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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2004  o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 333-61286   KID CASTLE EDUCATIONAL CORPORATION  Florida
(State or other jurisdiction of
incorporation or organization)
    
    59-2549529
(IRS Employer
Identification No.)
 8th Floor, No. 98 Min Chuan Road, Hsien Tien
Taipei, Taiwan ROC
(Address of principal executive offices) Registrants telephone number, including area code:
    
    011-886-22218 5996
 Securities registered pursuant to Section 12(b) of the Act: Title of each class
    
    Name of each exchange on which registeredCommon Stock
    
    N/A
 Securities registered under Section 12(g) of the Act: Title of classNone Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last ninety days. Yes x No o -1-




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Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes o No x As of July 31, 2004, there were 18,999,703 shares of the Registrants common
stock outstanding. Documents incorporated by reference: None. -2-




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FORM 10-Q KID CASTLE EDUCATIONAL CORPORATION  
 TABLE OF CONTENTS PagePART I            FINANCIAL INFORMATIONItem 1. Unaudited Condensed Consolidated Financial Statements
    
    
    1Item 2. Managements Discussion and Analysis of Financial
Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity SecuritiesItem 3. Defaults upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6 Exhibits and Reports on Form 8-KSIGNATURESEXHIBIT 3.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  i




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KID CASTLE EDUCATIONAL CORPORATION UNAUDITED CONDENSED 
 CONSOLIDATED FINANCIAL STATEMENTS
 AS OF JUNE 30, 2004 AND DECEMBER 31, 2003
AND
FOR THE THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 2004 AND 2003 KID CASTLE EDUCATIONAL CORPORATION
INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PagesCondensed Consolidated Balance Sheet
    
    2 3Condensed Consolidated Statements of Operations
    
    4Condensed Consolidated Statements of Stockholders Equity
    
    5Condensed Consolidated Statements of Cash Flows
    
    6  8Notes to Condensed Consolidated Financial Statements
    
    9  24
 -1-




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Kid Castle Educational Corporation 
 Condensed Consolidated Balance Sheets (Expressed in US Dollars) June 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent assetsCash and bank balances
    
    $
    542,188
    
    
    $
    1,273,723Bank fixed deposits  pledged (Note 12)
    
    
    317,660
    
    
    
    204,889Notes and accounts receivable, net (Notes 5 and 10)
    
    
    1,868,207
    
    
    
    2,334,385Inventories, net (Note 6)
    
    
    2,162,633
    
    
    
    1,991,951Other receivables (Notes 7 and 10)
    
    
    557,505
    
    
    
    524,974Prepayments and other current assets (Note 8)
    
    
    114,188
    
    
    
    122,292Pledged notes receivable (Note 12)
    
    
    955,675
    
    
    
    1,062,406Deferred income tax assets
    
    
    604,617
    
    
    
    615,286Total current assets
    
    
    7,122,673
    
    
    
    8,129,906Deferred income tax assets
    
    
    135,577
    
    
    
    120,335Prepaid long-term investments
    
    
    
    
    
    
    60,323Long-term investments (Note 9)
    
    
    309,313
    
    
    
    114,200Property and equipment, net
    
    
    1,955,349
    
    
    
    1,993,849Intangible assets, net of amortization (Note 11)
    
    
    920,390
    
    
    
    989,865Long-term notes receivable
    
    
    576,815
    
    
    
    505,091Pledged notes receivable (Note 12)
    
    
    320,328
    
    
    
    444,302Other assets
    
    
    271,724
    
    
    
    184,345Total assets
    
    $
    11,612,169
    
    
    $
    12,542,216LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesBank borrowings  short-term and maturing within
one year (Note 12)
    
    $
    1,695,956
    
    
    $
    1,317,690Notes and accounts payable
    
    
    1,301,253
    
    
    
    1,072,584Accrued expenses
    
    
    777,300
    
    
    
    805,556Amounts due to officers (Note 10)
    
    
    
    
    
    
    572,160Other payables
    
    
    331,407
    
    
    
    266,276Deposits received
    
    
    514,915
    
    
    
    421,734Receipts in advance (Note 13)
    
    
    2,568,872
    
    
    
    2,924,636Income tax payable
    
    
    41,263
    
    
    
    44,067Obligation under capital leases due within one year
    
    
    24,611
    
    
    
    32,468Total current liabilities
    
    
    7,255,577
    
    
    
    7,457,171Bank borrowings maturing after one year (Note 12)
    
    
    1,328,992
    
    
    
    1,166,781Receipts in advance (Note 13)
    
    
    1,471,034
    
    
    
    1,467,025Obligation under capital leases
    
    
    
    
    
    
    5,534Deposits received
    
    
    640,715
    
    
    
    603,635Accrued pension liabilities
    
    
    144,298
    
    
    
    134,073Total liabilities
    
    
    10,840,616
    
    
    
    10,834,219
 -2-




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Kid Castle Educational Corporation Condensed Consolidated
Balance Sheets - Continued (Expressed in US Dollars) June 30,
    
    December 31,2004
    
    2003(Unaudited)Commitments and contingencies (Note 16)Stockholders equityCommon stock, no par share:25,000,000 shares authorized;
18,999,703 shares issued and
outstanding at June 30, 2004 and
December 31, 2003
    
    
    7,669,308
    
    
    
    7,669,308Additional paid-in capital
    
    
    194,021
    
    
    
    194,021Legal reserve
    
    
    65,320
    
    
    
    65,320Accumulated deficit
    
    
    (6,987,774
    )
    
    
    (6,057,482
    )Accumulated other comprehensive loss
    
    
    (169,322
    )
    
    
    (163,170
    )Total stockholders equity
    
    
    771,553
    
    
    
    1,707,997Total liabilities and stockholders equity
    
    $
    11,612,169
    
    
    $
    12,542,216
 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. -3-




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Kid Castle Educational Corporation 
 Condensed Consolidated Statements of Operations (Expressed in US Dollars) Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)
    
    (Unaudited)
    
    (Unaudited)Operating RevenueSales of goods
    
    $
    1,186,926
    
    
    $
    712,735
    
    
    $
    3,216,779
    
    
    $
    2,987,448Franchising income
    
    
    664,608
    
    
    
    415,298
    
    
    
    1,192,740
    
    
    
    846,949Other operating revenue
    
    
    151,561
    
    
    
    79,791
    
    
    
    203,914
    
    
    
    135,519Total net operating revenue
    
    
    2,003,095
    
    
    
    1,207,824
    
    
    
    4,613,433
    
    
    
    3,969,916Operating costsCost of goods sold
    
    
    (650,418
    )
    
    
    (346,036
    )
    
    
    (1,324,923
    )
    
    
    (1,070,083
    )Cost of franchising
    
    
    (113,403
    )
    
    
    (165,606
    )
    
    
    (245,504
    )
    
    
    (269,394
    )Other operating costs
    
    
    (78,544
    )
    
    
    (47,248
    )
    
    
    (135,739
    )
    
    
    (104,835
    )Total operating costs
    
    
    (842,365
    )
    
    
    (558,890
    )
    
    
    (1,706,166
    )
    
    
    (1,444,312
    )Gross profit
    
    
    1,160,730
    
    
    
    648,934
    
    
    
    2,907,267
    
    
    
    2,525,604Advertising costs
    
    
    (327,850
    )
    
    
    (154,772
    )
    
    
    (454,492
    )
    
    
    (198,747
    )Other operating expenses
    
    
    (1,413,680
    )
    
    
    (1,474,346
    )
    
    
    (3,430,104
    )
    
    
    (3,122,693
    )Income (loss) from operations
    
    
    (580,800
    )
    
    
    (980,184
    )
    
    
    (977,329
    )
    
    
    (795,836
    )Interest expenses, net
    
    
    (43,171
    )
    
    
    (80,451
    )
    
    
    (64,936
    )
    
    
    (154,472
    )Share of profit (loss) of an investment
    
    
    (15,542
    )
    
    
    
    
    
    
    31,425
    
    
    
    (12,681
    )Loss on write-off of an investment
    
    
    
    
    
    
    (132,116
    )
    
    
    
    
    
    
    (132,116
    )Other non-operating income (loss), net
    
    
    38,097
    
    
    
    18,108
    
    
    
    81,770
    
    
    
    74,208Loss before income taxes
    
    
    (601,416
    )
    
    
    (1,174,643
    )
    
    
    (929,070
    )
    
    
    (1,020,897
    )Provision for taxes
    
    
    (1,222
    )
    
    
    (34,184
    )
    
    
    (1,222
    )
    
    
    (182,681
    )Net loss
    
    $
    (602,638
    )
    
    $
    (1,208,827
    )
    
    $
    (930,292
    )
    
    $
    (1,203,578
    )Loss per share  basic and diluted
    
    $
    (0.032
    )
    
    $
    (0.080
    )
    
    $
    (0.049
    )
    
    $
    (0.080
    )Weighted-average shares used to
compute loss per share  basic
and diluted
    
    
    18,999,703
    
    
    
    15,074,329
    
    
    
    18,999,703
    
    
    
    15,074,329
 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. -4-




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Kid Castle Educational Corporation 
 Condensed Consolidated Statements of Stockholders Equity (Expressed in US Dollars) Common StockAccumulatedAdditional
    
    
    
    
    
    
    
    
    
    otherNumber of
    
    
    
    
    
    paid-in
    
    Legal
    
    Accumulated
    
    comprehensiveshares
    
    Amount
    
    capital
    
    reserve
    
    deficit
    
    loss
    
    TotalBalance, December 31, 2002
    
    
    15,074,329
    
    
    $
    4,654,880
    
    
    $
    194,021
    
    
    $
    65,320
    
    
    $
    (4,116,891
    )
    
    $
    (160,764
    )
    
    $
    636,566Net loss for 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,940,591
    )
    
    
    
    
    
    
    (1,940,591
    )Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,406
    )
    
    
    (2,406
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,942,997
    )Issuance of common stock for
cash
    
    
    3,592,040
    
    
    
    2,514,428
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,514,428Repayment of a liability by
issuance of common stock
    
    
    333,334
    
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500,000Balance, December 31, 2003
    
    
    18,999,703
    
    
    
    7,669,308
    
    
    
    194,021
    
    
    
    65,320
    
    
    
    (6,057,482
    )
    
    
    (163,170
    )
    
    
    1,707,997Net loss for the six months ended
June 30, 2004 (Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (930,292
    )
    
    
    
    
    
    
    (930,292
    )Cumulative translation adjustment
(Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,152
    )
    
    
    (6,152
    )Comprehensive loss (Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (936,444
    )Balance, June 30, 2004 (Unaudited)
    
    
    18,999,703
    
    
    $
    7,669,308
    
    
    $
    194,021
    
    
    $
    65,320
    
    
    $
    (6,987,774
    )
    
    $
    (169,322
    )
    
    $
    771,553
 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. -5-




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Kid Castle Educational Corporation 
 Condensed Consolidated Statements of Cash Flows (Expressed in US Dollars) Six months ended June 30,2004
    
    2003(Unaudited)Cash flows from operating activitiesNet (loss) income
    
    $
    (930,292
    )
    
    $
    (1,203,578
    )Adjustments to reconcile net loss to
net cash used in operating activitiesDepreciation of property and equipment
    
