841,377		19.36	%
Min-Tang Yang / 3F, No. 10, Lane 31, Chelutou St., Sanchong City, Taipei County 241, Taiwan, R.O.C.		9,165,538		36.66	%
Chin-Chen Huang / No. 4, Alley 11, Lane 338, Dahu Road, Yingge Town, Taipei County 239, Taiwan, R.O.C.		5,000		0.02	%
Ming-Tsung, Shih / No. 29 Yongdong Street Yushun Villiage, Lukang Township Chang Hua, Taiwan, R.O.C.		—		—
Robert Theng / 3 Ally 21 Ln 36 Chieh Shou S. Rd. Changhua 500, Taiwan, R.O.C.		—		—
All officers and directors as a Group (5 persons)		14,011,915		56.02	%

(1) Unless otherwise indicated, the address of each person listed is 8th Floor, No. 98 Min Chuan Road, Hsien Tien, Taipei, Taiwan, Republic of China.

(2) Based on 25,000,000 shares of common stock outstanding as at December 31, 2006.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

In late 2005, our company experienced financial difficulties and was incapable of generating cash flows sufficient to sustain our operations. At the time, our board of directors approached Messrs. Pai and Yang for financial aid and management support. Mr. Pai, a director of the Company, was elected Chairman on November 2, 2005 and subsequently procured short-term loans for the Company from two third parties, Olympic Well International Ltd. (“Olympic”) and Chen-Chen Shih, payable in three months in the amount of approximately U.S.$690,000 and $60,000 respectively, with a 7% annual interest rate. Mr. Yang, who was elected as a director of the Company on November 2, 2005, loaned us approximately U.S. $1.05 million with a 7% annual interest rate. As of July 31, 2006, the remaining debt owed by the Company to Olympic and Shih was assigned to Mr. Pai pursuant to Assignment Agreements dated as of August 1, 2006. On December 28, 2006, pursuant to the loan settlement and conversion agreement, the parties agreed to convert a portion of the loans to stock at conversion price of $0.15 per share and to issue promissory notes to the remaining amount. The promissory notes are due in one year and have an annual interest rate of 7%. These transactions are summarized in the following table:

	Outstanding Principal as of 12/28/2006 (US$)		Amount of Residual Promissory Note (US$)		Promissory Note Due Date		Promissory Note Interest Rate			Principal converted to Common Stock (US$0.15/ share)		Shares of Common Stock
Pai		407,725		107,680		12/27/2007		7	%		300,045		2,000,297
Yang		840,789		240,789		12/27/2007		7	%		600,000		4,000,000

Policy and Procedures with Respect to Related Person Transactions

The Company recognizes that Related Person Transactions (defined as transactions, arrangements or relationships in which the Company was, is or will be a participant and the amount involved exceeds $10,000, and in which any Related Person (defined below) had, has or will have a direct or indirect interest) may raise questions among shareholders as to whether those transactions are consistent with the best interests of the Company and its shareholders. It is the Company’s policy to enter into or ratify Related Person Transactions only when the Board of Directors determines that the Related Person Transaction in question is in, or is not inconsistent with, the best interests of the Company and its shareholders, including but not limited to situations where the Company may obtain products or services of a nature, quantity or quality, or on other terms, that are not readily available from alternative sources or when the Company provides products or services to Related Persons on an arm’s length basis on terms comparable to those provided to unrelated third parties or on terms comparable to those provided to employees generally.

“Related Person” is defined as follows:

any person who is, or at any time since the beginning of the Company’s last fiscal year was, a director or executive officer of the Company or a nominee to become a director of the Company;

any person who is known to be the beneficial owner of more than 5% of any class of the Company’s voting securities;

any immediate family member of any of the foregoing persons, which means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of the director, executive officer, nominee or more than 5% beneficial owner, and any person (other than a tenant or employee) sharing the household of such director, executive officer, nominee or more than 5% beneficial owner; and

any firm, corporation or other entity in which any of the foregoing persons is employed or is a general partner or principal or in a similar position or in which such person has a 5% or greater beneficial ownership interest.

Directors and executive officers are required to submit to the Board of Directors, acting in its role as audit committee, a list of immediate family members and a description of any current or proposed Related Person Transactions on an annual basis and provide updates during the year.

In its review of any Related Person Transactions, the Board of Directors must consider all of the relevant facts and circumstances available to it, including (if applicable) but not limited to: the benefits to the Company; the impact on a director’s independence in the event the Related Person is a director, an immediately family member of a director or an entity in which a director is a partner, shareholder or executive officer; the availability of other sources for comparable products or services; the terms of the transaction; and the terms available to unrelated third parties or to employees generally. No member of the Board of Directors may participate in any review, consideration or approval of any Related Person Transaction with respect to which such member or any of his or her immediate family members is the Related Person. The Board of Directors will approve or ratify only those Related Person Transactions that are in, or are not inconsistent with, the best interests of the Company and its shareholders, as the Board of Directors determines in good faith. The Board of Directors will convey the decision to the Chief Executive Officer or the Chief Financial Officer, who will convey the decision to the appropriate persons within the Company.

Director Independence

Based on the definition of “Independent Director” contained American Stock Exchange, Inc. Listed Company Manual, Messrs. Shih and Theng are “Independent Directors”. Messrs. Pai, Yang, and Huang are not “Independent Directors.”

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

The total audit fees incurred for years 2005 and 2006 amounted to US$69,264 and US$136,325, respectively.

Audit-Related Fees

No audit-related fees were incurred in 2005 or 2006.

Tax Fees

The fees incurred for engaging tax advisors for years 2005 and 2006 amounted to US$13,000 for each period.

All Other Fees

None

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) List of documents filed.

(1) Consolidated Financial Statements

(2) Summary of Quarterly Results

	1Q						2Q						3Q						4Q						For the Year
	2006			2005			2006			2005			2006			2005			2006			2005			2006			2005
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Operating Revenue
Sales of Goods	$	2,220,496		$	2,375,155		$	1,309,033		$	1,174,176		$	2,573,101		$	2,822,830		$	671,630		$	684,371		$	6,774,260		$	7,020,532
Franchise income		506,547			597,925			688,141			710,121			831,805			606,879			54,058			374,730			2,080,551			2,289,655
Other operating revenue		245,484			149,912			(70,988	)		156,436			307,698			142,459			374,578			734,340			856,772			922,147
Total net operating revenue		2,972,527			3,122,992			1,926,186			2,040,733			3,712,604			3,572,168			1,100,266			1,496,441			9,711,583			10,232,334
Operating costs
Cost of goods sold		(807,487	)		(927,731	)		(562,738	)		(579,442	)		(987,402	)		(1,194,054	)		(327,023	)		(30,925	)		(2,684,650	)		(2,732,152	)
Cost of franchising		(80,125	)		(113.613	)		(91,242	)		(63,042	)		(83,107	)		(370,880	)		(83,512	)		50,835			(337,986	)		(496,700	)
Other operating costs		(42,251	)		(74,196	)		(39,326	)		(103,075	)		(527,095	)		(129,805	)		(7,430	)		(275,116	)		(616,102	)		(582,192	)
Total operating costs		(929,863	)		(1,115,540	)		(693,306	)		(745,559	)		(1,597,604	)		(1,694,739	)		(417,965	)		(255,206	)		(3,638,738	)		(3,811,044	)
Gross profit		2,042,664			2,007,452			1,232,880			1,295,174			2,115,000			1,877,429			682,301			1,241,235			6,072,845			6,421,290
Advertising costs		(2,541	)		(33,363	)		(14,747	)		(23,491	)		(2,296	)		0			(2,249	)		(34,289	)		(21,833	)		0
Other operating expenses		(1,415,130	)		(1,785,500	)		(1,429,510	)		(1,465,044	)		(1,379,880	)		(2,302,459	)		(1,301,798	)		(1,035,920	)		(5,526,318	)		(6,588,923	)
(Loss) income from operations		624,993			188,589			(211,377	)		(193,361	)		732,824			(425,030	)		(621,746	)		171,026			524,694			(258,776	)
Interest expenses, net		(33,373	)		(59,253	)		(86,752	)		(56,730	)		(31,632	)		(55,363	)		(28,068	)		(65,542	)		(179,825	)		(236,888	)
Share of loss of investments		(8,594	)		12,483			(491	)		0			(10,915	)		(34,116	)		(19,489	)		(33,169	)		(39,489	)		(54,802	)
Loss on write-off of investment		0			0			0			0			0			0			0			0			0			0
Other non-operating income, net		(37,735	)		(48,939	)		38,910			102,563			77,719			138,777			(232,697	)		(868,859	)		(153,803	)		(676,458	)
(Loss) income before income taxes		545,291			92,880			(259,710	)		(147,528	)		767,996			(375,732	)		(902,000	)		(796,544	)		151,577			(1,226,924	)
Benefit (provision) for taxes		(168,481	)		(143,453	)		(18,428	)		(41,297	)		(62,552	)		(90,611	)		76,136			(201,936	)		(173,325	)		(477,297	)
Net income (loss) from operations		376,810			(50,573	)		(278,138	)		(188,825	)		705,444			(466,343	)		(825,864	)		(998,480	)		(21,748	)		(1,704,221	)
Minority interest income		(18,951	)		143			5,359			(19,202	)		(41,731	)		35,206			30,860			(10,208	)		(24,463	)		5,939
Net (loss) income	$	357,859		$	(50,430	)	$	(272,779	)	$	(208,027	)	$	663,713		$	(432,137	)	$	(795,004	)	$	(1,008,688	)	$	(46,211	)	$	(1,698,282	)
(Loss) earnings per share—basic and diluted	$	0.019		$	(0.003	)	$	(0.014	)	$	(0.01	)	$	0.03		$	(0.02	)	$	(0.03	)	$	(0.053	)	$	(0.002	)	$	(0.089	)
Weighted-average shares used to compute (loss) earnings per share—basic and diluted		18,999,703			18,999,703			18,999,703			18,999,703			18,999,703			18,999,703			25,000,000			18,999,703			25,000,000			18,999,703