    
    107,729
    
    
    
    81,549Amortization of intangible assets
    
    
    80,824
    
    
    
    77,753(Reversal of) provision for allowance for sales returns
    
    
    (13,126
    )
    
    
    44,617Allowance for doubtful debts
    
    
    130,866
    
    
    
    28,785Provision for (reversal of) loss on inventory
obsolescence and slow-moving items
    
    
    34,970
    
    
    
    (168,989
    )Share of (profit) loss of investments
    
    
    (31,425
    )
    
    
    12,681Loss on write-off of an investment
    
    
    
    
    
    
    132,116(Increase)/decrease in:Notes and accounts receivable
    
    
    402,524
    
    
    
    (606,246
    )Inventories
    
    
    (185,880
    )
    
    
    (339,939
    )Other receivables
    
    
    (202,283
    )
    
    
    (32,527
    )Prepayments and other current assets
    
    
    9,484
    
    
    
    (123,391
    )Deferred income tax assets
    
    
    3,306
    
    
    
    182,030Other assets
    
    
    (86,257
    )
    
    
    (39,644
    )Increase/(decrease) in:Notes and accounts payable
    
    
    219,374
    
    
    
    (235,045
    )Accrued expenses
    
    
    (36,063
    )
    
    
    30,899Other payables
    
    
    205,497
    
    
    
    454,737Receipts in advance
    
    
    (202,230
    )
    
    
    31,030Income taxes payable
    
    
    (3,306
    )
    
    
    Deposits received
    
    
    99,576
    
    
    
    167,098Accrued pension liabilities
    
    
    8,882
    
    
    
    29,102Net cash used in operating activities
    
    
    (387,830
    )
    
    
    (1,476,962
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (47,371
    )
    
    
    (87,809
    )Amount due from stockholder/director
    
    
    
    
    
    
    122,300Acquisition of long-term investments
    
    
    (103,346
    )
    
    
    Bank fixed deposits  pledged
    
    
    (111,678
    )
    
    
    (65,381
    )Pledged notes receivable
    
    
    11,407
    
    
    
    37,873Net cash (used in) provided by investing activities
    
    
    (250,988
    )
    
    
    6,983
 -6-




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Kid Castle Educational Corporation Condensed Consolidated Statements of Cash Flows  Continued (Expressed in US Dollars) Six months ended June 30,2004
    
    2003(Unaudited)Cash flows from financing activitiesProceeds from bank borrowings
    
    $
    2,865,929
    
    
    $
    618,415Repayment of bank borrowings
    
    
    (2,346,878
    )
    
    
    (201,489
    )Repayment of capital leases
    
    
    (13,933
    )
    
    
    (6,585
    )Proceeds from loan from officers/stockholders
    
    
    
    
    
    
    31,427Repayment of loan from officers/stockholders
    
    
    (585,006
    )
    
    
    Stock subscriptions received in advance
    
    
    
    
    
    
    2,181,578Net cash provided by financing activities
    
    
    (79,888
    )
    
    
    2,623,346Net (decrease) increase in cash and cash equivalents
    
    
    (718,706
    )
    
    
    1,153,367Effect of exchange rate changes on cash and
cash equivalents
    
    
    (12,829
    )
    
    
    3,033Cash and cash equivalents at beginning of period
    
    
    1,273,723
    
    
    
    125,806Cash and cash equivalents at end of period
    
    $
    542,188
    
    
    $
    1,282,206Supplemental disclosure of cash flow information
Interest paid
    
    $
    32,885
    
    
    $
    247,149Income taxes paid
    
    $
    1,222
    
    
    $
    1,729Supplemental disclosure of significant non-cash
transactionsCapital lease of transportation equipment
    
    $
    
    
    
    $
    57,571Increase (decrease) of notes receivable and pledged
notes receivable corresponding to the increase
(decrease) in the following accounts:Other receivables  related parties
    
    $
    
    
    
    $
    (259,308
    )Accrued expenses
    
    $
    
    
    
    $
    5,181Deposits received
    
    $
    20,924
    
    
    $
    Other payables
    
    $
    32,900
    
    
    $
    Receipts in advance
    
    $
    (200,303
    )
    
    $
    533,472
 -7-




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Kid Castle Educational Corporation Condensed Consolidated Statements of Cash Flows  Continued (Expressed in US Dollars) Six months ended June 30,2004
    
    2003(Unaudited)Write-off of an associate investment against deferred incomeBalance of an associate investment
    
    $
    
    
    
    $
    298,113Balance of deferred income
    
    
    
    
    
    
    (165,997
    )Loss on write-off of an associate investment
    
    $
    
    
    
    $
    132,116
 The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements. -8-




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Kid Castle Educational Corporation 
 Notes to Condensed Consolidated Financial Statements (Expressed in US Dollars) NOTE 1  ORGANIZATION AND DESCRIPTION OF BUSINESS Kid Castle Internet Technologies Limited (KCIT) was incorporated on December
17, 1999 under the provisions of the Company Law of the Republic of China
(ROC) as a limited liability company. KCIT is engaged in the business of
childrens education focusing on the English language. The business comprises
publication, sales and distribution of related books, magazines, audio and
videotapes and compact disc, franchising and sales of merchandises
complementary to the business. KCIT commenced operations in April 2000 when it
acquired the above business from a related company, Kid Castle Enterprises
Limited (KCE), which was owned by two directors and stockholders of KCIT. On March 9, 2001, KCIT formed a wholly-owned subsidiary, Premier Holding
Investment Property Limited incorporated in the British Virgin Islands, which
held the entire common stock of Higoal Developments Limited (Higoal)
incorporated in the Cayman Islands on March 8, 2001. On September 10, 2001,
Higoal established a wholly owned subsidiary, Kid Castle Educational Software
Development Company Limited (KCES) in the Peoples Republic of China (the
PRC). The existing operations of Higoal are principally located in Taiwan and
are being expanded in the PRC. In June 2002, after KCIT undertook a series of
group restructurings, KCIT became the direct owner of the outstanding shares of
Higoal. Premier Holding Investment Property Limited was then liquidated in
June 2003. On September 18, 2002, Higoal issued 11,880,000 shares of common stock to the
stockholders of KCIT in exchange for 100% of the outstanding common stock of
KCIT. As a result of this reorganization, KCIT became a wholly owned
subsidiary of Higoal. On October 1, 2002, Kid Castle Educational Corporation,
formerly King Ball International Technology Limited Corporation (the Company)
entered into an exchange agreement with Higoal whereby the Company issued to
the stockholders of Higoal 11,880,000 shares of common stock of the Company in
exchange for 100% of the issued and fully paid up capital of Higoal. As a result of the share exchange, the former stockholders of Higoal hold a
majority of the Companys outstanding capital stock. Generally accepted
accounting principles require in certain circumstances that a company whose
stockholders retain the majority voting interest in the combined business to be
treated as the acquirer for financial reporting purposes. Accordingly, the
acquisition has been accounted for as a reverse acquisition whereby Higoal is
deemed to have purchased the Company. However, the Company remains the legal
entity and the Registrant for Securities and Exchange Commission reporting
purposes. The Company, Higoal and its subsidiaries collectively are referred
to as the Group. The operations of the Group are principally located in
Taiwan and the PRC. NOTE 2  BASIS OF PRESENTATION The accompanying financial data as of June 30, 2004 and for the six months and
three months ended June 30, 2004 and 2003 have been prepared by the Group,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures -9-




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normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been condensed or omitted pursuant to such rules and regulations. However, the
Group believes that the disclosures are adequate to make the information
presented not misleading. These financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Groups audited annual financial statements for the year ended December 31,
2003. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates that affect the reported amounts of assets,
liabilities, revenues and expenses and the disclosure of contingent assets and
liabilities. Actual results could differ from these estimates. The Group has incurred operating losses since inception and hence, as of June
30, 2004, the balance of accumulated deficit was $6,987,774. The Group plans
to fund its working capital needs by obtaining new credit lines from financial
institutions and raising capital through the sale of equity securities. If the
Group is unable to meet its current operating plan, it will be required to
obtain additional funding. Management believes such funding will be available,
but there can be no assurances that such funding will be available, or if it is
available, on terms acceptable to the Group. Management believes that if
funding is not available, other actions can and will be taken to reduce costs.
These actions may entail the Group to reduce headcount, sales and marketing,
other expansion activities, which may affect the future growth of the Groups
operations. NOTE 3  SUMMARY OF IMPORTANT ACCOUNTING POLICIES REVENUE RECOGNITION Sales of books, magazines, audio and video tapes, compact disc and other
merchandises are recognized as revenue on the transfer of risks and rewards of
ownership, which generally coincides with the time when the goods are delivered
to customers and title has passed. Provision is made for expected future sales
returns and allowances when revenue is recognized. Franchise fees are the annual licensing fees for franchisees to use the Groups
brand name and consulting services. Franchising income is recognized on a
straight-line basis over the terms of the relevant franchise agreements. ALLOWANCE FOR DOUBTFUL ACCOUNTS An allowance for doubtful accounts is provided based on the evaluation of
collectibility and aging analysis of notes and accounts receivables. INVENTORIES Inventories are stated at the lower of cost or market. Cost includes all costs
of purchase, cost of conversion and other costs incurred in bringing the
inventories to their present location and condition, and is calculated using
the weighted average method. Market value is determined by reference to the
sales proceeds of items sold in the ordinary course of business after the
balance sheet date or to management estimates based on prevailing market
conditions. -10-




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PROPERTY AND EQUIPMENT AND DEPRECIATION Property and equipment are stated at cost. Depreciation is computed using the
straight-line method to allocate the cost of depreciable assets over the
estimated useful lives of the assets as follows: Estimated useful life(in years)Land
    
    IndefiniteBuildings
    
    50Furniture and fixtures
    
    3-10Transportation equipment
    
    2.5-5Miscellaneous equipment
    
    5-10
 Maintenance, repairs and minor renewals are charged directly to the statement
of operations as incurred. When assets are disposed of, the related cost and
accumulated depreciation thereon are removed from the financial statements and
any resulting gain or loss is included in the statement of operations. LONG-LIVED ASSETS Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets might not be
recoverable. The Group does not perform a periodic assessment of assets for
impairment in the absence of such information or indicators. Conditions that
would necessitate an impairment assessment include a significant decline in the
observable market value of an asset, a significant change in the extent or
manner in which an asset is used, or a significant adverse change that would
indicate that the carrying amount of an asset or group of assets is not
recoverable. For long-lived assets to be held and used, the Group measures fair
value based on quoted market prices or based on discounted estimates of future
cash flows. INCOME TAXES The Company and its subsidiaries accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109 Accounting for
Income Taxes. Under SFAS No. 109, deferred tax liabilities or assets at the
end of each period are determined using the tax rate expected to be in effect
when taxes are actually paid or recovered. Valuation allowances are established
when it is considered more likely than not that the deferred tax assets will
not be realized. INTANGIBLE ASSETS Franchises and copyrights are stated at cost and amortized on the straight-line
method over their estimated useful lives of 10 years. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) is defined as the change in equity of a company
during a period from transactions and other events and circumstances excluding
transactions resulting from investments from owners and distributions to
owners. Comprehensive income (loss) is disclosed in the condensed consolidated
statement of stockholders equity. NET EARNINGS (LOSS) PER COMMON SHARE The Group computes net earnings (loss) per share in accordance with SFAS No.
128, Earnings per Share. Under the provisions of SFAS No. 128, basic net
earnings (loss) per share is computed by dividing the net earnings (loss)
available to common shareholders for the period by the weighted -11-