(3) Financial Statement Schedules

Schedule II — Valuation and Qualifying Accounts

Accounts receivable

Allowance for doubtful accounts and sales returns

	Balance at Beginning of Year		Charged to Expenses		Write-Offs and Others			Translation Adjustments			Balance at End of Year
2004		436,841		29,297		(289,007	)		19,057			196,188
2005		196,188		604,928		―			(48,634	)		752,482
2006		752,482		356,871		―			1,032			1,108,321

Inventory

Provision for loss on inventory obsolescence and slow-moving items

	Balance at Beginning of Year		Charged (Credit) to Costs			Translation Adjustments			Balance at End of Year
2004		651,795		70,792			53,150			775,737
2005		775,737		5,403			(26,689	)		754,451
2006		754,451		(310,948	)		6,227			449,730

Deferred income tax assets

Valuation allowance for deferred income tax assets — current

	Balance at Beginning of Year		Charged (Credit) to Costs			Translation Adjustments			Balance at End of Year
2004	$	394,610	$	193,573		$	40,306			628,489
2005		624,489		261,670			(130,941	)		755,218
2006		755,218		(611,059	)		5,537			149,696

Valuation allowance for deferred income tax assets — non current

	Balance at Beginning of Year		Charged (Credit) to Costs			Translation Adjustments		Balance at End of Year
2004	$	30,084		9,445			3,090		42,619
2005		42,619		36,152			193,805		272,576
2006		272,576		(30,696	)		1,998		243,878

(b) Exhibits

The exhibits filed with this annual report on Form 10-K are listed in the Exhibit Index that follows the signatures.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	KID CASTLE EDUCATIONAL CORPORATION

	By:	/s/ Min-Tan Yang
		Name: Min-Tan Yang Title: Chief Executive Officer
Date: June 14, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/s/ Min-Tan Yang
Min-Tan Yang	Director and President (Principal Executive Officer)	June 14, 2007
	Director and President (Principal Executive Officer)
/s/ Suang-Yi Pai
Suang-Yi Pai	Director, Chief Financial Officer and Chairman (Principal Financial and Accounting Officer)	June 14, 2007

/s/ Chin-Chen Huang
Chin-Chen Huang	Director	June 14, 2007
	Director
/s/ Ming-Tsung Shih
Ming-Tsung Shih	Director	June 14, 2007
	Director
/s/ Robert Theng
Robert Theng	Director	June 14, 2007
	Director

Exhibit Index

Exhibit Number	Description	Incorporated by Reference from Document	Exhibit No. in Referenced Document
3.1	Articles of Incorporation	Form 10-K filed March 8, 2007	3.1

3.2	Bylaws	Form 10-Q/A filed August 17, 2004	3.1

10.1	Acknowledgements of Loan, Loan Agreement by and between Chang Hwa Commercial Bank and Kid Castle Internet Technology Corporation and Guarantee Agreement by and among Chang Hwa Bank Co., Ltd., Kid Castle Internet Technology Corporation (Borrower), Kuo-An Wang (Guarantor) and Yu-En Chiu (Guarantor) on March 21, 2005	Form 10-K filed March 8, 2007	10.1

10.2	Complete translation of Acknowledgement of Loan, Loan Agreement by and between FUHWA Bank and Kid Castle Internet Technology Corporation, and Receipt of Borrowing by and among Kid Castle Internet Technology Corporation (Borrower), Mr. Min-Tan Yang (Guarantor) and Mr. Suang-Yi Pai (Guarantor) and FUHWA Bank on December 2006

10.3	Acknowledgement of Loan by International Bank of Taipei and Loan agreement by and between Kid Castle Internet Technology Corporation and International Bank of Taipei on February 2, 2005	Form 10-K filed March 8, 2007	10.3

10.4	Complete translation of Approval notification from Chang Hwa Bank Co., Ltd., for loan extension on October 2006

10.5	Complete translation of Copyright agreement by Kid Castle Internet Technology Corporation and 21^st century Publishing House

10.6	Complete translation of House Lease Agreement, dated as of March 8, 2006 by and between Real Estate Co. of Shanghai China International Travel Service Co. Ltd. and Kid Castle Education Software Development Company Ltd.

10.7	Complete translation of Lease Agreement, dated as of May 30, 2006, by and between, Rei-Bi Wang (Lessor) and Kid Castle Internet Technology Corporation (Lessee)

10.8	Lease Agreement, by and between Kuan Lei Construction Ltd. (Lessor) and Kid Castle Internet Technology Corporation (Lessee) on November 1, 2004	Form 10-K filed April 15, 2005	10.17

Exhibit Number	Description	Incorporated by Reference from Document	Exhibit No. in Referenced Document

10.9	English Summary of Lease Agreement of Warehouse by and between Jen Shan Chang and Hon Chan Lin (Lessor) and Kid Castle Internet Technology Corporation (Lessee) on April 1, 2006	10K filed April 15, 2004	10.18

10.10	English-language summary of joint venture agreement dated as of April 1, 2004, by and between Tianjin Foreign Enterprises & Experts Service Corp. and Kid Castle Educational Software Development Co., Ltd.	10Q filed May 14, 2004	10.1

10.11	English-language summary of joint venture agreement dated as of April 28, 2004, by and among LANBEISI Education & Culture Industrial Co., Ltd, Sichuan Province Education Institutional Service Center and Kid Castle Educational Software Development Co., Ltd.	10Q filed May 14, 2004	10.2

10.12	English-language summary of Liability Transfer Agreement dated as of March 25, 2004, by and among Higoal Development Limited, Kidcastle Internet Technologies Limited, Mr. His Ming Pai and Mr. Kuo-An Wang and Mr. Yu-En Chiu	Form 10-KSB filed March 30, 2004	10.30

14	Code of Ethics	Form 10-K filed April 15, 2005	14

21	Subsidiaries of the Company	Form 10-KSB filed March 30, 2004	21

31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934

31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934

32.1	Certifications of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2	Certifications of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Kid Castle Educational Corporation

Index to Consolidated Financial Statements

		Pages
Report of Brock, Schechter & Polakoff, LLP		F-2
Report of PricewaterhouseCoopers		F-3
Consolidated Balance Sheets as of December 31, 2006 and 2005		F-4
Consolidated Statements of Operations for the years ended December 31, 2006, 2005, and 2004		F-5
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2006, 2005, and 2004		F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005, and 2004		F-7
Notes to Consolidated Financial Statements		F-11

F-1

Report of Independent Registered Public Accounting Firm

To the Shareholders

Kid Castle Educational Corporation

Taipei, Taiwan ROC

We have audited the accompanying consolidated balance sheets of Kid Castle Educational Corporation and it’s Subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years ended December 31, 2006 and December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements and financial statement schedule of the Company as of and for the year ended December 31, 2004 were audited by other independent accountants whose report dated March 31, 2005, except as to Note 19. B. (xi) footnote 2., which was dated March 7, 2007, expressed an unqualified opinion on those statements.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2006 and 2005, and the results of its operations and its cash flows for the years ended December 31, 2006 and December 31, 2005 in conformity with U.S. generally accepted accounting principles.

Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule appearing under Item 15(a)(2) on page 37 is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 16 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 16. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Brock, Schechter & Polakoff, LLP

Buffalo, New York

June 14, 2007

F-2

Report of Independent Registered Public Accounting Firm

To the Board of Directors and shareholders of

Kid Castle Educational Corporation

The financial statements for the year ended December 31, 2004 have been prepared assuming that the Company will continue as a going concern. As discussed in Note 16 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 16. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Taipei, Taiwan

March 31, 2005, except as to Note 19. B. (xi) footnote 2. which was dated March 7, 2007

F-3

Kid Castle Educational Corporation

Consolidated Balance Sheets

	December 31, 2006			December 31, 2005
	(Expressed in US Dollars)
ASSETS
Current assets
Cash and bank balances	$	1,419,873		$	613,391
Bank fixed deposits - pledged (Note 12)		75,210			120,813
Notes and accounts receivable, net (Notes 3 and 19)		2,001,145			2,593,276
Inventories, net (Note 4)		1,636,020			2,069,492
Other receivables (Notes 5 and 19)		127,062			223,063
Prepayments and other current assets (Note 6)		141,620			411,526
Pledged notes receivable (Note 12)		430,415			849,704
Deferred income tax assets (Note 7)		105,426			72,992

Total current assets		5,936,771			6,954,257
Deferred income tax assets (Note 7)		49,909			46,382
Interest in associates (Note 8)		33,295			71,158
Property and equipment, net (Note 9)		1,755,992			1,808,411
Intangible assets, net of amortization (Note 10)		538,638			699,246
Long-term notes receivable		812,809			482,483
Pledged notes receivable (Note 12)		13,851			357,825
Other assets		231,958			563,175