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average number of shares of common stock outstanding during the period. The
calculation of diluted net earnings (loss) per share gives effect to common
stock equivalents. For the six months ended June 30, 2004 and 2003, the Group
did not have any potential common stock shares. RECLASSIFICATION The presentation of certain prior information has been reclassified to conform
with current presentation. NOTE 4  RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No.46, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51 (FIN 46). FIN 46 clarifies when a company
should consolidate in its financial statements the assets, liabilities and
activities of a variable interest entity. FIN 46 provides general guidance as
to the definition of a variable interest entity and requires a variable
interest entity to be consolidated if a company absorbs the majority of the
variable interest entitys expected losses, or is entitled to receive a
majority of the variable interest entitys residual returns, or both. In
December 2003, the FASB issued a revised interpretation of FIN 46 (FIN 46-R),
which supersedes FIN 46 and clarifies and expands current accounting guidance
for variable interest entities. FIN 46 and FIN 46-R are effective immediately
for all variable interest entities created after January 31, 2003, and for
variable interest entities created prior to February 1, 2003, no later than the
end of the first reporting period after March 15, 2004. We have performed a
review of all entities created prior to and subsequent to January 31, 2003, and
determined the adoption of FIN 46 and FIN 46-R did not have a material impact
on the Groups financial reporting and disclosures. On April 30, 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities.(SFAS No.
149) SFAS No. 149 amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133. The new guidance amends SFAS No. 133 for
decisions made as part of the Derivatives Implementation Group (DIG) process
that effectively required amendments to SFAS No. 133, and decisions made in
connection with other FASB projects dealing with financial instruments and in
connection with implementation issues raised in relation to the application of
the definition of a derivative and characteristics of a derivative that
contains financing components. In addition, it clarifies when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The Group does not expect SFAS No. 149 to have a material impact on the
Groups consolidated financial statements upon adoption. In May 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (SFAS No. 150). SFAS No. 150
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS No. 150 is effective for
all financial instruments created or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Group does not expect SFAS No. 150 to have a material impact on
the Groups consolidated financial statements upon adoption. In December 2003, the Staff of the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, which
supersedes SAB 101, Revenue -12-




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Recognition in Financial Statements. SAB 104s primary purpose is to rescind
accounting guidance contained in SAB 101 related to multiple element revenue
arrangements and revises the SECs Revenue Recognition in Financial Statements
Frequently Asked Questions and Answers that have been codified in Topic 13.
SAB 104 was effective immediately and did not have a material impact on the
Groups financial reporting and disclosures. In December 2003, the FASB revised SFAS No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits. This Statement revises employers
disclosures about pension plans and other postretirement benefit plans. It
requires additional disclosures to those in the original SFAS No. 132 about the
assets, obligations, cash flows and net periodic benefit cost of defined
benefit pension plans and other defined benefit postretirement plans. The
required information should be provided separately for pension plans and for
other postretirement benefit plans. This Statement, which also requires new
disclosures for interim periods beginning after December 15, 2003, is effective
for fiscal years ended after December 15, 2003. The Group has adopted this
Statement since the year ended December 31, 2003. NOTE 5  NOTES AND ACCOUNTS RECEIVABLE June 30,
    
    December 31,2004
    
    2003(Unaudited)Notes and accounts receivable Third parties
    
    $
    2,080,179
    
    
    $
    2,140,073 Related parties
    
    
    84,504
    
    
    
    631,153Total
    
    

    2,164,683
    
    
    
    2,771,226Allowance for doubtful accounts and sales returns
    
    
    (296,476
    )
    
    
    (436,841
    )Notes and accounts receivable, net
    
    $
    1,868,207
    
    
    $
    2,334,385
 NOTE 6  INVENTORIES June 30,
    
    December 31,2004
    
    2003(Unaudited)Work in process
    
    $
    60,173
    
    
    $
    53,756Finished goods and other merchandises
    
    
    2,795,835
    
    
    
    2,589,9902,856,008
    
    
    
    2,643,746Less: Allowance for obsolete inventories and
lower of cost or market
    
    
    (693,375
    )
    
    
    (651,795
    )$
    2,162,633
    
    
    $
    1,991,951
 NOTE 7  OTHER RECEIVABLES -13-




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June 30,
    
    December 31,2004
    
    2003(Unaudited)Other receivables  third parties:Tax paid on behalf of landlord
    
    $
    1,340
    
    
    $
    1,442Advances to staff
    
    
    80,658
    
    
    
    43,242Penalties receivables
    
    
    
    
    
    
    14,658Receivables from Shanghai Wonderland Educational
Resources Co., Ltd. (Shanghai Wonderland) (Note (i))
    
    
    70,824
    
    
    
    105,847Other receivables
    
    
    87,887
    
    
    
    43,622Sub-total
    
    
    240,709
    
    
    
    208,811Other receivables  related parties (Note (ii))
    
    
    316,796
    
    
    
    316,163$
    557,505
    
    
    $
    524,974
 Note:  (i)
    
    Shanghai Wonderland was established in October 2003 as a distributor of
the Group. The Group has loaned Shanghai Wonderland RMB$450,000
(approximately $54,000) for operations, which is unsecured and bears no
interest and has paid certain pre-operating costs on behalf of Shanghai
Wonderland. Shanghai Wonderland will have to repay the loan of RMB$450,000
on or before January 23, 2005.  (ii)
    
    The amount due from related parties consists of the loan of RMB$1,000,000
(approximately $120,000) from the Group to 21st Century Publishing House
(Publishing House) for the incorporation of Jiangxi 21st Century Kid
Castle Culture Media Co., Ltd. (Culture Media). According to the
agreement, the loan is unsecured and bears no interest. Pursuant to the
terms of the loan, if Publishing House did not repay the loan on or before
June 27, 2004, it would transfer 40% of its ownership in Culture Media to
the Group. On July 2, 2004, as the loan was not repaid by Publishing
House, the board decided to take over the 40% ownership, and the Groups
ownership in Culture Media increased to 90%. As of June 30, 2004, in
addition to the loan of RMB$1,000,000 to Publishing House, the amount due
from related parties also includes the payment of certain pre-operating
costs paid by the Group on behalf of Culture Media for $176,296. The
amount due from this related party has no fixed repayment term and bears
no interests. In addition, the Group also paid on behalf of its related
party, 21st Century Kid Castle Language and Education Center (Education
Center), for inventory purchases. The amount due from this related party
amounted to $2,463 as of June 30, 2004 and has no fixed repayment term and
bears no interests. NOTE 8  PREPAYMENTS AND OTHER CURRENT ASSETS June 30,
    
    December 31,2004
    
    2003(Unaudited)Prepayments
    
    $
    59,000
    
    
    $
    51,990Temporary payments
    
    
    213
    
    
    
    4,989VAT tax recoverable
    
    
    4,926
    
    
    
    Tax recoverable
    
    
    33,573
    
    
    
    29,208
 -14-




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June 30,
    
    December 31,2004
    
    2003(Unaudited)Prepaid interest
    
    
    3,221
    
    
    
    19,856Others
    
    
    13,255
    
    
    
    16,249$
    114,188
    
    
    $
    122,292
 NOTE 9  LONG-TERM INVESTMENTS June 30,
    
    December 31,2004
    
    2003(Unaudited)Jiangxi 21st Century Kid Castle Culture Media Co., Ltd
(Culture Media) (Note (i))Investment cost
    
    $
    120,446
    
    
    $
    120,646Share of profit (loss)
    
    
    21,707
    
    
    
    (11,326
    )$
    142,153
    
    
    $
    109,32021st Century Kid Castle Language and Education Center
(Education Center) (Note (ii))Investment cost
    
    $
    90,334
    
    
    $
    30,161Share of loss
    
    
    (26,757
    )
    
    
    (25,281
    )$
    63,577
    
    
    $
    4,880Tianjin Kid Castle Educational Investment Consulting Co., Ltd. (Note
(iii))Investment cost
    
    $
    60,223
    
    
    
    Lanbeisi Education &Culture Industrial Co., Ltd (Lanbeisi) (Note (iv))Investment cost
    
    $
    43,360
    
    
    
    Total
    
    $
    309,313
    
    
    $
    114,200
 Note:  (i)
    
    In July 2003, the Group entered into an agreement with
21st Century
Publishing House to incorporate Culture Media. It is agreed in the
agreement that KCES, the Groups wholly owned PRC subsidiary, and 21st
Century Publishing House each has 50% ownership and that each party
contributed RMB$1 million for the incorporation. As the Groups ownership
accounts for 50% equity interest in Culture Media and that the Group has
significant influence and should therefore account for its interest on the
equity method.For the six months ended June 30, 2004, the Group recorded an investment
gain accounted for under the equity method in Culture Media of $32,939 in
the current periods operation results.On July 2, 2004, the Group has decided to take over the other 40% of the
ownership from Publishing House, and therefore starting from July 2,
2004, the Groups ownership in Culture Media increased to 90%.(ii)
    
    In October 2003, the Group obtained the governments approval to co-found
Education Center with 21st Century Publishing House in the PRC. In 2004,
Education Center registered the total capital as RMB$1,500,000, and KCEC
and 21st Century Publishing House each owns 50% of -15-




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the investee. It has been determined that the Group has significant
influence and should therefore account for its investee on the equity
method.For the six months ended June 30, 2004, the Group recognized an
investment loss accounted for under the equity method in Education Center
of $1,514 in the current periods operation results.(iii)
    
    On April 1, 2004, the Group signed a joint venture agreement with
Tianjin Foreign Enterprises & Experts Service Corp., in Tianjin City, PRC.
Pursuant to this joint venture agreement, the Group and Tianjin Foreign
Enterprises & Experts Service Corp. each owns a 50% interest in Tianjin
Kid Castle Educational Investment Consulting Co., Ltd. It has been
determined that the Group has significant influence and should therefore
account for its investee on the equity method. The operations had not
commenced as of June 30, 2004.(iv)
    
    On April 28, 2004, the Group signed a joint venture agreement with
Lanbeisi Education & Culture Industrial Co., Ltd in Sichuan Province, PRC
and Sichuan Province Education Institutional Service Center in Sichuan
Province, PRC. Pursuant to this joint venture agreement, the Group,
Lanbeisi Education & Culture Industrial Co., Ltd and Sichuan Province
Education Institutional Service Center own, respectively, 45%, 45% and 10%
interests in Sichuan Lanbeisi Kid Castle Education Development Co., Ltd.
It has been determined that the Group has significant influence and should
therefore account for its investee using the equity method. However,
through June 30, 2004, the joint venture was non-operational. NOTE 10  RELATED PARTY TRANSACTIONS  A.
    