Total assets	$	9,373,223		$	10,982,937

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Bank borrowings ― short-term and maturing within one year (Note 12)	$	808,037		$	1,516,906
Notes and accounts payable (Note 19)		925,577			1,385,478
Accrued expenses (Note 11)		975,396			560,733
Amounts due to officers (Note 19)		355,653			977,838
Other payables		381,647			1,057,161
Deposits received (Note 13)		752,597			462,007
Receipts in advance (Note 14)		2,402,624			2,353,680
Income tax payable (Note 7)	$	143,771		$	122,481

Total current liabilities		6,745,302			8,436,284
Bank borrowings maturing after one year (Note 12)		979,323			1,640,391
Receipts in advance (Note 14)		1,275,638			1,130,207
Deposits received (Note 13)		629,165			864,196
Deferred Liability		36,624			35,416
Accrued pension liabilities (Note 15)		287,363			174,387

Total liabilities		9,953,415			12,280,881

Commitments and contingencies (Note 16)
Minority interest		54,561			28,627
Shareholders’ equity
Common stock, no par share (Note 17):
25,000,000 shares authorized; 25,000,000 and 18,999,703 shares issued and outstanding at December 31, 2006 and 2005, respectively.		8,592,138			7,669,308
Additional paid-in capital		194,021			194,021
Legal reserve		65,320			65,320
Accumulated deficit (Note 18)		(9,056,567	)		(9,010,356	)
Accumulated other comprehensive loss		(330,713	)		(244,864	)
Net loss not recognized as pension cost		(98,952	)		—

Total shareholders’ equity		(634,753	)		(1,326,571	)

Total liabilities and shareholders’ equity	$	9,373,223		$	10,982,937

See accompanying notes to Consolidated Financial Statements.

F-4

Kid Castle Educational Corporation

Consolidated Statements of Operations

	Years Ended December 31,
	2006			2005			2004
	(Expressed in US Dollars)
Operating revenue (Note 21)
Sales of goods	$	6,774,260		$	7,020,532		$	6,822,420
Franchise income		2,080,551			2,289,655			2,442,746
Other operating revenue		856,772			922,147			463,947

Net operating revenue		9,711,583			10,232,334			9,729,113

Operating costs (Note 21)
Cost of goods sold		(2,684,650	)		(2,732,152	)		(2,569,078	)
Cost of franchising		(337,986	)		(496,700	)		(474,304	)
Other operating costs		(616,102	)		(582,192	)		(390,176	)

Total operating costs		(3,638,738	)		(3,811,044	)		(3,433,558	)

Gross profit		6,072,845			6,421,290			6,295,555
Advertising costs		(21,833	)		(91,143	)		(532,015	)
Other operating expenses		(5,526,318	)		(6,588,923	)		(6,546,844	)

Profit (loss) from operations		524,694			(258,776	)		(783,304	)
Interest expense, net (Note 12)		(179,825	)		(236,888	)		(150,704	)
Share of profit (loss) of investments		(39,489	)		(54,802	)		(36,573	)
Other non-operating income, net		(153,803	)		(676,458	)		151,981

Profit (loss) before income taxes and minority interest income		151,577			(1,226,924	)		(818,600	)
Income taxes (expense) benefit (Note 7)		(173,325	)		(477,297	)		(430,729	)

Loss after income taxes		(21,748	)		(1,704,221	)		(1,249,329	)
Minority interest income		(24,463	)		5,939			(5,263	)

Net loss	$	(46,211	)	$	(1,698,282	)	$	(1,254,592	)

Loss per share — basic and diluted	$	(0.002	)	$	(0.089	)	$	(0.066	)

Weighted-average shares used to compute loss per share — basic and diluted		25,000,000		$	18,999,703		$	18,999,703

See accompanying notes to Consolidated Financial Statements.

F-5

Kid Castle Educational Corporation

Consolidated Statements of Shareholders’ Equity

	Common Stock				Additional							Accumulated Other			Net loss not recognized
	Number of Shares		Amount		Paid-In Capital		Legal Reserve		Accumulated Deficit			Comprehensive Loss			as pension cost			Total
	(Expressed in US Dollars)
Balance, January 1, 2004		18,999,703		7,669,308		194,021		65,320		(6,057,482	)		(163,170	)		—			1,707,997
Net loss for 2004		—		—		—		—		(1,254,592	)		—			—			(1,254,592	)
Cumulative translation adjustment		―		―		―		―		―			(59,480	)		—			(59,480	)
Comprehensive loss																			(1,314,072	)
Balance, December 31, 2004		18,999,703	$	7,669,308	$	194,021	$	65,320	$	(7,312,074	)	$	(222,650	)		—		$	393,925

Net loss for 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 loss for 2006		—		—		—		—		(46,211	)		—			—			(46,211	)
Cumulative translation adjustment		—		—		—		—		—			(85,849	)		—			(85,849	)
Comprehensive loss																			(132,060	)
Repayment of a liability by issuance of common stock		6,000,297		922,830		—		—		—			—			—			922,830
Net loss not recognized as pension cost		—		—		—		—		—			—			(98,952	)		(98,952	)
Balance, December 31, 2006		25,000,000		8,592,138		194,021		65,320		(9,056,567	)		(330,713	)		(98,952	)		(634,753	)

See accompanying notes to Consolidated Financial Statements.

F-6

Kid Castle Educational Corporation

Consolidated Statements of Cash Flows

	Years Ended December 31,
	2006			2005			2004
	(Expressed in US Dollars)
Cash flows from operating activities
Net loss	$	(46,211	)	$	(1,698,282	)	$	(1,254,592	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation of property and equipment		215,249			299,884			203,077
Amortization of intangible assets		166,106			167,945			161,648
Allowance for sales returns		(20,814	)		(30,220	)		(75,595	)
Allowance for doubtful debts		363,687			604,928			104,892
Provision (reversal of) for loss on inventory obsolescence and slow-moving items		17,755			5,403			70,792
Share of loss of investments in associates		39,489			―			36,573
Loss on write-off of an investment		―			54,802			―
Loss (gain) on disposal of property and equipment		―			11,363			6,879
Minority interest income		24,463			(4,089	)		2,616
(Increase)/decrease in:
Notes and accounts receivable		(362,561	)		(1,090,681	)		65,060
Inventories		431,898			819,533			(599,829	)
Other receivables		743,006			387,069			(60,977	)
Prepayments and other current assets		273,531			51,907			(264,909	)
Deferred income tax assets		(35,164	)		261,670			381,664
Other assets		336,099			30,029			(394,070	)
Increase/(decrease) in:
Notes and accounts payable		(600,254	)		(70,890	)		192,896
Accrued expenses		425,041			(127,811	)		(145,690	)
Other payables		(900,934	)		(719,516	)		(129 292	)
Receipts in advance		169,592			(8,420	)		(38,325	)
Income taxes payable		20,438			29,263			47,194
Deposits received		512,377			(288,778	)		129,253
Accrued pension liabilities		474			19,641			15,833
Net cash (used in) provided by operating activities		1,773,267			(1,295,250	)		(1,544,902	)

Cash flows from investing activities
Purchase of property and equipment		(149,424	)		(203,030	)		(321,001	)
Proceeds from disposal of property and equipment		―			202,822			70,062
Net cash acquired from acquisition of subsidiary		―			―			79,151

F-7

Kid Castle Educational Corporation

Consolidated Statements of Cash Flows — (Continued)

	Years Ended December 31,
	2006			2005			2004
	(Expressed in US Dollars)
Amount due from shareholder/director		―			977,838			―
Prepayment of long-term investments		―			―			(24,131	)
Acquisition of long-term investments		―			―			(103,762	)
Bank fixed deposits — pledged		46,593			166,827			(70,152	)
Pledged notes receivable		773,849			369,807			15,760
Advance to ex-CFO (Note 19 B(xi)2)		―			(2,953,337	)		(799,820	)
Repayments of advance to ex-CFO (Note 19 B(xi)2)		―			2,953,337			799,820

Net cash (used in) provided by investing activities		671,018			1,514,264			(354,073	)

Cash flows from financing activities
Proceeds from bank borrowings	$	213,357		$	3,067,111		$	3,351,287
Repayment of bank borrowings		(1,609,571	)		(4,068,179	)		(1,821,481	)
Repayment of capital leases		―			(8,536	)		(30,571	)
(Repayment of loan) borrowings from officers/shareholders		(1,110,555	)		1,271,800			(585,006	)
Issuance of common stock		922,830			―			―

Net cash provided by financing activities		(1,583,939	)		262,196			914,229

Net increase (decrease) in cash and cash equivalents		860,346			481,210			(984,746	)
Effect of exchange rate changes on cash and cash equivalents		(53,864	)		(81,383	)		(75,413	)
Cash and cash equivalents at beginning of year		613,391			213,564			1,273,723

Cash and cash equivalents at end of year	$	1,419,873		$	613,391		$	213,564

Supplemental disclosure of cash flow information
Interest paid	$	107,696		$	236,978		$	238,225

Income taxes paid	$	169,797		$	177,920		$	6,280

Supplemental disclosure of significant non-cash transactions
Capital lease of transportation equipment	$	―		$	―		$	―

Increase of long-term investments corresponding to the (decrease) of the following accounts:
Prepaid long-term investments	$	―		$	―		$	(61,202	)

Other receivable — related parties	$	―		$	―		$	(120,422	)

Write-off of an equity investment against deferred income:
Balance of an equity investment	$	―		$	―		$	―
Balance of deferred income		―			―			―

Loss on write-off of an equity investment	$	―		$	―		$	―

Repayment of a liability by issuance of common stock	$	―		$	―		$	―

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

F-8

Kid Castle Educational Corporation

Notes To 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 is comprised of publication, sales and distribution of books, magazines, audiotapes, videotapes and compact discs, and the franchising and sales of merchandises complementary to the business of teaching children the English language. 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 shareholders 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 shareholders 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 shareholders 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 shareholders of Higoal hold a majority of the Company’s outstanding capital stock. Generally accepted accounting principles require in certain circumstances that a company whose shareholders retain the majority voting interest in the combined business to be treated as the acquirer for financial reporting purposes. Accordingly, the acquisition has been accounted for as a “reverse acquisition” whereby Higoal is deemed to have purchased the Company. However, the Company remains the legal entity and the Registrant for Securities and Exchange Commission reporting purposes.

In July 2003, KCES entered into an agreement with 21st Century Publishing House to incorporate Jiangxi 21st Century Kid Castle Culture Media Co., Ltd (Culture Media). It was agreed that KCES and 21st Century Publishing House each would own 50% ownership and that each party would contribute RMB$1 million for the incorporation. On July 2, 2004, KCES acquired additional 40% of Culture Media’s ownership from 21st Century Publishing House. KCES now owns 90% of Culture Media.

On December 27, 2006, KCES established a wholly-owned subsidiary, Shanghai Kid Castle Educational Info Constitution Company Limited (‘KCEI”) in the People’s Republic of China (the PRC), with registered total capital of RMB$1,200,000, in order to operate direct-owned schools in PRC.

The Company, Higoal and its subsidiaries collectively are referred to as the “Group.” The operations of the Group are principally located in Taiwan and the PRC.

NOTE 2 — SUMMARY OF IMPORTANT ACCOUNTING POLICIES

Basis of Accounting and Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of all significant intercompany accounts and transactions. The preparation of financial statements in accordance with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

F-11

Kid Castle Educational Corporation

Notes To Consolidated Financial Statements — (Continued)

Foreign Currency Translation and Transactions

The functional currency of the Company is U.S. dollars and the financial records are maintained and the financial statements are prepared in US$. The functional currency of Higoal and its subsidiary, KCIT is New Taiwan Dollars (“NT$”) and the financial records are maintained and the financial statements are prepared in NT$. The functional currency of KCES, Culture Media and KCEI is Renminbi (“RMB”) and the financial records are maintained and the financial statements are prepared in RMB.

For the Company, foreign currency transactions during the year are translated into US$ at the exchange rates existing on the transaction dates. Gain and loss resulting from foreign currency transactions are included in the consolidated statement of operations. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated into US$ at year-end exchange rates. All exchange differences are dealt with in the statement of operations.

For Higoal and KCIT, foreign currency transactions during the year are translated into NT$ at the exchange rates existing on the transaction dates. Gain and loss resulting from foreign currency transactions are included in the statement of operations. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated into NT$ at year end exchange rates. All exchange differences are dealt with in the statement of operations.

For KCES, Culture Media and KCEI, foreign currency transactions during the year are translated into RMB at the exchange rates existing on the transaction dates. Gain and loss resulting from foreign currency transactions are included in the statement of operations. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated into RMB at year end exchange rates. All exchange differences are dealt with in the statement of operations.

For the purpose of preparing the Group’s consolidated financial statements, the statement of operations of KCES prepared in RMB has been translated at the average exchange rates of NT$4.045 = RMB1.00 (2005: NT$3.926 = RMB1.00; 2004:NT$4.037 RMB1.00) and the balance sheet expressed in RMB has been translated at the exchange rate of NT$4.177 = RMB 1.00 (December 31, 2005: NT$4.069 = RMB1.00; December 31, 2004:NT$3.831=RMB1:00) existing on December 31, 2006. Translation adjustments are included as a component of shareholders’ equity.

For presentation of the Group’s consolidated financial statements, the consolidated statement of operations and consolidated statement of cash flows of Higoal prepared in NT$ have been translated at the average exchange rate of US$1.00 = NT$32.523 (2005: US$1.00 = NT$32.167; 2004:US$1:00 = NT$33.42;2003: US$1.00 = NT$34.44) and the consolidate balance sheet of Higoal expressed in NT$ have been translated at the exchange rate of US$1.00 = NT$32.596 (December 31, 2005: US$1.00 =NT$32.835; December 31, 2004:US$1:00 = NT$31.71; December 31, 2003: US$1.00 =NT$34.11) ruling as of December 31, 2006. Translation adjustments are included as a component of shareholders’ equity.

Revenue Recognition

Sales of books, magazines, audiotapes, video tapes, compact discs and other merchandise 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 discounts when revenue is recognized.

Franchise income is recognized on a straight-line basis over the terms of the relevant franchise agreements.

F-12

Kid Castle Educational Corporation

Notes To Consolidated Financial Statements — (Continued)

Allowance for Doubtful Accounts

An allowance for doubtful accounts is provided based on the evaluation of collectibility and aging analysis of note receivable, accounts receivable and other 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. An allowance for loss on obsolescence and decline in market value is provided, when necessary.

Cash Equivalents

Cash equivalents include all highly liquid investments with an original maturity of three months or less when purchased.

Investments in Associates

Investments in other companies in which, through ownership and other factors, the Company has significant influence, but less than a majority of the voting common stock are accounted for under the equity method. Under the equity method the Company includes its share of the investee’s income or loss in its results of operations. The Company reviews its investments on a regular basis and considers factors including the operating results, available evidence of the market value and economic outlook of the relevant industry sector. When the Company concludes that an investment has suffered impairment that is other-than-temporary, the impairment is written off against earnings.

Fair Values of Financial Instruments

The carrying amounts of certain financial instruments approximate their fair values as of December 31, 2006, 2005, and 2004 because of the relatively short-term maturity of these instruments.

Property, 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.

F-13

Kid Castle Educational Corporation

Notes To Consolidated Financial Statements — (Continued)

Intangible Assets

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

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 Company 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 Company measures fair value based on quoted market prices or based on discounted estimates of future cash flows.

Advertising Costs

All advertising costs incurred in the promotion of the Company’s products and services are expensed as incurred.

Income Taxes

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

Net Earnings (Loss) Per Share

The Company 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 potential common shares. For the years ended December 31, 2006, 2005, and 2004, the Group did not have any potential common shares.

Reclassification

The presentation of certain prior information has been reclassified to conform to current presentation.

Recent Accounting Pronouncements

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

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

F-14

NOTE 3 — NOTES AND ACCOUNTS RECEIVABLE

	December 31, 2006			December 31, 2005

Accounts receivable
— Third parties	$	2,995,538		$	2,944,574
— Related parties (Note 19 B(vi))		113,928			401,184

Total		3,109,466			3,345,758
Less: Allowance for doubtful accounts and sales returns (Note)		(1,108,321	)		(752,482	)

Notes and accounts receivable, net	$	2,001,145		$	2,593,276

Note: The total allowance for doubtful accounts and sales returns for the year ended December 31, 2006 amounted to US$1,108,321. Of this total, the allowance for sales returns was US$6,707, and allowance for doubtful accounts was US$1,101,614. The allowance for sales returns in the amount of US$6,707 is calculated based on historical operations in the ROC. Allowance for doubtful accounts in the amount of US$1,101,614 includes US$707,715 attributable to Shanghai Wonderland which was having difficulty paying its debts in the third fiscal quarter of 2005. The balance of US$393,899 is attributable to other debtors of the Company. The estimate of allowance for doubtful debt is made based on a percentage ageing analysis, whereby 100% of overdue receivables in our ROC operations exceeding 365 days are recognized as a doubtful account. Allowance for doubtful accounts in our operations in the PRC region are recognized in two categories with varying percentages based on the number of days overdue. The categories are (1) overdue between 181 and 365 days (based on an analysis of the financial strength of each customer, a discount ranging between 10% and 80% is assigned) and (2) overdue exceeding 365 days, which are revised at 100%.

NOTE 4 —INVENTORIES

	December 31, 2006			December 31, 2005

Work in progress	$	145,110		$	127,001
Finished goods and other merchandise		2,268,608			2,696,942

		2,413,718			2,823,943
Less: Allowance for obsolete inventories		(777,698	)		(754,451	)

	$	1,636,020		$	2,069,492

F-15

NOTE 5 —OTHER RECEIVABLES

	December 31, 2006			December 31, 2005

Tax paid on behalf of landlord	$	—		$	2,013
Advances to staff		55,438			125,590
Penalties receivable		—			—
Grants from Market Information Center		—			—
Receivables from Shanghai Wonderland Educational Resources Co., Ltd. (“Shanghai Wonderland”) (Note i)		381,092			368,528
Bank pledged deposits		—			—
Other receivables		42,480			86,141
Less : Allow for doubtful accounts		(381,092	)		(368,528	)

		97,918			213,744
Other receivables — related parties (Note 19 B(vii))		29,144			9,319

	$	127,062		$	223,063

Note:

(i)

Shanghai Wonderland was a distributor of the Group. The Group loaned Shanghai Wonderland RMB$450,000 (approximately $54,000), RMB$500,000 (approximately $60,000), and RMB$2,500,000 (approximately $310,000) for operations in December 2003, July 2005 and August 2005, respectively. The identified loans were unsecured and bore no interest. Shanghai Wonderland has fully repaid the loan of RMB$450,000 in December 2004 and January 2005. As of December 31, 2006, Shanghai Wonderland still owes the Group a balance of RMB$3,000,000 (approximately $381,092). Such sum has now been itemized and recorded as "allowance for doubtful accounts" compared to its prior recognition as "Other receivables".