    Names of related parties and relationship with the Group are as follows: Names of related parties
    
    Relationship with the CompanyMr. Kuo-An Wang
    
    He is a director, stockholder
and chairman of the CompanyMr. Yu-En Chiu
    
    He is a director, stockholder
and vice chairman of the CompanyGlobal International Education
Investment Ltd. (Global
International)
    
    It was an equity investee prior to August
2003 and one of its stockholders and
directors is Mr. Kuo-An WangKid Castle Enterprises Limited (KCE)
    
    Its two directors and stockholders are Mr.
Kuo-An Wang and Mr. Yu-En ChiuChevady Culture Enterprise Limited
(CCE)
    
    Its chairman is Mr. Kuo-An WangPrivate Kid Castle Short Term Language
Cram School (PKC Language)
    
    Its chairman is Mr. Yu-En ChiuTaipei Country Private Kid Castle
Short Term Language Cram School (TCP
PKC)
    
    Its chairman is Mr. Yu-En ChiuTaipei Country Private Chevady
Preschool (TCP Chevady)
    
    Its chairman is Mr. Yu-En Chiu
 -16-




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Names of related parties
    
    Relationship with the CompanyTaipei Country Private Chung-hua
Preschool (TCP Chung-hua)
    
    Its chairman is Mr. Yu-En ChiuTaipei Country Private Wonderland
Preschool (TCP Wonderland)
    
    Its chairman is Mr. Yu-En ChiuTaipei City Private Kid Castle
Preschool ( TCP Kid Castle)
    
    Its chairman is Mr. Yu-En Chiu21st Century Publishing House
(Publishing House)
    
    A joint ventureJiangxi 21st Century Kid Castle
Culture Media Co., Ltd (Culture
Media)
    
    An investment accounted for under the
equity method.21st Century Kid Castle Language and
Education Center (Education Center)
    
    An investment accounted for under the
equity method.Tianjin Foreign Enterprises & Experts
Service Corp.
    
    An investment accounted for under the
equity methodLanbeisi Education &Culture
Industrial Co., Ltd (Lanbeisi)
    
    An investment accounted for under the
equity method
 B. Significant transactions and balances with related parties are as follows: Six months ended June 30,2004
    
    2003(Unaudited)(i)
    
    Sales to:- PKC Language
    
    $
    6,944
    
    
    $
    6,442- TCP PKC
    
    
    6,944
    
    
    
    6,442- TCP Chevady
    
    
    6,631
    
    
    
    8,088- TCP Chung-hua
    
    
    11,669
    
    
    
    13,304- TCP Wonderland
    
    
    6,631
    
    
    
    8,203- TCP Kid Castle
    
    
    6,554
    

    
    
    11,386$
    45,373
    
    
    $
    53,865(ii)
    
    Rental income from:- KCE
    
    $
    
    
    
    $
    864- CCE
    
    
    898
    
    
    
    864$
    898
    
    
    $
    1,728(iii)
    
    Franchising income from:- PKC Language
    
    $
    425
    
    
    $
    1,119- TCP PKC
    
    
    465
    
    
    
    - TCP Kid Castle
    
    
    4,887
    
    
    
    4,222- TCP Chung-Hua
    
    
    1,468
    
    
    
    768- TCP Chevady
    
    
    2,444
    
    
    
    2,111- TCP Wonderland
    
    
    2,444
    
    
    
    2,111$
    12,133
    
    
    $
    10,331
 -17-




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(iv)
    
    The two directors and stockholders, Mr. Kuo-An Wang and Mr. Yu-Eng Chiu,
have given personal guarantees to certain bank loans and borrowings.
Please see the details as described in Note 12  Bank Borrowings.Our management is of the opinion that the above transactions were carried
out in the normal course of business at agreed upon terms.  (v)
    
    Accounts and notes receivable  related parties: June 30,
    
    December 31,Name of related parties
    
    2004
    
    2003(Unaudited)- KCE
    
    $
    3,556
    
    
    $
    571,755- PKC Language
    
    
    8,439
    
    
    
    3,358- TCP PKC
    
    
    8,200
    
    
    
    3,358- TCP Chung-hua
    
    
    16,571
    
    
    
    2,863- TCP Chevady
    
    
    12,181
    
    
    
    2,537- TCP Wonderland
    
    
    12,181
    
    
    
    2,537- TCP Kid Castle
    
    
    10,896
    
    
    
    - Publishing House
    
    
    12,480
    
    
    
    - Culture Media
    
    
    
    
    
    
    42,646- Education Center
    
    
    
    
    
    
    2,099$
    84,504
    
    
    $
    631,153
  (vi)
    
    Other receivables  related parties: June 30,
    
    December 31,Name of related parties
    
    2004
    
    2003(Unaudited)Amount due from Publishing House (Note 1)
    
    $
    128,840
    
    
    $
    135,513Amount due from Culture Media (Note 2)
    
    
    176,460
    
    
    
    178,331Amount due from Education Center (Note 3)
    
    
    2,463
    
    
    
    2,319Amount due from Lanbeisi (Note 4)
    
    
    9,033
    
    
    
    $
    316,796
    
    
    $
    316,163
 Note:  1.
    
    The amount due from Publishing House is mainly a result of the loan of
RMB$1,000,000 (approximately $120,000 from the Group to Publishing House
for the incorporation of Culture Media). According to the agreement, the
loan is unsecured and bears no interest. Pursuant to the terms of the
loan, Publishing House must repay the loan on or before June 27, 2004 or
give up 40% of its ownership in Culture Media to the Group. On July 2,
2004, the Group decided to take over the 40% ownership from -18-




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Publishing House, and therefore, the Groups ownership in Culture Media
increased to 90%.  2.
    
    Culture Media was incorporated in December 2003. The Group paid certain
pre-operating costs on behalf of Culture Media. The amount due from this
related party has no fixed repayment term and bears no interests.  3.
    
    Education Center was founded in October 2003. The amount due from the
associate is mainly inventory purchases paid by the Group on behalf of
Education Center. The amount due from this related party has no fixed
repayment term and bears no interests.  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 interests.  (vii)
    
    Amount due to officers: June 30,
    
    December 31,2004
    
    2003(Unaudited)Mr. Kuo-An Wang and Mr. Yu-En Chiu (Note 1)
    
    $
    
    
    
    $
    572,160$
    
    
    
    $
    572,160
 Note:  1.
    
    As of December 31, 2002, the outstanding balance of amount due to Mr.
Hsi-Ming Pai, a stockholder, which was unsecured and bears interests at
25.2% per annum, was $606,208 (including the principal of $600,000 and
related interests). On November 15, 2003, the Group entered into a
liability transfer agreement with the stockholder to transfer its
liability to Mr. Kuo-An Wang and Mr. Yu-En Chiu. According to the
agreement, it is stated that the Group would transfer its original
liability of $600,000 and the interest thereon separately in two lump sum
payments. The first transfer was completed on December 30, 2003 for
$70,000, and the remaining balance, including the principal of $530,000
and related interests, which had yet to be transferred, amounted to
$572,160 as of December 31, 2003. The Group completed the transfer
subsequent to December 31, 2003. NOTE 11  INTANGIBLE ASSETS June 30,
    
    December 31,2004
    
    2003(Unaudited)Gross carrying amountFranchise
    
    $
    1,008,086
    
    
    $
    997,446Copyrights
    
    
    592,592
    
    
    
    586,338
 -19-




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June 30,
    
    December 31,2004
    
    2003(Unaudited)1,600,678
    
    
    
    1,583,784Less: Accumulated amortizationFranchise
    
    
    (428,436
    )
    
    
    (374,042
    )Copyrights
    
    
    (251,852
    )
    
    
    (219,877
    )(680,288
    )
    
    
    (593,919
    )Net
    
    $
    920,390
    
    
    $
    989,865
  Amortization charged to operations was $80,824 and $77,753 for the six months
ended June 30, 2004 and 2003, respectively.  The estimated aggregate amortization expenses for each of the five succeeding
fiscal years are as follows: 2005
    
    $
    161,6482006
    
    
    161,6482007
    
    
    161,6482008
    
    
    161,6482009
    
    
    161,648$
    808,240
 NOTE 12  BANK BORROWINGS June 30,
    
    December 31,Notes
    
    2004
    
    2003(Unaudited)Bank term loans
    
    
    (i
    )
    
    $
    633,323
    
    
    $
    986,280Short-term unsecured bank loans
    
    (ii)
    
    
    681,481
    
    
    
    234,535Mid-term loan
    
    (iii)
    
    
    761,996
    
    
    
    325,515Mid-term secured bank loan
    
    (iv)
    
    
    948,148
    
    
    
    938,1413,024,948
    
    
    
    2,484,471Less: Balances maturing within one year included
in current liabilitiesBank term loans
    
    
    
    
    
    
    484,054
    
    
    
    757,640Short-term unsecured bank loans
    
    
    
    
    
    
    681,481
    
    
    
    234,535Mid-term loan
    
    
    
    
    
    
    475,085
    
    
    
    325,515Mid-term secured bank loan
    
    
    
    
    
    
    55,336
    
    
    
    1,695,956
    
    
    
    1,317,690Bank borrowings maturing after one year
    
    
    
    
    
    $
    1,328,992
    
    
    $
    1,166,781
 -20-




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Note:  (i)
    
    The balance represents bank loans with which are pledged by post-dated
checks amounting to $1,276,003 and $1,506,708 received from franchisees
and the Groups bank deposits of $36,179 and $87,621 as of June 30, 2004
and December 31, 2003, respectively, for the purpose of financing
operations. The repayment dates of the loans coincided with the maturity
dates of the corresponding pledged post-dated checks. The applicable
interest rates ranged from 5.61% to 7.60% per annum as of June 30, 2004.
For the six months ended June 30, 2004 and 2003, the interest expenses
charged to operations amounted to $22,158 and $38,512, respectively.  (ii)
    
    In August 2003, KCIT obtained an unsecured short-term loan with principal
amount of $237,037, which is guaranteed by two directors and stockholders
of the Group, to finance the Groups operations. The loan that bears
interest at the Taiwan basic borrowing rate plus 1.20% per annum is wholly
repayable in August 2004. The applicable interest rate is approximately
4.50% per annum as of June 30, 2004.In March 2004, KCIT obtained an unsecured short-term loan with
principal amount of $296,296, which is guaranteed by two directors
and stockholders of the Group, to finance the Groups operations.
The loan that bears interest at the Taiwan basic borrowing rate plus
1.65% per annum is wholly repayable in September 2004. The
applicable interest rate is approximately 5.16% per annum as of June
30, 2004.In April 2004, KCIT obtained another unsecured short-term loan
with principal amount of $148,148, which is also guaranteed by two
directors and stockholders of the Group, to finance the Groups
operations. The loan that bears interest at the Taiwan basic
borrowing rate plus 1.24% per annum is wholly repayable in April
2005. The applicable interest rate is approximately 4.75% per annum
as of June 30, 2004.For the six months ended June 30, 2004, the interest expenses charged to
operations from the above three unsecured short-term loans amounted to
$12,007.  (iii)
    