NOTE 6 - PREPAYMENTS AND OTHER CURRENT ASSETS

	December 31, 2006		December 31, 2005

Prepayments	$	139,582	$	399,659
Temporary payments		1,084		11,038
Tax recoverable		—		—
Prepaid interest		54		—
Others		900		829

	$	141,620	$	411,526

NOTE 7 -INCOME TAXES

The income taxes of the Group are substantially attributable to the operations in Taiwan and the PRC whose statutory tax rates are 25% and 15%, respectively.

	Years Ended December 31,
	2006		2005		2004

Income taxes expense (benefit) consisted of:
Income taxes	$	143,771	$	232,086	$	9,186
Deferred income taxes		29,554		208,343		381,665
Tax on undistributed earnings (Note 18)		—		36,868		39,878

	$	173,325	$	477,297	$	430,729

F-16

The principal differences between taxes on income computed at the applicable statutory income tax rate in Taiwan and recorded income tax (benefit) expense are as follows:

	Years Ended December 31,
	2006			2005			2004

Income taxes (benefit) expense calculated on applicable statutory tax rates	$	(64,236	)	$	(67,397	)	$	(265,709	)
Lower effective income tax rates of other countries		8,446			97,185			114,107
Valuation allowance		—			353,705			476,929
Non-taxable income		—			—			(54,431	)
Non-deductible expenses		229,115			56,936			119,955
Tax on undistributed earnings		—			36,868			39,878

Income taxes expense (benefit) as recorded in statement of operations	$	173,325		$	477,297		$	430,729

Significant components of the estimated deferred income tax assets as of December 31, 2006 and 2005 are as follows:

	December 31, 2006			December 31, 2005

Deferred income tax assets - current assets
Allowance for sales returns and discounts	$	1,690		$	11,606
Allowance for doubtful debts		4,368			23,251
Allowance for obsolete inventories		99,367			243,383
Web site design costs		—			—
Pre-operating expenses		—			—
Future benefit of tax losses		149,697			378,546
Others		—			171,424

		255,122			828,210
Less: Valuation allowance		(149,696	)		(755,218	)

	$	105,426		$	72,992

Deferred income tax assets - non-current assets
Provision for pension fund		46,074			56,099
Amortization of intangible assets		243,878			223,161
Provision for diminution in value of long-term investment		3,835			39,698

		293,787			318,958
Less: Valuation allowance		(243,878	)		(272,576	)

	$	49,909		$	46,382

Total deferred income tax assets	$	155,335		$	119,374

At December 31, 2005, KCESD has net operating losses of approximately US$997,982, available to be carried forward to offset future taxable income which will expire in 2007.

The Company’s net operating loss carry forwards to offset future taxable income is insignificant.

F-17

NOTE 8 -INTEREST IN ASSOCIATES

	December 31, 2006			December 31, 2005

21^st Century Kid Castle Language and Education Center (“Education Center”) (Note (i))
Investment cost	$	96,111		$	92,942
Share of loss		(52,091	)		(40,803	)

	$	44,020		$	52,139

Tianjin Kid Castle Educational Investment Consulting Co., Ltd. (“Tianjin Consulting”) (Note (ii))
Investment cost	$	89,704		$	86,746
Share of loss		(104,693	)		(80,360	)

	$	(14,989	)	$	6,386

Sichuan Lanbeisi Kid Castle Education Development Co., Ltd. (“Lanbeisi”) (Note (iii))
Investment cost	$	46,133		$	44,612
Share of loss		(41,869	)		(31,979	)

	$	4,264		$	12,633

	$	33,295		$	71,158

Notes:

(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 years ended December 31, 2006 and 2005, the Group recognized an investment loss, accounted for under the equity method, in Education Center of $9,759 and $7,103 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 over its investee and accordingly the investment is accounted for under the equity method. For the year ended December 31, 2006 and 2005, the Group recognized an investment loss of $21,164 and $37,846 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 over its investee and accordingly the investment is accounted for under the equity method. For the year ended December 31, 2006 and 2005, the Group recognized an investment loss accounted for under the equity method in Lanbeisi of $8,625 and $9,853, respectively.

F-18

NOTE 9 —PROPERTY AND EQUIPMENT

	December 31, 2006			December 31, 2005

Freehold land	$	563,579		$	559,477
Buildings		920,358			913,659
Furniture and fixtures		773,009			823,599
Transportation equipment		189,542			85,904
Miscellaneous equipment		329,612			225,250

		2,776,100			2,607,889
Less: Accumulated depreciation		(1,020,108	)		(799,478	)

	$	1,755,992		$	1,808,411

The land and buildings at 8th floor, No. 98 Min Chuan Road, Hsin-Tien City, Taipei City, Taiwan, with carrying cost of $1,483,937 and $1,473,136 as of December 31, 2006 and 2005, respectively, purchased from a director are pledged to a bank to secure a bank loan (Note 12(iv)) granted in December 2003.

Depreciation charged to the operations was $215,249, $299,884 and $203,077 for the years ended December 31, 2006, 2005, and 2004, respectively.

NOTE 10 — INTANGIBLE ASSETS

	December 31, 2006			December 31, 2005

Gross carrying amount
Franchise	$	1,043,775		$	1,036,178
Copyrights		613,572			609,106

		1,657,347			1,645,284

Less: Accumulated amortization
Franchise		(704,548	)		(595,802	)
Copyrights		(414,161	)		(350,236	)

		(1,118,709	)		(946,038	)

	$	538,638		$	699,246

Amortization charged to operations was $166,106, $167,945 and $161,648 for the years ended December 31, 2006, 2005, and 2004, respectively.

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

2007	$	166,105
2008		166,105
2009		166,105
2010		40,323
2011		—

	$	538,638

F-19

NOTE 11 —ACCRUED EXPENSES

	December 31, 2006		December 31, 2005

Accrued compensation	$	305,860	$	195,489
Accrued commission		—		—
Accrued professional fee		146,828		196,766
Accrued production cost		18,968		47,944
Accrued value-add-in tax		—		—
Accrued advertising cost		—		—
Others		503,740		120,534

	$	975,396	$	560,733

NOTE 12 —BORROWINGS

	Notes			December 31, 2006		December 31, 2005

Bank term loans		(i	)	$	108,922	$	564,704
Short-term unsecured bank loans		(ii	)		446,086		539,583
Mid-term loan		(iii	)		—		586,436
Mid-term secured bank loan		(iv	)		1,232,352		1,466,574

					1,787,360		3,157,297

Less: Balances maturing within one year included in current liabilities bank term loans					103,523		145,042
Short-term unsecured bank loans					446,086		539,583
Mid-term loans					—		586,436
Mid-term secured bank loan					258,428		245,845

					808,037		1,516,906

Bank borrowings maturing after one year				$	979,323	$	1,640,391

Notes:

(i)

The balance represents discounting notes receivable loans with the bank using post-dated checks totaling $261,142 and $873,215 received from franchises and also collateralized by the Group’s bank deposits of $1,963 and $46,456 as of December 31, 2006 and 2005, respectively. The repayment dates of the loans coincided with the maturity dates of the corresponding pledged post-dated checks, and was extended on October 18, 2006. The weighted average interest rates were 5.37% and 5.83% per annum as of December 31, 2006 and 2005, respectively.

For the years ended December 31, 2006 and 2005, the interest expense charged to operations amounted to $17,995 and $50,225, respectively.

(ii)

In March 2005, KCIT obtained an unsecured short-term loan in the amount of $304,553, which is guaranteed by two directors and shareholders of the Group. The loan bears interest at the Taiwan basic borrowing rate plus 1.3% per annum and was extended on April 11, 2006 and October 18, 2006. It is due and payable in September 2007. The applicable interest rate is approximately 5.37% and 5.45% per annum as of December 31, 2006 and 2005, respectively.

In August 2005, KCIT obtained an unsecured short-term loan in the amount of $304,553, which was collateralized by the KCIT’s refundable deposits of $60,911 and notes receivables approximating 30% of loan balance, and guaranteed by two directors and shareholders of the Group. The loan bears interest at the lending back’s basic fixed deposit rate plus 3.29% per annum, which was extended on August 4, 2006 to a due date of in February 2007. The applicable interest rate is approximately 5.31% and 5.1% per annum as of December 31, 2006 and 2005, respectively.

F-20

For the years ended December 31, 2006 and 2005, the interest expense charged to operations from the above unsecured short-term loans amounted to $27,473 and-$24,653, respectively.

(iii)

In June 2005, KCIT obtained a loan of $609,106 from a financial institution, which bears interest at 5% per annum, the Group settled in advance and totally repaid on July 17, 2006.

In November 2004, KCIT signed a loan contract with a new financial institution to obtain a loan of $630,716, which bears interest at 5.26% per annum, the Group settled in advance and totally repaid on January 11, 2006.

For the years ended December 31, 2006 and 2005, the interest expense charged to operations from loans of financial institutions amounted to $8,199 and $32,146, 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, 2003 and to finance its operations. The loan is secured by the Group’s land and buildings and personal guarantees provided by two directors of the Group. The loan bears interest at the lending bank’s basic fixed deposit rate plus 0.69%, between annum, for the year 2005 to 2007, and plus 1.69% from the annum for the year 2008. On August 10, 2005, the bank extended the term of the loan and the Group agreed to repay the loan, which is now repayable in 84 equal monthly installments starting August 10, 2012. As of December 31, 2006, the applicable per annum interest rate is approximately 2.6%, the Group repaid $70,185.

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 approximating 30% of the loan balance, and guaranteed by two directors of the Group. As of December 31, 2006, the Group repaid $270,810.

In August 2005, KCIT obtained a new bank loan of $213,187, which bears interest at 3.7% per annum, and is repayable in 60 equal monthly installments. The last installment will be due on August 10, 2010, and guaranteed by two directors of the Group. As of December 31, 2006, the Group repaid $53,499.

For the years ended December 31, 2006 and 2005, the interest expense charged to operations from the aforementioned loans amounted to $47,837 and $69,573, respectively.

NOTE 13 — DEPOSITS RECEIVED

	December 31, 2006			December 31, 2005

Deposits received	$	1,381,762		$	1,326,203
Less: Amount refundable within one year included in current liabilities		(752,597	)		(462,007	)

Amount due after one year	$	629,165		$	864,196

The balance represents deposits received from franchises for their due performance under the franchise agreements. The deposits are refundable to franchises upon expiration of the franchise agreements, usually within a three-year period for operations in Taiwan and within five-year period for operations in the PRC.

F-21

NOTE 14 —RECEIPTS IN ADVANCE

	Notes			December 31, 2006		December 31, 2005

Current liabilities:
Sales deposits received		(i	)	$	481,334	$	682,553
Franchise income received		(ii	)		1,608,066		1,391,625
Subscription fees received		(iii	)		285,531		234,342
Related parties (Note 19 B(x))					566		—
Other					27,127		45,160

					2,402,624		2,353,680

Long-term liabilities:
Franchise income received		(ii	)		1,275,638		1,130,207
Other					—		—

					1,275,638		1,130,207

				$	3,678,262	$	3,483,887

Notes:

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

(ii) The balance represents franchise income received in advance which is attributable to the periods after the respective year end date in which the Group is obliged to provide training to teachers of the franchises and marketing material and to sell course material at the agreed price in the franchise agreements.

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

NOTE 15 — RETIREMENT PLANS

The Group maintains tax-qualified defined contribution and benefit retirement plan for its employees in accordance with 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 defined the new contribution retirement plan (the ‘New Plan”) covering all regular employees in KCIT, and KCIT contributes monthly an amount equals 6% of the employees’ basic 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 employees of KCIT who were employed before June 30, 2005, and 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. Contribution amounts are determined in accordance with the advice of professionally qualified actuaries in Taiwan. Under the plan, the employees are entitled to receive retirement benefits upon retirement in the manner stipulated by the relevant labor laws in Taiwan. The benefits under the plan are based on various factors such as years of service and the final base salary preceding retirement.

F-22

The net periodic pension cost is as follows:

	Years Ended December 31,
	2006			2005			2004

Service cost	$	—		$	24,995		$	61,550
Interest cost		12,214			9,575			6,912
Actual return on plan assets		(2,425	)		(3,295	)		(1,466	)
Amortization of unrecognized loss		2,955			870			1,287

Net periodic pension cost	$	12,744		$	32,145		$	68,283

The net pension amount recognized in the consolidated balance sheet as at December 31, 2006, and 2005, the measurement dates, is as follows:

	December 31, 2006			December 31, 2005

Accumulated benefit obligation at end of year	$	348,971		$	255,931

Projected benefit obligation at beginning of year		353,625			277,862
Translation reserve		(4,654	)		(3,948	)
Service cost on benefits earned during the period		—			24,995
Member contributions		—			—
Interest cost		12,214			9,575
Actuarial (gain)/loss		10,490			45,141
Benefits paid		—			—

Projected benefit obligation at end of year	$	371,675		$	353,625

Changes in plan assets are as follows:

	December 31, 2006			December 31, 2005

Fair value of plan assets at beginning of year	$	83,348		$	71,512
Translation reserve		(1,094	)		(1,019	)
Actual return on plan assets		2,058			98
Employer contribution		—			12,757
Employee contribution		—			—
Benefits paid		—			—

Fair value of plan assets at end of year	$	84,312		$	83,348

Funded status	$	(287,363	)	$	(264,776	)
Unrecognized net transition amount		—			—
Unrecognized prior service cost		(98,952	)		—
Unrecognized net actuarial (gain)/loss		98,952			90,389

Net amount recognized	$	(287,363	)	$	(174,387	)

F-23

As of December 31, 2006 and 2005, the asset category of the plan assets consisted of cash contributions deposited with Central Trust of China.

Actuarial assumptions used:

	December 31, 2006			December 31, 2005

Discount rate		3.50	%		3.50	%
Salary increase rate		2.00	%		2.00	%
Expected return on plan assets		2.50	%		2.50	%

Under the Plan, 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 as follow:

Years ended December 31,
2007	$	—
2008		—
2009		—
2010		—
2011		16,735
Years 2012 to 2016	$	70,149

	$	86,884

In addition, the estimated contribution to be paid to the Plan in 2007 by the Group is $16,993.

The Group also makes defined contributions to a retirement benefits plan for its employees in the PRC in accordance with local regulations. The contributions made by the Company for the years ended December 31, 2006, 2005, and 2004 amounted to $77,750, $51,007, and $83,176, respectively.

NOTE 16 —COMMITMENTS AND CONTINGENCIES

A. Lease Commitment

During the years ended December 31, 2006, 2005, and 2004, the Company incurred lease expenses amounting to $404,405, $491,909, and $198,478, respectively. As of December 31, 2006, the Company’s future minimum lease payments under non-cancelable operating leases expiring in excess of one year are as follows:

Years ended December 31,
2007	$	346,430
2008		196,475
2009		54,192
2010		—
2011	$	—

	$	597,097

B. Going Concern

The accompanying financial statements have been prepared assuming the Group will continue as a going concern. Although the Group still has suffered recurring net losses, it has conspicuous increased capital from operations. Therefore, management expects net income in 2007, although the realization of net income is uncertain. 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.

F-24

NOTE 17 —COMMON STOCK

Pursuant to an exchange agreement effective on October 1, 2002, the Company issued to the shareholders of Higoal 11,880,000 authorized but unissued shares of common stock of the Company in exchange for 100 % of the issued and fully paid up capital of Higoal.

The issued and outstanding common stock of the Company immediately prior to the above share exchange was 3,120,829 shares. All shares and per share data prior to October 1, 2002 have been restated to reflect the stock issuance as a recapitalization of Higoal.

On October 2, 2002, the Company issued 73,500 shares of common stock to a shareholder, Halter Capital Corporation, pursuant to certain anti-dilution terms set forth in a stock exchange agreement dated June 6, 2002.

Pursuant to a special Board resolution passed on April 2, 2003, the Company resolved to issue 6,000,000 shares of common stock at a subscription price of $0.70 per share to investors in reliance on Regulation S under the Securities Act. Subsequent to the resolution and before December 31, 2003, the Company issued 3,592,040 shares for cash and received net proceeds of $2,514,428. Additionally, pursuant to an agreement entered into in November 2003, the Company issued 333,334 shares to ACE Capital Investment Ltd. to repay the liability of $500,000 as required by the original creditor.

On November 4, 2003, the Company submitted “Common Stock Listing Application” with American Stock Exchange LLC (“AMEX”) for the listing of its issued and outstanding shares of common stock. On November 29, 2004, as the Company had not received approval for the listing application from AMEX, the management decided to withdraw the application.

On December 28, 2006, the Company issued 6,000,297 shares of common stock at a conversion price of $0.15 to Suang-Yi Pai, our Chairman of the Board, and Min-Tan Yang, our Chief Executive Officer, pursuant to the Loan Settlement and Conversion Agreement relating to settlement certain loans made by Messrs. Pai and Yang to the Company. (For further information please refer to Form 8-K/A filed on January 24, 2007).

As of December 31, 2004, the Company was authorized to issue 25,000,000 shares of common stock with no par value. And as of December 31, 2006, 2005, and 2004, the total issued and outstanding shares were 25,000,000, 18,999,703, and 18,999,703 shares, respectively.

NOTE 18 — RESTRICTIONS ON RETAINED EARNINGS

In accordance with the regulations of the countries where KCIT, KCES, Culture Media and KCEI, the Group’s wholly-owned subsidiaries, were incorporated, certain restrictions on these subsidiaries’ retained earnings are described as follows:

A. KCIT

Legal reserve

According to the Taiwan Company Law, the annual net income should be used initially to cover any accumulated deficit; thereafter 10% of the annual net income should be set aside as a legal reserve until the reserve has reached 100% of contributed capital. Under the Taiwan Company Law, the legal reserve shall be exclusively used to cover accumulated deficit or, if the balance of reserve exceeds 50 % of contributed capital, to increase capital not exceeding 50% of reserve balance and shall not be used for any other purpose.