    In March 2003, KCIT obtained a loan of $592,593 from a financial
institution, which bears interest at 13.5% per annum and is repayable by
18 equal monthly installments, to finance the Groups operations. The last
installment is due on September 30, 2004. As of June 30, 2004 and December
31, 2003, the loan was pledged by KCITs deposits of $59,259 and $117,268,
respectively, and guaranteed by two directors and stockholders of the
Group. As of June 30, 2004, the Group repaid $485,357 of the loan.In March 2004, KCIT obtained a new bank loan of $740,741, which bears
interest at 5.25% per annum and is repayable in 24 equal monthly
installments, to finance the Groups operations. The last installment is
due on March 31, 2006. As of June 30, 2004, the loan was pledged by the
KCITs deposits of $222,222, and guaranteed by two directors and
stockholders of the Group. As of June 30, 2004, the Group repaid
$88,404.For the six months ended June 30, 2004 and 2003, the interest expenses
charged to operations from the aforementioned loans amounted to $25,042
and $0, respectively. -21-




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##### Table of Contents



(iv)
    
    In August 2003, KCIT obtained a loan with principal amount of $948,148
from a bank to repay its mortgage loan that was originally granted by a
bank on October 5, 2001, as well as to finance its operations. The loan is
secured by the Groups land and buildings and personal guarantees provide
by two directors and stockholders of the Group. The loan, which carries
interest at the lending banks basic borrowing rate plus 1.45% per annum.
On July 19, 2004, the bank extended the term of the loan and the Group
will have to repay the loan by 168 equal monthly installments starting
July 30, 2004. As of June 30, 2004, the applicable interest rate was
approximately 3.00% per annum. For the six months ended June 30, 2004,
the interest expenses charged to operations amounted to $22,747. NOTE 13  RECEIPTS IN ADVANCE The balance comprises: June 30,
    
    December 31,Notes
    
    2004
    
    2003(Unaudited)Current liabilities:Sales deposits received
    
    
    (i
    )
    
    $
    367,780
    
    
    $
    356,575Franchising income received
    
    (ii)
    
    
    1,574,199
    
    
    
    1,703,426Subscription fees received
    
    (iii)
    
    
    599,957
    
    
    
    842,509Others
    
    
    
    
    
    
    26,936
    
    
    
    22,1262,568,872
    
    
    
    2,924,636Long-term liabilities:Franchising income received
    
    (ii)
    
    
    1,438,850
    
    
    
    1,432,343Others
    
    
    
    
    
    
    32,184
    
    
    
    34,6821,471,034
    
    
    
    1,467,025$
    4,039,906
    
    
    $
    4,391,661
 Note:  (i)
    
    The balance represents receipts in advance from customers for goods sold to
them.  (ii)
    
    The balance mainly represents franchising income received in advance
which is attributable to the periods after the respective period end
dates.  (iii)
    
    The balance represents subscription fees received in advance for
subscription of magazines published by the Group. NOTE 14  RETIREMENT PLANS The Group has a defined benefit retirement plan (the Plan) covering all
regular employees of KCIT, its ROC subsidiary in Taiwan. Under the funding
policy of the Plan, commencing from September 2003, 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 -22-




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##### Table of Contents



unit credit cost method of calculation and is charged to the consolidated
statement of operations on a systematic basis over the average remaining
service lives of current employees. Under the plan, the employees are entitled
to receive retirement benefits upon retirement in the manner stipulated by the
ROC Labor Standard Law in Taiwan. The benefits under the plan are based on
various factors such as years of service and the final base salary preceding
retirement. The net periodic pension cost is as follows: Six months ended June 30,2004
    
    2003(Unaudited)Service cost
    
    $
    30,775
    
    
    $
    26,396Interest cost
    
    
    3,456
    
    
    
    2,231Expected return on assets
    
    
    (733
    )
    
    
    Amortization of unrecognized loss
    
    
    643
    
    
    
    475Net periodic pension cost
    
    $
    34,141
    
    
    $
    29,102
 The Group previously disclosed in its financial statements for the year ended
December 31, 2003, that it expected to contribute $54,355 to the Plan in 2004.
As of June 30, 2004, $25,260 of contributions had been made. The Group
presently anticipates contributing an additional $34,047 to fund the Plan in
2004 for a total of $54,355. NOTE 15  GEOGRAPHICAL SEGMENTS The Group is principally engaged in the business of child educational teaching
materials and related services focusing on English language in Taiwan and the
PRC. Accordingly, the Group has two reportable geographic segments: Taiwan and
the PRC. The Group evaluates the performance of each geographic segment based
on its net income or loss. The Group also accounts for inter-segment sales as
if the sales were made to third parties. Information concerning the operations
in these geographical segment is as follows: Taiwan
    
    The PRC
    
    TotalSix months ended
    
    Six months ended
    
    Six months ended
    
    Six months ended
    
    Six months ended
    
    Six months endedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003RevenueExternal revenue
    
    $
    3,817,279
    
    
    $
    3,583,706
    
    
    $
    796,154
    
    
    $
    386,210
    
    
    $
    4,613,433
    
    
    $
    3,969,916Inter-segment revenue
    
    
    1,949
    
    
    
    26,893
    
    
    
    
    
    
    
    
    
    
    
    1,949
    
    
    
    26,893$
    3,819,228
    
    
    $
    3,610,599
    
    
    $
    796,154
    
    
    $
    386,210
    
    
    $
    4,615,382
    
    
    $
    3,996,809Profit (loss) from
Operations
    
    $
    (324,680
    )
    
    $
    64,675
    
    
    $
    (552,785
    )
    
    $
    (398,834
    )
    
    $
    (877,465
    )
    
    $
    (334,159
    )Capital expenditures
    
    $
    32,957
    
    
    $
    133,164
    
    
    $
    14,414
    
    
    $
    12,216
    
    
    $
    47,371
    
    
    $
    145,380
 [Additional columns below] [Continued from above table, first column(s) repeated] Corporate
    
    Eliminations
    
    ConsolidatedSix months ended
    
    Six months ended
    
    Six months ended
    
    Six months ended
    
    Six months ended
    
    Six months endedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003RevenueExternal revenue
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    4,613,433
    
    
    $
    3,969,916Inter-segment revenue
    
    
    
    
    
    
    
    
    
    
    (1,949
    )
    
    
    (26,893
    )
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (1,949
    )
    
    $
    (26,893
    )
    
    $
    4,613,433
    
    
    $
    3,969,916Profit (loss) from
Operations
    
    $
    (145,311
    )
    
    $
    (386,194
    )
    
    $
    45,447
    
    
    $
    (75,483
    )
    
    $
    (977,329
    )
    
    $
    (795,836
    )Capital expenditures
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    47,371
    
    
    $
    145,380
 June 30,
    
    December 31,
    
    June 30,
    
    December 31,
    
    June 30,
    
    December 31,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Total assets
    
    $
    10,618,773
    
    
    $
    10,614,292
    
    
    $
    1,182,101
    
    
    $
    2,053,029
    
    
    $
    11,800,874
    
    
    $
    12,667,321
 [Additional columns below] [Continued from above table, first column(s) repeated] June 30,
    
    December 31,
    
    June 30,
    
    December 31,
    
    June 30,
    
    December 31,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Total assets
    
    $
    639,081
    
    
    $
    7,487
    
    
    $
    (827,786
    )
    
    $
    (132,592
    )
    
    $
    11,612,169
    
    
    $
    12,542,216
 -23-




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##### Table of Contents



NOTE 16  COMMITMENT (i) On May 28, 2004, the Group signed a joint venture agreement with Zhangjhou
Yu Hua Educational Investment Co., Ltd. in Henan Province, PRC to establish a
company, Henan Kid Castle Education Development Co., Ltd. with registered
capital of RMB$300,000. Pursuant to this joint venture agreement, the Group
and Zhangjhou Yu Hua Educational Investment Co., Ltd. each owns 65% and 35%
interests in Henan Kid Castle Education Development Co., Ltd. No capital
contribution has yet been made for the joint venture as of June 30, 2004. (ii) On June 29, 2004, the Group signed a joint venture agreement with Li Kai
and Zhang Wuen Shou in PRC to establish a company, Shanxi Kid Castle Education
Development Co., Ltd. with registered capital of RMB$500,000. Pursuant to this
joint venture agreement, the Group, Li Kai and Zhang Wuen Shou own,
respectively, 51%, 30% and 19% interests in Shanxi Kid Castle Education
Development Co., Ltd. No capital contribution has yet been made for the joint
venture as of June 30, 2004. -24-




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION This report contains certain forward-looking statements and information
relating to us that are based on the beliefs and assumptions made by our
management as well as information currently available to the management. When
used in this document, the words anticipate, believe, estimate, and
expect and similar expressions, are intended to identify forward-looking
statements. Such statements reflect our current views with respect to future
events and are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected. Certain of
these risks and uncertainties are discussed under the caption Factors That May
Affect Our Future Results And Financial Condition contained herein and other
factors disclosed in our filings with the Securities and Exchange Commission
including, but not limited to our Annual Report on Form 10-KSB for the year
ended December 31, 2003. We do not intend to update these forward-looking
statements. GENERAL We are engaged in the business of childrens education, focusing on the
publication and sale of kindergarten language school and primary school
teaching materials and magazines. We also provide management and consulting
services to our franchised kindergarten and language schools. Our teaching
materials include books, audio tapes, video tapes and compact discs. A major
portion of our educational materials focuses on English language education. We
also sell educational tools and equipment that are complementary to our
business. Currently, our major business is in Taiwan. In 2001, we started to
expand our business in the Peoples Republic of China (PRC). We officially
launched our operations in Shanghai in April 2002. As in Taiwan, we offer
advanced teaching materials and tools, and monthly and bi-weekly magazines to
provide children ranging from two to twelve years of age a chance to learn
exceptional English language and computer skills, and to provide a pre-school
education program. CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to product
returns, bad debts, inventories, equity investments, income taxes, financing
operations, pensions and commitment and contingencies. We base our estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements. Revenue Recognition.We recognize sales of teaching materials and educational
tools and equipment as revenue when title of the product and risk of ownership
are transferred to the customer, which occurs at the time of delivery, or when
the goods arrive at the customer designated location, depending on the
associated shipping terms. Additionally, we deliver products sold by our
distributors directly to the distributors customers and as such the delivered
goods are recognized as revenue similar to sales to our direct customers. We
estimate sales returns and discounts based on historical experience and record
as reductions to revenues. -25-




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If market conditions were to decline, we may take actions to increase sales
discounts, possibly resulting in an incremental reduction of revenue at the
time when revenues are recognized. Allowance for doubtful accounts.We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our customers to make
required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Allowance for obsolete inventories and lower of cost or market.We write down
our inventory for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventory and the estimated market value based
upon assumptions about inventory aging, future demand and market conditions.
If actual market conditions are less favorable than those projected by
management, additional inventory write-downs may be required. Investment impairments.We hold equity interests in companies having
operations in areas within our strategic focus. We record an investment
impairment charge when we believe an investment has experienced a decline in
value that is not temporary. Future adverse changes in market conditions or
poor operating results of underlying investments could result in losses or an
inability to recover the carrying value of the investments that may not be
reflected in an investments current carrying value, thereby possibly requiring
an impairment charge in the future. Fixed assets and depreciation.Our fixed assets are stated at cost. Major
improvements and betterments to existing facilities and equipment are
capitalized. Expenditures for maintenance and repairs that do not extend the
life of the applicable asset are charged to expense as incurred. Buildings are
depreciated over a 50-year term. Fixtures and equipment are depreciated using
the straight-line method over their estimated useful lives, which range from
two-and-a-half years to ten years. Impairment of long-lived assets.We review our fixed assets and other
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to undiscounted future net cash flows expected to
be generated by the asset over its remaining useful life. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. The estimate of fair value is generally based on quoted market prices
or on the best available information, including prices for similar assets and
the results of using other valuation techniques. As of June 30, 2004, the balance of our amortizable intangible assets was
$920,390, including franchise-related intangible assets of $579,650 and
copyrights of $340,740. The amortizable intangible assets are amortized on a
straight-line basis over estimated useful lives of 10 years. In determining the
useful lives and recoverability of the intangibles, assumptions must be made
regarding estimated future cash flows and other factors to determine the fair
value of the assets, which may not represent the true fair value. If these
estimates or their related assumptions change in the future, there may be
significant impact on our results of operations in the period of the change
incurred. Income taxes.We account for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and tax loss carry-forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Deferred tax assets are subject to valuation allowances based upon -26-