As of December 31, 2006, 2005, and 2004, the balance of legal reserve as shown on the consolidated statement of shareholders’ equity is $65,320, $65,320, and $65,320, respectively, based on the local statutory financial statements of the subsidiary.

Undistributed earnings

In accordance with KCIT’s articles of incorporation, the annual net income should be used initially to cover income tax and any accumulated deficit; 10% of the annual net income should be set aside as legal reserve. Thereafter, the board of directors may propose and the shareholders may approve the distribution of the remaining earnings.

B. KCES, Culture Media and KCEI

The laws and regulations of the PRC require KCES, Culture Media and KCEI to provide certain statutory funds, namely, a reserve fund, an enterprise expansion fund, and a staff and workers’ bonus and welfare fund, which are appropriated from net profit (based on the subsidiaries’ statutory accounts) after offsetting any prior years’ losses but before dividend distribution. These funds are created for specific purposes and appropriations to these funds are at the discretion of the directors. The reserve fund can only be used, upon approval by the relevant authority, to offset accumulated losses or increase capital. The enterprise expansion fund can only be used to increase capital upon approval by the relevant authority. The staff and workers’ bonus and welfare fund can only be used for special bonuses or collective welfare of the subsidiaries’ employees, and assets acquired through this fund shall not be taken as the subsidiaries’ assets.

F-25

Names of related parties		Relationship with the Company

Mr. Kuo-An Wang		In October 2005 resigned as chairman of the board of directors, president and chief executive officer of the Company. On October 18, 2006 resigned as director of the board of directors.
Mr. Yu-En Chiu		On June 1, 2006 resigned as chief financial officer and director of the board of directors. Mr. Chiu remained the Chairman of PRC operations 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 of the board of directors and appointed as chairman of the board since November 2, 2005.
Kid Castle Enterprises Limited (“KCE”)		Its two directors and shareholders are Mr. Kuo-An Wang and Mr. Yu-En Chiu.
Chevady Culture Enterprise Limited (‘CCE”)		Its chairman of the board of directors is Mr. Kuo-An Wang
Private Kid Castle Short Term Language Cram School (“PKC Language”)		Its chairman of the board of directors is Mr. Yu-En Chiu.
Taipei Country Private Kid Castle Short Term Language Cram School (“TCP PKC”)		Its chairman of the board of directors is Mr. Yu-En Chiu.
Taipei Country Private Chevady Preschool (“TCP Chevady”)		Its chairman of the board of directors is Mr. Yu-En Chiu.
Taipei Country Private Chung-hua Preschool (“TCP Chung-hua”)		Its chairman of the board of directors is Mr. Yu-En Chiu.
Taipei Country Private Wonderland Preschool (“TCP Wonderland”)		Its chairman of the board of directors is Mr. Yu-En Chiu.
Taipei City Private Kid Castle Preschool (“TCP Kid Castle”)		Its chairman of the board of directors is Mr. Yu-En Chiu.
Taipei Country Private Kid’s Castle Yin Cyun Preschool (“TCP Yin Cyun”)		Its chairman of the board of directors is Mr. Min-Tan Yang.
Yin Cyun Language & Computer School ("Yin Cyun Language")		Its chairman of the board of directors is Mr. Min-Tan Yang.
Taipei Country Private Yin Tzu Preschool (“TCP Yin Tzu”)		Its chairman of the board of directors is Mr. Min-Tan Yang.
Private Kuan Lung Short Term Language Cram School (“Kuan Lung Language”)		Its chairman of the board of directors is Mr. Min-Tan Yang.
Taipei City Private Chu Sheng Preschool (“TCP Chu Sheng”)		Its chairman of the board of directors is Mr. Min-Tan Yang.
Taipei Country Private Chu Yao Preschool (“TCP Chu Yao”)		Its chairman of the board of directors is Mr. Min-Tan Yang.
Private Liang Yu Language & Computer School ("Liang Yu Language")		Its chairman of the board of directors is Mr. Min-Tan Yang.
21^st Century Publishing House (“Publishing House”)		A joint venture partner (third-party after July 2004).
Jiangxi 21^st 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.
21^st 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.

F-26

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

	Years Ended December 31,
	2006		2005		2004

(i)Sales to:
— PKC Language	$	—	$	8,763	$	13,290
— TCP PKC		—		8,763		13,290
— TCP Chevady		—		9,070		14,151
— TCP Chung-hua		—		20,267		17,310
— TCP Wonderland		—		9,070		14,151
— TCP Kid Castle		—		8,618		16,402
— TCP Yin Cyun		59,669		101,977		—
— Yin Cyun Language		37,735		—		—
— TCP Yin Tzu		30,100		55,330		—
— Liang Yu Language		48,490		51,841		—
— Kuan Lung Language		18,401		—		—
— TCP Chu Sheng		9,026		—		—
— TCP Chu Yao		25,614		—		—
— Education Center		50,663		26,090		10,335
— Tianjin Consulting		43,721		20,151		10,823
— Lanbeisi		62,110		47,896		20,057

	$	385,529	$	367,836	$	129,809

(ii) Rental income from:
CCE	$	—	$	1,399	$	1,795

	$	—	$	1,399	$	1,795

(iii) Franchise income
PKC Language	$	—	$	—	$	627
TCP PKC		—		—		627
TCP Chevady		—		3,621		4,374
TCP Chung-hua		—		—		1,781
TCP Wonderland		—		3,621		4,374
TCP Kid Castle		—		7,269		8,649
TCP Yin Cyun		6,328		11,168		—
TCP Yin Tzu		11,046		13,655		—
Liang Yu Language		2,460		—		—
Kuang Lung Language		2,075		—		—
TCP Chu Sheng		6,328		—		—
TCP Chu Yao		6,328		—		—
Education Center		—		8,362		—
Tianjin Consulting		—		3,316		—
Lanbeisi		—		1,264		—
	$	34,565	$	52,276	$	20,432

(iv) Purchase Publishing House	$	—	$	—	$	453,766

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

F-27

(vi)	Accounts and notes receivable — related parties:

Name of Related Parties	December 31, 2006		December 31, 2005

— PKC Language	$	—	$	26,147
— TCP PKC		—		52,294
— TCP Chung-hua		—		53,665
— TCP Chevady		—		48,685
— TCP Wonderland		—		48,685
— TCP Kid Castle		—		58,172
— TCP Yin Cyun		19,888		33,585
— Yin Cyun Language		5,967		—
— TCP Yin Tzu		1,132		41,133
— Liang Yu Language		4,530		—
— Kuang Lung Language		6,684		—
— TCP Chu Sheng		17,937		—
— TCP Chu Yao		18,565		—
— Education Center		—		—
— Tianjin Consulting		16,631		20,826
— Lanbeisi		22,594		17,992

	$	113,928	$	401,184

(vii)

Other receivables — related parties:

Name of Related Parties	December 31, 2006		December 31, 2005

Publishing House (Note 1)	$	—	$	—
Education Center (Note 2)		19,507		—
Tianjin Consulting (Note 3)		16		15
Lanbeisi (Note 4)		9,621		9,304

	$	29,144	$	9,319

Notes:

As of December 31, 2003, the amount due from Publishing House consisted primarily of the remaining amount 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 40% ownership from Publishing House. In so doing, the Group’s ownership in Culture Media increased to 90%, and Culture Media has become a consolidated entity as of December 31, 2004.

2.	Education Center was founded in October 2003. The amount due from this related party is mainly inventory purchases paid by the Group on behalf of Education Center. The amount due 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.

F-28

(viii)

Notes payable - related parties:

Name of Related Parties	December 31, 2006		December 31, 2005

TCP Yin Cyun	$	61,357	$	—
Mr. Kuo-An Wang		67,493		60,911

	$	128,850	$	60,911

(ix) Other payables - related parties:

Name of Related Parties	December 31, 2006		December 31, 2005

Lanbeisi	$	7,689	$	—

	$	7,689	$	—

(x) Receipts in advance:

Name of Related Parties	December 31, 2006		December 31, 2005

Educational Center	$	436	$	—
Lanbeisi		130		—

	$	566	$	—

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

1. Amount due to officers/directors:

Name of Related Parties	December 31, 2006		December 31, 2005

Mr. Min-Tan Yang (note 1)	$	245,627	$	840,789

Mr. Suang-Yi Pai (note 1)	$	110,026	$	76,138

	$	355,653	$	977,838

Note 1.