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managements estimates of realizability. Actual results may differ
significantly from managements estimate. Currency Risk Our transactions with suppliers and customers are primarily effected in New
Taiwan dollars, which is the functional currency of our Taiwanese subsidiary,
Kid Castle Internet Technologies Limited. As a result of our expansion in the
PRC, our transactions denominated in Renminbi, which is the functional currency
of our PRC subsidiary, Kid Castle Educational Software Development Company
Limited, are increasing. Our financial statements are reported in U.S.
dollars. As a result, fluctuations in the relative exchange rate among the U.S.
dollar, the New Taiwan dollar and the Renminbi will affect our reported
financial results. Such impacts could be meaningful and are independent of the
underlying performance of the business. The market price of our securities
could be significantly harmed based on unfavorable changes in exchange rates.
We do not actively manage our exposure to currency exchange rate fluctuations. RESULTS OF OPERATIONS The six months ended June 30, 2004 and 2003 Total net operating revenues increased by $643,517, or 16%, to $4,613,433 for
the six months ended June 30, 2004 from $3,969,916 for the six months ended
June 30, 2003, including the increase in sales of goods of $229,331 and the
franchising income of $345,791 and other operating revenues of $68,395. The
increase in sales of goods, from $2,987,448 for the six months ended June 30,
2003 to $3,216,779 for the six months ended June 30, 2004, or 8%, was mainly
due to the increase in net sales of goods generated from our Shanghai
operations of $265,027, or 117%, to $490,764 for the six months ended June 30,
2004 from $225,737 for the six months ended June 30, 2003. The increase in
franchising income, from $846,949 for the six months ended June 30, 2003 to
$1,192,740 for the six months ended June 30, 2004, or 41%, was mainly due to
the increase in numbers of our franchised schools and the increase in the
annual franchising fees. Our other operating revenues represent revenues from
other activities and services such as training of teachers, arranging for
personal English language tutors, organizing field trips and educational fairs,
and designing the school layout for franchised schools. Other operating
revenues increased by $68,395, or 50%, to $203,914 for the six months ended
June 30, 2004 from $135,519 for the six months ended June 30, 2003. The
increase was mainly due to the fees paid by our franchised schools for our
services in connection with the construction and decoration of those franchised
schools and the income resulting from the sales of education related equipments
to our franchised schools. Gross profit increased by $381,663, or 15%, to $2,907,267 for the six months
ended June 30, 2004 from $2,525,604 for the six months ended June 30, 2003.
The increase in gross profit was attributable to the fact that the rate of
increase in franchising costs from June 30, 2003 to June 30, 2004 was lower
than the rate of increase in franchising income for the same period. In
addition, our advertising campaign during this period particularly helped to
boost franchising income in both Taiwan and Shanghai, PRC. Total operating expenses increased by $563,156, or 17%, to $3,884,596 for the
six months ended June 30, 2004 from $3,321,440 for the six months ended June
30, 2003. Advertising costs increased by $255,745, or 129%, to $454,492 for
the six months ended June 30, 2004 from $198,747 for the six months ended June
30, 2003. The increase was mainly due to the additional expenses incurred with
respect to the filming of commercials for our new promotional campaign for our
products and franchised schools. Other operating expenses increased by
$307,411, or 10%, to $3,430,104 for the six months ended June 30, 2004 from
$3,122,693 for the six months ended June 30, 2003, principally due to increases
in commission fees from monthly magazines and in expenses as a result of the
expansion in Shanghai, PRC. Commission fees increased by $206,484, or 182%, to
$320,175 for the six months ended June 30, 2004 -27-




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from $113,691 for the six months ended June 30, 2003, which was mainly due to
the increase in volume of commission fees incurred from the new promotional
campaign of our monthly magazines sold to pre-schools. In addition, our
personnel expenses and other relevant expenses increased as a result of the
continued expansion of our business and workforce in Shanghai. Net interest expenses decreased by $89,536, or 58%, to $64,936 for the six
months ended June 30, 2004 from $154,472 for the six months ended June 30,
2003, primarily due to a loan from a stockholder in April 2002 (please refer to
Note 10 to the condensed consolidated financial statements for more
information) that had a monthly interest rate of 2.1%. The loan was fully
repaid subsequent to December 31, 2003. Share of profit (loss) of investments increased by $44,106, or 348%, to $31,425
for the six months ended June 30, 2004 from ($12,681) for the six months ended
June 30, 2003, primarily due to our new investment in Culture Media on July 8,
2003 that incurred an investment gain of $32,939 (please refer to Note 9 to our
condensed consolidated financial statements for more information) for the six
months ended June 30, 2004. Loss on write-off of an investment in the six months ended June 30, 2003, was
due to a special resolution adopted by our board of directors on June 5, 2003.
We resolved to amend the agreement we entered into on May 16, 2001 with Global
International to change our cooperation relationship from equity ownership to
strategic alliance. As a result, during the six months ended June 30, 2003, we
recognized a loss of $132,116 in the operating results. Other non-operating income increase by $7,562, or 10%, to $81,770 for the six
months ended June 30, 2004 from $74,208 for the six months ended June 30, 2003,
primarily because of the fluctuation in exchange rate. The
income tax expenses of $1,222 for the six months ended June 30, 2004
represents the additional income tax paid for 2002. Income tax provision for
the six months ended June 30, 2003 was $182,681. This income tax provision
mainly represents an increase in the valuation allowance against deferred tax
assets generated from our Shanghai operations so as to reduce the deferred tax
assets to the extent that the tax benefit is more than likely to be realized. The three months ended June 30, 2004 and 2003 Total net operating revenues increased by $795,271, or 66%, to $2,003,095 for
the three months ended June 30, 2004 from $1,207,824 for the three months ended
June 30, 2003, including the increase in sales of goods of $474,191,
franchising income of $249,310 and other operating revenues of $71,770. The
increase in sales of goods, from $712,735 for the three months ended June 30,
2003 to $1,186,926 for the three months ended June 30, 2004, or 67%, was mainly
due to the net sales of goods generated from our Shanghai operations increased
by $101,346, or 96%, to $193,013 or the three months ended June 30, 2004 from
$91,667 for the three months ended June 30, 2003. In addition, because we sold
the educational materials for the first semester of 2004 to our franchise
schools in Taiwan in June, which was earlier than 2003, the sales revenue in
the first six months of 2004 increased by approximately $206,335, compared with
the same period in 2003. The increase in franchising income, from $415,298 for
the three months ended June 30, 2003 to $664,608 for the three months ended
June 30, 2004, was mainly due to the increase in numbers of our franchised
schools and the increase in the annual franchising fees. Our other operating
revenues represent revenues from other activities and services such as training
of teachers, arranging for personal English language tutors, organizing field
trips and educational fairs, and designing the school layout for franchised
schools. Other operating revenues increased to $151,561 for the three -28-




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##### Table of Contents



months
ended June 30, 2004 from $79,791 for the three months ended June 30, 2003,
mainly due to the fees paid by our franchised schools for our services in connection with the
construction and decoration of those franchised schools and the income
resulting from the sales of education related equipments to our franchised
schools. Gross profit increase by $511,796, or 79%, to $1,160,730 for the three months
ended June 30, 2004 from $648,934 for the three months ended June 30, 2003.
The increase was mainly attributable to an increase in the annual franchising
fees as well as an improved utilization of our consulting and management
resources provided to our franchised schools. Total operating expenses increased by $112,412, or 7%, to $1,741,530 for the
three months ended June 30, 2004 from $1,629,118 for the three months ended
June 30, 2003. Advertising costs increased by $173,078, or 112%, to $327,850
for the three months ended June 30, 2004 from $154,772 for the three months
ended June 30, 2003. The increase was mainly because we spent additional cost
in filming our new commercials on the promotion of our products and franchised
schools. Other operating expenses decreased by $60,666, or 4%, to $1,413,680
for the three months ended June 30, 2004 from $1,474,346 for the three months
ended June 30, 2003, primarily because we saved some personnel expenses by
closing down our direct-marketing department in April, 2004. Net interest expenses decreased by $37,280, or 46%, to $43,171 for the three
months ended June 30, 2004 from $80,451 for the three months ended June 30,
2003, primarily due to a loan from a stockholder in April 2002 (please refer to
Note 10 to the condensed consolidated financial statements) that had a monthly
interest rate of 2.1%. The loan was fully repaid in January, 2004. Share of loss of investments was $15,542 for the three months ended June 30,
2004, primarily due to our new investments in Culture Media on July 8, 2003,
and Education Center in October 2003, which incurred investment losses of
$14,068 and $1,474 (please refer to Note 9 to our condensed consolidated
financial statements for more information) for the three months ended June 30,
2004, respectively. Loss on write-off of an investment in the three months ended June 30, 2003, was
due to a special resolution adopted by our board of directors on June 5, 2003.
We resolved to amend the agreement we entered into on May 16, 2001 with Global
International to change our cooperation relationship from equity ownership to
strategic alliance. As result, during the three months ended June 30, 2003, we
recognized a loss of $132,116 in the operation results. Other non-operating income increase by $19,989, or 110%, to $38,097 for the
three months ended June 30, 2004 from $18,108 for the three months ended June
30, 2003, primarily because of the fluctuation in exchange rates of the primary
currencies in which we conduct our operations, the New Taiwan (NT) Dollars and
Renminbi (RMB), against the US Dollar. Income tax expenses of $1,222 for the three months ended June 30, 2004
represents the additional income tax paid for 2002. Income tax provision for
the three months ended June 30, 2003 was $34,184. This income tax provision
mainly represents an increase in the valuation allowance against deferred tax
assets generated from our Shanghai operations so as to reduce the deferred tax
assets to the extent that the tax benefit is more than likely to be realized. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2004, our principal sources of liquidity included cash and bank
balances of $542,188, which decreased from $1,273,723 at December 31, 2003.
The decrease was mainly due to the -29-