In the fourth quarter of 2005, Mr. Yang loaned $1,050,000 to the Company, and third parties, Olympic Well International Ltd.(“Olympic”) and Chen-Chen Shih (“Shih”), procured by Mr. Pai loaned $690,000 and $60,089, respectively. The loans were treated as short-term loans, due in three months, with a per annum interest rate of 7%. A portion of the loan made by Olympic in the amount of US$342,364 was assigned to Mr. Pai on or about December 30, 2005. That amount, along with $209,211 which was owed Mr. Yang were forgiven in exchange for the Company’s forgiveness of Mr. Chiu’s debt to the Company of the amount of $551,575 (NT$18,500,000, the currency has been translated at the exchange rates at the time of the loans). Effective December 28, 2006 we entered into a loan settlement and conversion agreement with Messrs. Pai and Yang, related to settlement of the above loans to the Company. Pursuant to the loan settlement and conversion agreement, the parties have agreed to convert a portion of the loans to stocks at the conversion price $0.15 per share and to issue promissory note for the remaining amount. The promissory notes are due in one year and have an annual interest rate of 7%. The amount of residual promissory notes for Messrs. Pai and Yang are $107,680 and $240,789, respectively, and as of December 31, 2006, the Company has an interest payable for Messrs. Pai and Yang are $2,346 and $4,838, respectively. (The further information, please refer to the Company’s Form 8-K/A filed on January 24, 2007.)

Amount due from ex-CFO:

During the year ended December 31, 2004, certain inappropriate withdrawals and subsequent repayments by the Company’s then Chief Financial Officer Yu-En Chiu have been recognized in the Consolidated Statements of Cash Flows as short term non-interest bearing advances to Mr. Chiu. Mr. Chiu made cash repayments and withdrawals to and from the Company on an intermittent basis during the year. During the year ended December 31, 2004, the highest balance of the advances to Mr. Yu-En Chiu was $328,546. As of December 31, 2004, Mr. Yu-En Chiu had repaid all outstanding advances to the Company.

F-29

However, he initiated further withdrawals on January 13, 2005. During 2005, the total amount of withdrawals were NT$95,000,000($2,953,337), and as of December 31, 2005, the highest balance of the deemed loan to Mr. Chiu at any time was NT$21,660,000($673,361). Mr. Chiu had repaid all such withdrawals to the Company and the amount due from officers was nil. The circumstances surrounding Mr. Chiu’s fund misappropriation is more fully described in our June 23, 2006 Form 8-K. (The currency in 8-K’s disclosure have been translated from New Taiwan Dollars to US dollars based on an exchange rate of US$1 = NT$33.42.)

On June 1, 2006 Mr. Yu-En Chiu resigned as Chief Financial Officer and a Director of the Company following events that lead to the identification by current management of these inappropriate cash advances and repayments. Mr. Chiu was temporarily reassigned to act as the chairman of the Company’s PRC operations, and on December 29, 2006, the Company notified Mr. Chiu that the termination of his employment with the Company would be effective at February 28, 2007.

NOTE 20 — CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Group to significant concentrations of credit risk consist principally of cash, trade notes receivable and accounts receivable. The Group’s cash are deposited with various financial institutions in the ROC and the PRC. The Group offers credit terms on the sale of its products to certain customers. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers.

The Company maintains an allowance for uncollectible notes receivable and accounts receivable based upon the expected collectability of all notes receivable and accounts receivable.

In addition to cash, notes receivable and accounts receivable, the Company’s financial instruments include notes payable and accounts payable, which are carried at cost, which approximates the fair value because of the short-term maturity of these instruments.

No individual customer of the Group accounted for more than 10% of operating revenues for the years ended December 31, 2006, 2005, and 2004. However, one major customer accounted for approximately 23% and 22% of notes (including current and long-term notes receivable) and accounts receivable as of December 31, 2006 and 2005.

F-30

NOTE 21 — GEOGRAPHIC SEGMENTS

The Group is principally engaged in the business of child education, 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:

A.	For the year ended December 31, 2006

	Taiwan			The PRC			Total			Corporate			Eliminations			Consolidated

REVENUE
External revenue	$	6,095,296		$	3,616,287		$	9,711,583		$	—		$	—		$	9,711,583
Inter-segment revenue		458,071			—			458,071			—			(458,071	)		—

	$	6,553,368		$	3,616,287		$	10,169,655		$	—		$	(458,071	)	$	9,711,583

DEPRECIATION AND AMORTIZATION	$	325,823		$	55,532		$	381,355		$	—		$	—			381,355

SEGMENT RESULTS
Profit (loss) form operations	$	121,008		$	851,670		$	972,678		$	(447,984	)	$	—		$	524,694
Interest income		6,301			7,775			14,076			—			—			14,076
Interest expense		(102,588	)		(5,108	)		(107,696	)		(86,205	)		—			(193,901	)
Share of profit of associates		—			(39,489	)		(39,489	)		—			—			(39,489	)
Other non-operating income (loss), net		41,409			(188,957	)		(147,548	)		(18,028	)		153,803			(153,803	)

Profit (loss) before income taxes	$	66,101		$	508,793		$	574,894		$	(512,911	)	$	89,594		$	151,577
Income taxes		(161,351	)		(8,446	)		(169,797	)		(3,528	)					(173,325	)
Minority interest income		—			(24,463	)		(24,463	)		—			—			(24,463	)

Net income (loss)	$	(95,250	)	$	475,884		$	380,634		$	(516,439	)	$	89,594		$	(46,211	)

Capital expenditures	$	13,352		$	15,478		$	28,830		$	—		$	—		$	28,830

		December 31, 2006			December 31, 2006			December 31, 2006			December 31, 2006			December 31, 2006			December 31, 2006

Total assets	$	7,409,359		$	1,960,446		$	9,369,805		$	359,772		$	(356,354	)	$	9,373,223

F-31

B.	For the year ended December 31, 2005

	Taiwan			The PRC			Total			Corporate			Eliminations			Consolidated

REVENUE
External revenue	$	7,200,347		$	3,017,811		$	10,218,158		$	14,176		$	—		$	10,232,334
Inter-segment revenue		4,936			—			4,936			—			(4,936	)		—

	$	7,205,283		$	3,017,811		$	10,223,094		$	14,176		$	(4,936	)	$	10,232,334

DEPRECIATION AND AMORTIZATION	$	385,246		$	82,583		$	467,829		$	—		$	—			467,829

SEGMENT RESULTS
Profit (loss) form operations	$	1,034,241		$	(997,982	)	$	36,259		$	(295,035	)	$	—		$	(258,776	)
Interest income		8,608			1,107			9,715			5,172			—			14,887
Interest expenses		(225,378	)		(6,676	)		(232,054	)		(19,721	)		—			(251,775	)
Share of profit of associates		—			(54,802	)		(54,802	)		—			—			(54,802	)
Other non-operating income (loss), net		(629,904	)		(7,718	)		(637,622	)		(128	)		(38,708	)		(676,458	)

Profit (loss) before income taxes	$	187,567		$	(1,066,071	)	$	(878,504	)	$	(309,712	)	$	(38,708	)	$	(1,226,924	)
Income taxes		(400,290	)		(76,307	)		(476,597	)		(700	)					(477,297	)
Minority interest income		—			5,939			5,939			—			—			5,939

Net income (loss)	$	(212,723	)	$	(1,136,439	)	$	(1,349,162	)	$	(310,412	)	$	(38,708	)	$	(1,698,282	)

Capital expenditures	$	162,136		$	40,894		$	203,030		$	—		$	—		$	203,030

		December 31, 2005			December 31, 2005			December 31, 2005			December 31, 2005			December 31, 2005			December 31, 2005

Total assets	$	8,503,513		$	2,311,798		$	10,815,311		$	299,141		$	(131,515	)	$	10,982,937

F-32

C. For the year ended December 31, 2004

	Taiwan			The PRC			Total			Corporate			Eliminations			Consolidated

REVENUE
External revenue	$	7,330,039		$	2,342,423		$	9,672,462		$	56,651		$	—		$	9,729,113
Inter-segment revenue		451,750			61,879			513,629			—			(513,629	)		—

	$	7,781,789		$	2,404,302		$	10,186,091		$	56,651		$	(513,629	)	$	9,729,113

DEPRECIATION AND AMORTIZATION	$	317,053		$	47,672		$	364,725		$	—		$	—		$	364,725

SEGMENT RESULTS
Profit (loss) form operations	$	630,946		$	(1,073,998	)	$	(443,052	)	$	(376,160	)	$	35,908		$	(783,304	)
Interest income		24,681			1,168			25,849			2,001			(3,981	)		23,869
Interest expenses		(176,085	)		—			(176,085	)		(2,469	)		3,981			(174,573	)
Share of profit of associates		—			(36,573	)		(36,573	)		—			—			(36,573	)
Other non-operating income (loss), net		89,485			(18,436	)		71,049			18,461			62,471			151,981

Profit (loss) before income taxes		569,027			(1,127,839	)		(558,812	)		(358,167	)		98,379			(818,600	)
Income taxes		(313,597	)		(115,910	)		(429,507	)		(1,222	)		—			(430,729	)
Minority interest income		—			(5,263	)		(5,263	)		—			—			(5,263	)

Net income (loss)	$	255,430		$	(1,249,012	)	$	(993,582	)	$	(359,389	)		98,379		$	(1,254,592	)

Capital expenditures	$	134,210		$	186,928		$	321,138		$	—		$	—		$	321,138

		December 31, 2004			December 31, 2004			December 31, 2004			December 31, 2004			December 31, 2004			December 31, 2004

Total assets	$	10,313,287		$	2,827,431		$	13,140,718		$	30,225		$	(389,519	)	$	12,781,424

NOTE 22 — SUBSEQUENT EVENT

(a)

On December 29, 2006, the Company’s management notified Mr. Chiu that the termination of his employment with the Company would be effective at February 28, 2007.

F-33