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expenditures to fund the daily operations
and the new investments in our Shanghai operations (please refer to note 9 to
our condensed consolidated financial statement for more information). Net cash used in operating activities was $387,830 and $1,476,962 during the
six months ended June 30, 2004 and 2003, respectively. Net cash used in
operating activities during the six months ended June 30, 2004 was primarily
attributed to net loss, that was partially offset by an increase in notes and
accounts payable, an increase of deposit received, and an increase in other
payables. Net cash (used in) provided by investing activities was $(250,988) and $6,983
during the six months ended June 30, 2004 and 2003, respectively. The $257,971
difference was primarily attributable to the collections of amount due from
stockholder/director of $122,300 during the six months ended June 30, 2003 and
the payment of long-term investments of $103,346 in Shanghai. Net cash (used in) provided by financing activities during the six months ended
June 30, 2004 was $(79,888) as compared to $2,623,346 during the six months
ended June 30, 2003. The $2,703,234 difference was primarily attributable to
the net proceeds of $2,181,578 we received from the issuance of 3,116,540
shares of common stock during the six months ended June 30, 2003, and the
repayment of loans from officers/stockholders of $585,006 during the six months
ended June 30, 2004. As of June 30, 2004, the Company has a total line of credit of $2,518,519 from
certain banks and the unused credit facility was $255,566. Off-Balance Sheet Arrangement The Securities and Exchange Commission (SEC) has described various
characteristics to identify contractual arrangements that would fall within the
SECs definition of off-balance sheet arrangements. The following table represents the Groups contractual obligations: Payments Due By Period (Thousand dollars)Total
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterContractual obligationsBank borrowing
    
    $
    2,187
    
    
    
    909
    
    
    
    1,097
    
    
    
    181
    
    
    
    
    
    
    
    
    
    
    
    Pension Benefit
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41Operating leases
    
    
    393
    
    
    
    118
    
    
    
    100
    
    
    
    82
    
    
    
    54
    
    
    
    39
    
    
    
    Total
    
    $
    2,621
    
    
    
    1,197
    
    
    
    263
    
    
    
    82
    
    
    
    54
    
    
    
    39
    
    
    
    41
 Bank borrowing One of our financing sources is from bank borrowings. As of June 30, 2004 and
December 31, 2003, the balances of bank borrowings, including current and
non-current portions, were $3,024,948 and $2,484,471, respectively. Equity investments in joint ventures On May 28, 2004, KCES signed a joint venture agreement with Zhangjhou Yu Hua
Educational Investment Co., Ltd. in Henan Province, PRC. Pursuant to this
joint venture agreement, the Group and -30-




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Zhangjhou Yu Hua Educational Investment
Co., Ltd. each owns 65% and 35% interests in Henan Kid Castle Education
Development Co., Ltd. On June 29, 2004, KCES signed a joint venture agreement with Li Kai and Zhang
Wuen Shou in PRC. Pursuant to this joint venture agreement, the Group, Li Kai
and Zhang Wuen Shou own, respectively, 51%, 30% and 19% interests in Shanxi Kid
Castle Education Development Co., Ltd. As of June 30, 2004, no operations had commenced yet for Henan Kid Castle
Education Development Co., Ltd., and Shanxi Kid Castle Education Development
Co., Ltd. In addition, no capital injection had made for Henan Kid Castle
Education Development Co., Ltd. and Shanxi Kid Castle Education Development
Co., Ltd. Pension Benefit We have a defined benefit retirement plan (the Plan) covering all regular
employees of KCIT, our subsidiary in Taiwan, as described in Note 14 to the
Consolidated Financial Statements. The benefits expected to be paid in each of
the next five fiscal years, and in the aggregate for the five fiscal years
thereafter are $0 and $40,913, respectively. We also make defined
contributions to a retirement benefits plan for its employees in the PRC in
accordance with local regulations. The contributions made by us for the six
months ended June 30, 2004 and 2003 amounted to $70,454 and $45,290,
respectively. Operating Leases We have entered into several non-cancelable lease arrangements for
administrative office space, warehouse space and sales offices in various
periods. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 must be applied
for the first interim or annual period beginning after June 15, 2003.
Management is currently evaluating the effect of adopting FIN 46 on its results
of operations and financial position. On April 30, 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities (SFAS No. 149). SFAS No. 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. The
new guidance amends SFAS No. 133 for decisions made as part of the Derivatives
Implementation Group (DIG) process that effectively required amendments to
SFAS No. 133, and decisions made in connection with other FASB projects dealing
with financial instruments and in connection with implementation issues raised
in relation to the application of the definition of a derivative and
characteristics of a derivative that contains financing components. In
addition, it clarifies when a derivative contains a financing component that
warrants special reporting in the statement of cash flows. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. We believe that the
adoption of SFAS No. 149 will have no material impact on our consolidated
financial statements. -31-




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In May 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (SFAS
No. 150). SFAS No. 150 establishes standards for classifying and measuring as
liabilities certain financial instruments that embody obligations of the issuer
and have characteristics of both liabilities and equity. SFAS No. 150 is
effective for all financial instruments created or modified after May 31, 2003
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. We believe that the adoption of SFAS No. 150
will have no material impact on our consolidated financial statements. In December 2003, the Staff of the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, which
supersedes SAB 101, Revenue Recognition in Financial Statements. SAB 104s
primary purpose is to rescind accounting guidance contained in SAB 101 related
to multiple element revenue arrangements and revises the SECs Revenue
Recognition in Financial Statements Frequently Asked Questions and Answers
that have been codified in Topic 13. SAB 104 was effective immediately and did
not have a material impact on our financial reporting and disclosures. In December 2003, the FASB revised SFAS No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits. This Statement revises employers
disclosures about pension plans and other postretirement benefit plans. It
requires additional disclosures to those in the original SFAS No. 132 about the
assets, obligations, cash flows and net periodic benefit cost of defined
benefit pension plans and other defined benefit postretirement plans. The
required information should be provided separately for pension plans and for
other postretirement benefit plans. This Statement, which also requires new
disclosures for interim periods beginning after December 15, 2003, is effective
for fiscal years ended after December 15, 2003. We have adopted this Statement
since the year ended December 31, 2003, and the adoption of this Statement has
no impact on our consolidated financial statements. FACTORS THAT MAY AFFECT OUR FUTURE RESULTS AND FINANCIAL CONDITION Investing in our securities involves a high degree of risk. In addition to the
other information contained in this quarterly report, you should consider the
following factors before investing in our securities. Because our officers and directors are not U.S. Persons, and our operating
subsidiaries are Taiwan and Peoples Republic of China companies, you may not
be able to enforce judgments under the Securities Act. Our operating subsidiaries are a Taiwanese company and a Peoples Republic of
China company, our officers and directors are residents of various
jurisdictions outside the United States. All or a substantial portion of the
assets of our business and of such persons are located outside the United
States. As a result, it may be difficult for investors to effect service of
process within the United States upon such persons or to enforce in the United
States courts judgments obtained against such persons in United States courts
and predicated upon the civil liability provisions of the Securities Act. Because we face competition from established competitors, we may be unable to
maintain market share. Our primary competitors have significant financial, technical and marketing
resources, and/or name recognition, including Giraffe, G-Telp and Jia Yin. Some
of these competitors have a longer operating history and greater overall
resources than we do. These companies also have established customer support
and professional services organizations. As a result, our competitors may be
able to adapt more quickly to changes in customer needs, offer products and
services at lower prices than us, devote greater resources -32-




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than us to
development and sale of teaching/learning products and services, which could
result in reducing our market share. 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, Kuo-An Wang, our Chief Executive Officer, and Yu-En Chui,
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 management, educators, technical, marketing
and sales personnel. These individuals are in high demand and we may not be
able to attract the staff we need. The hiring process is intensely
competitive, time consuming and may divert the attention of our management from
our operations. Competitors and others have in the past, and may in the
future, attempt to recruit our employees. If we lose the services of any of
our senior management or key education personnel, or if we fail to continue to
attract qualified personnel, our business could suffer. Because we conduct operations in New Taiwan (NT) Dollars and Renminbi (RMB), we
are subject to risk from exchange rate fluctuations. Our transactions with suppliers and customers are effected in New Taiwan
dollars, the functional currency of our Taiwanese subsidiary, KCIT, and
increasingly in RMB, the functional currency of our PRC subsidiary, KCES, as a
result of our expansion in the PRC. Our financial statements are reported in
U.S. dollars. As a result, fluctuations in the relative exchange rate among the
U.S. dollar, the NT dollar and the RMB will affect our reported financial
results from one period to the next. Such impacts could be meaningful and are
independent of the underlying performance of our business. The market price of
our securities could be significantly harmed based on unfavorable changes in
exchange rates. We do not actively manage our exposure to such effects. An increase in market competition could have a negative impact on our business. Our markets are new, rapidly evolving and highly competitive, and we expect
this competition to persist and intensify in the future. This increase in
competition could lead to price reductions, decreased sales-volume,
under-utilization of employees, reduced operating margins and loss of market
share. There can be no assurance that we will be able to successfully compete
for customers in our targeted markets. Our failure to maintain and enhance our competitive position could seriously
harm our business and operating results. We encounter current or potential
competition from a number of sources, including:  
    
    branches and franchises of international language instruction companies;
    
    public institutions and private schools; and
    
    private tutors. We cannot predict whether demand for our products and services will continue to
develop, particularly at the volume or prices that we need to remain
profitable. Although the market for English language instruction and education is growing
rapidly, we cannot be certain that this growth will continue in its present
form, or at all. We believe our success ultimately will depend upon, among
other things, our ability to: -33-




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
    
    increase awareness of our brand and the availability of our
products and services;
    
    continue to attract and develop relationships with educational
institutions and regulatory authorities in our targeted geographic
markets; and
    
    continue to attract and retain customers. We have a history of operating losses and we anticipate losses and negative
cash flow to continue for the foreseeable future, and unless we are able to
generate profits and positive cash flow on a consistent basis we may not be
able to continue operations. Our ability to attain a positive cash flow and become profitable depends on our
ability to generate and maintain greater revenues while incurring reasonable
expenses. This, in turn, depends, among other things, on the development of
our business of child educational teaching materials and related services
focusing on English language in Taiwan and the PRC, and we may be unable to
achieve and maintain profitability if we fail to do any of the following:  
    
    maintain and improve our current products and services and
develop or license new ones on a timely basis;
    
    compete effectively with existing and potential competitors;
    
    further develop our business activities;
    
    manage expanding operations; and
    
    attract and retain qualified personnel. We have incurred operating losses since inception and hence, as of June 30,
2004, the balance of accumulated deficit was $6,987,774. We incurred net
losses of $(1,940,591), $(1,906,996), and $(2,500) for the years ended December
31, 2003, 2002 and 2001, respectively, and had cash flow from operations of
$(2,689,688), 33,886 and $0 in 2003, 2002 and 2001, respectively. If we are
unable to achieve and maintain a positive cash flow and profitability, we may
be unable to continue our operations. Even if we do achieve a positive cash
flow and profitability, we cannot be certain that we will be able to sustain or
increase them on a quarterly or annual basis in the future Our inability to achieve or maintain profitability or positive cash flow
could result in disappointing financial results, impede implementation of our
growth strategy or cause the market price of our common stock to decrease.
Specifically, if we cannot effectively maintain, improve and develop products
and services we may not be able to recover our fixed costs or otherwise turn
profitable. We may not be able to develop and introduce new products, services
and enhancements that respond to technological changes, evolving education
industry standards or customer needs and trends on a timely basis. We may
experience difficulties that could delay or prevent the successful development,
introduction or marketing of new products, services and service enhancements.
These new products, services and service enhancements may not achieve market
acceptance or our competitors may develop alternative technologies and methods
that gain broader market acceptance than our products and services.
Accordingly, we cannot assure you that we will be able to generate the cash
flow and profits necessary to sustain our business expectations, which makes
our ability to successfully implement our business plan uncertain. Because we may not be able to protect our proprietary rights on a global basis,
we may incur substantial costs to defend or protect our business and
intellectual property. If we fail to protect our intellectual property, we may be exposed to expensive
litigation or risk jeopardizing our competitive position. The steps we have
taken may be inadequate to protect our -34-




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intellectual property. We may have to
litigate to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others. This litigation could
result in substantial costs and the diversion of our management and technical
resources which could harm our business. In addition, laws in the PRC have traditionally been less protective of
intellectual property rights and enforcement relating to the protection of
intellectual property in the PRC has been sporadic at best. Deterioration in
compliance with existing legal protections or reductions in the legal
protection for intellectual property rights in the PRC could adversely affect
our revenue as we continue to expand into the PRC market. Because we may not be able to avoid claims that we infringed the proprietary
rights of others, we may incur substantial costs to defend or protect our
business and intellectual property. Although we have taken steps to avoid infringement claims from others, these
measures may not be adequate to prevent others from claiming that we violated
their copyrights, other trademarks or other proprietary rights. Any claim of
infringement could cause us to incur substantial costs defending against the
claim, even if the claim is invalid, and could distract our management from our
business. A party making a claim could secure a judgment that requires us to
pay substantial damages. Because we intend to expand internationally, we will be subject to risks of
conducting business in foreign countries. As we expand our operations outside of Taiwan, we will be subject to the risks
of conducting business in foreign countries, including:  
    
    our inability to adapt our products and services to local cultural
traits, customs and mobile user preferences;
    
    our inability to locate qualified local employees, partners and suppliers;
    
    difficulties managing foreign operations;
    
    the potential burdens of complying with a variety of foreign laws;
    
    trade standards and regulatory requirements;
    
    geopolitical risks, such as political and economic instability and
changes in diplomatic and trade relationships;
    
    legal uncertainties or unanticipated changes regarding regulatory
requirements, liability, export and import restrictions, tariffs and
other trade barriers;
    
    uncertainties of laws and enforcement relating to the protection of
intellectual property;
    
    political, economic and social conditions in the foreign countries
where we conduct operations;
    
    currency risks and exchange controls;
    
    potential inflation in the applicable foreign economies; and
    
    foreign taxation of earnings and payments received by us from our franchisees and affiliates. We cannot be certain that the risks associated with our anticipated foreign
operations will not negatively affect our operating results or prospects,
particularly as these operations expand in scope, scale and significance. Our operations in the PRC are subject to political, regulatory and economic
uncertainties. Our operations and assets in the PRC are subject to significant political,
regulatory and economic uncertainties. Changes in laws and regulations, or
their interpretation, or the imposition of confiscatory -35-




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taxation, restrictions
on currency conversion, imports and sources of supply, devaluations of currency
or the nationalization or other expropriation of private enterprises could have
a material adverse effect on
our business, results of operations and financial condition. Under its current
leadership, the PRC government has been pursuing economic reform policies that
encourage private economic activity and greater economic decentralization.
There is no assurance, however, that the PRC government will continue to pursue
these policies, or that it will not significantly alter these policies from
time to time without notice. In addition, our subsidiary, KCES, entered into agreements in July 2003 to
establish two joint ventures, Culture Media and Education Center, with a local
Chinese party, 21st Century Publishing House, in Jiangxi Province. We
established Culture Media and Education Center to engage mainly in the
publication and distribution of English language education materials, the
operation of kindergarten and language schools, and the running of cooperative
schools in China. We intend to use these joint ventures as one of our primary
vehicles for our expansion in the PRC market. Although we have received, on
January 19, 2004 and October 31, 2003, licenses from the applicable government
authorities to conduct the business of Culture Media and Education Center,
respectively, in the PRC, the regulations with respect to operation of
businesses by foreign-owned entities are still in flux. There is no assurance
that the licenses will not be challenged by the PRC authorities. The lack of remedies and impartiality under the PRCs legal system could
negatively impact us. Unlike the U.S., the PRC has a civil law system based on written statutes in
which judicial decisions have little precedential value. The PRC government
has enacted some laws and regulations dealing with matters such as corporate
organization and governance, foreign investment, commerce, taxation and trade.
However, their experience in implementing, interpreting and enforcing these
laws and regulations is limited, and our ability to enforce commercial claims
or to resolve commercial disputes is unpredictable. These matters may be
subject to the exercise of considerable discretion by agencies of the PRC
government, and forces unrelated to the legal merits of a particular matter or
dispute may influence their determination. Penny Stock regulations may impose certain restrictions on marketability of
our common stock. The SEC has adopted regulations which generally define penny stock to be an
equity security that has a market price of less than $5.00 per share. Our
common stock may fall within the definition of penny stock and subject to rules
that impose additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited
investors (generally those with assets in excess of $1,000,000, or annual
incomes exceeding $200,000 or $300,000, together with their spouse). For transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchasers prior written consent to the transaction. Additionally, for any
transaction, other than exempt transactions, involving a penny stock, the rules
require the delivery, prior to the transaction, of a risk disclosure document
mandated by the SEC relating to the penny stock market. The broker-dealer also
must disclose the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealers presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the penny stock rules may restrict the ability of
broker-dealers to sell our common stock and may affect the ability of investors
to sell our common stock in the secondary market. -36-




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An outbreak of Severe Acute Respiratory Syndrome (SARS) may adversely affect
our results of operations. In March 2003, Guangdong Province of the PRC, Hong Kong, Singapore, Taiwan and
several other Asian countries encountered in outbreak of SARS, a highly
contagious form of atypical pneumonia. Although the SARS epidemic now appears
to become under control, some experts fear that the SARS epidemic might
resurface as number of isolated SARS cases have been reported recently. In the
future, if any of our employees or students is suspected to have contracted
SARS, under certain circumstances such employees, students and affected areas
of our premises may have to be quarantined. As a result, we may have to
temporarily suspend all or part of our operations. Furthermore, a future
outbreak of SARS may negatively impact our ability to attract foreign teachers,
who may be less inclined to come to Taiwan, and students, whose parents may
choose to have them taught at home by an individual. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the risk of loss that may affect us due to adverse
changes in financial market prices and rates. Our market risk exposure is
primarily fluctuations in foreign exchange rates and interest rates. We have
not entered into derivative or hedging transactions to manage risk in
connection with such fluctuations. Interest rate exposure We are exposed to fluctuating interest rates related to variable rate bank
borrowings. It is estimated that if interest rates were to increase by 1%, the
result would be an annual increase in our interest expense of $30,523. However,
due to the uncertainty of the actions that would be taken and their possible
effects, this analysis assumes no such action. Further, this analysis does not
consider the effect of the change in the level of overall economic activity
that could exist in such an environment. Foreign currency exposure We have operations in both Taiwan and the PRC. The functional currency of
Higoal and its subsidiaries other than KCES is NT Dollars and the financial
records are maintained and the financial statements are prepared for these
entities in NT$. The functional currency of KCES is RMB and the financial
records are maintained and the financial statements are prepared for KCES in
RMB. In the normal course of business, these operations are not exposed to
fluctuations in currency values. We do not generally enter into derivative
financial instruments in the normal course of business, nor are such
instruments used for speculative purposes. However, fluctuations in the
relative exchange rate will affect our reported financial results. The
translation from the applicable local currency assets and liabilities to the US
dollar is performed using exchange rates in effect at the balance sheet date
except for stockholders equity, which is translated at historical exchange
rates. Revenue and expense accounts are translated using average exchange rates
during the period. Gains and losses resulting from such translations are
recorded as a cumulative translation adjustment, a separate component of
stockholders equity. 
 ITEM 4. CONTROLS AND PROCEDURES We are in the process of identifying, developing and implementing measures to
improve the effectiveness of our disclosure controls and procedures, and, in
particular, internal controls, including plans to enhance our resources,
systems and training with respect to our financial reporting and disclosure
responsibilities, and to review our actions with the audit committee and
independent auditors. Based on this evaluation as of June 30, 2004, our CEO
and our CFO have concluded that steps can be taken to improve our disclosure
controls and procedures. Nevertheless, our CEO and CFO believe that, subject
to the limitations noted -37-




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above, our disclosure controls and procedures are
effective to ensure that material information required to be included in this
report is made known to them on a timely basis. During the quarter ended June 30, 2004, there were no changes in our internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting. -38-




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PART II
OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS We have no material pending legal proceedings. 
 ITEM 2. CHANGES IN SECURITIES Pursuant to a stock purchase agreement dated August 18, 2003, Globe Wisdom
Investments Limited (GWIL), a Samoan international business company,
subscribed for 175,500 shares of our common stock at an aggregate purchase
price of $122,850 in a private offering. As of June 30, 2004, we had not yet
issued any shares to GWIL pursuant to the August 18, 2003 stock purchase
agreement. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At our Annual Meeting of Shareholders held on June 28, 2004, the following
proposals were adopted by the margins indicated: PROPOSAL 1: Annual Election of Directors. The nominees for election as
directors were Kuo-An Wang, Yu-En Chiu, Suang-Yi Pai, Chin-Chen Huang, Yu-Fang
Lin, Ming-Tsung Shih, Yuanchau Liour and Robert Theng. Each of these nominees
was elected to serve for a one-year term, by the following margins of votes: Nominees
    
    For
    
    WithheldKuo-An Wang
    
    
    13,963,212
    
    
    
    760,520Yu-En Chiu
    
    
    13,963,212
    
    
    
    760,520Suang-Yi Pai
    
    
    13,963,212
    
    
    
    760,520Chin-Chen Huang
    
    
    13,963,212
    
    
    
    760,520
 -39-




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Nominees
    
    For
    
    WithheldYu-Fang Lin
    
    
    13,963,212
    
    
    
    760,520Ming-Tsung Shih
    
    
    13,963,212
    
    
    
    760,520Yuanchau Liour
    
    
    13,963,212
    
    
    
    760,520Robert Theng
    
    
    13,963,212
    
    
    
    760,520
 PROPOSAL 2: Ratification of the selection of PricewaterhouseCoopers LLP to
serve as our independent auditors for the fiscal year ending December 31, 2004. For
    
    Against
    
    Abstain1,3963,212
    
    0
    
    
    
    
    
    760,520
 
 ITEM 5. OTHER INFORMATION None. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A.
    
    Exhibits3.1
    
    Amended Bylaws31.1
    
    Certification of Kuo-An Wang, Chief Executive Officer of the
registrant, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Yu-En Chiu, Chief Financial Officer of the
registrant, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
 -40-




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32.1
    
    Certification of Kuo-An Wang, Chief Executive Officer of the
registrant, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Yu-En Chiu, Chief Financial Officer of the
registrant, pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.B.
    
    Reports on Form 8-KNot applicable.
 -41-




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##### Table of Contents



SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized. Dated: August 13, 2004 By:
    /s/ Kuo-An WangName:
    Kuo-An WangTitle:
    Chief Executive Officer -42-