##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549


FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

Commission File Number: 333-61286

KID CASTLE EDUCATIONAL CORPORATION

(formerly King Ball International Technology Corporation)

Florida
    
    59-2549529(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification Number)


8th Floor, No. 98 Mon Chuan Road
Hsien Tien, Taipei, Taiwan ROC
011-88622218 5996



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(Registrants Telephone Number, Including Area Code)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.

[X] YES [   ] NO

There were 18,190,869 shares of the Registrants no par value common stock
outstanding as of October 31, 2003.

Transitional Small Business Format (check one) Yes [   ] NO [X]



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TABLE OF CONTENTS



|                             |                                                                                              |  |  |  |  |  |  | 
|---------------------------- | -------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION
|                             | ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                               
|                             | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
|                             | ITEM 3. CONTROLS AND PROCEDURES                                                             
|PART II OTHER INFORMATION   
|                             | ITEM 1. LEGAL PROCEEDINGS                                                                   
|                             | ITEM 2. CHANGES IN SECURITIES                                                               
|                             | ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                     
|                             | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                 
|                             | ITEM 5. OTHER INFORMATION                                                                   
|                             | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                    
|SIGNATURES                  
|EXHIBIT 10.1                
|EXHIBIT 10.2                
|EXHIBIT 31.1                
|EXHIBIT 31.2                
|EXHIBIT 32.1                
|EXHIBIT 32.2                



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##### Table of Contents



FORM 10-QSB

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 Operations
    
    
    18Item 3.
    
    Controls and Procedures
    
    
    28PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    29Item 2.
    
    Changes in Securities
    
    
    29Item 3.
    
    Defaults Upon Senior Securities
    
    
    29Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    29Item 5.
    
    Other Information
    
    
    29Item 6
    
    Exhibits and Reports on Form 8-K
    
    
    29SIGNATURES
    
    
    
    
    30


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##### Table of Contents






PART I
FINANCIAL INFORMATION




ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PagesCondensed Consolidated Balance Sheets as of September 30, 2003
and December 31, 2002
    
    
    1  2Condensed Consolidated Statements of Operations for the three and nine months
ended September 30, 2003 and 2002
    
    
    3Condensed Consolidated Statements of Stockholders Equity for the nine
months ended September 30, 2003 and for the year ended December 31, 2002
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and 2002
    
    
    5  6Notes to Condensed Consolidated Financial Statements
    
    
    7  17


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##### Table of Contents



Kid Castle Educational Corporation

(Formerly King Ball International Technology Corporation)

Condensed Consolidated Balance Sheets

(Expressed in US Dollars)

September 30,
    
    December 31,2003
    
    2002(unaudited)ASSETSCurrent assetsCash and bank balances
    
    $
    903,242
    
    
    $
    125,806Bank fixed deposits  pledged
    
    
    160,633
    
    
    
    148,398Notes and accounts receivable, net (Note 5)
    
    
    3,850,780
    
    
    
    1,628,355Inventories, net (Note 6)
    
    
    1,792,881
    
    
    
    1,446,076Other receivables (Note 9)
    
    
    496,715
    
    
    
    319,415Prepayments and other current assets (Note 7)
    
    
    607,864
    
    
    
    493,755Pledged notes receivable
    
    
    1,037,384
    
    
    
    905,754Deferred income tax assets
    
    
    480,514
    
    
    
    805,075Total current assets
    
    
    9,330,013
    
    
    
    5,872,634Deferred income tax assets
    
    
    91,829
    
    
    
    84,503Prepayments for long-term investments
    
    
    60,063
    
    
    
    Interest in an associate (Note 8)
    
    
    
    
    
    
    312,051Amount due from stockholder/director (Note 9)
    
    
    
    
    
    
    122,795Property, plant and equipment, net
    
    
    1,948,954
    
    
    
    1,822,329Intangible assets, net of amortization (Note 10)
    
    
    1,037,674
    
    
    
    1,131,982Pledged notes receivable
    
    
    423,294
    
    
    
    436,793Other assets
    
    
    127,333
    
    
    
    106,057Total assets
    
    $
    13,019,160
    
    
    $
    9,889,144LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesShort-term bank borrowings (Note 11)
    
    $
    2,324,691
    
    
    $
    842,581Notes and accounts payable
    
    
    1,691,236
    
    
    
    1,713,315Accrued expenses
    
    
    1,058,753
    
    
    
    1,059,265Amounts due to stockholders (Note 9)
    
    
    690,288
    
    
    
    606,208Other payables
    
    
    600,608
    
    
    
    266,604Deposits received
    
    
    182,033
    
    
    
    104,624Receipts in advance (Note 12)
    
    
    3,877,502
    
    
    
    3,047,941Obligation under capital leases due within one year
    
    
    29,514
    
    
    
    Total current liabilities
    
    
    10,454,625
    
    
    
    7,640,538Long-term bank borrowings (Note 11)
    
    
    202,981
    
    
    
    1,139,438Obligation under capital leases
    
    
    15,897
    
    
    
    Stock subscriptions received in advance
    
    
    122,850
    
    
    
    Deposits received
    
    
    567,154
    
    
    
    385,405Accrued pension liabilities
    
    
    133,969
    
    
    
    87,197Total liabilities
    
    
    11,497,476
    
    
    
    9,252,578


(to be continued)

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##### Table of Contents



Kid Castle Educational Corporation

(Formerly King Ball International Technology Corporation)

Condensed Consolidated Balance Sheets  Continued

(Expressed in US Dollars)

September 30,
    
    December 31,2003
    
    2002(Unaudited)Commitments (Note 15)Stockholders equityCommon stock, no par share (Note 13):25,000,000 shares authorized;
18,190,869 shares and 15,074,329
shares issued and outstanding at
September 30, 2003 and December 31,
2002, respectively
    
    
    6,836,458
    
    
    
    4,654,880Additional paid-in capital
    
    
    194,021
    
    
    
    194,021Legal reserve
    
    
    65,320
    
    
    
    65,320Accumulated deficit
    
    
    (5,413,777
    )
    
    
    (4,116,891
    )Accumulated other comprehensive loss
    
    
    (160,338
    )
    
    
    (160,764
    )Total stockholders equity
    
    
    1,521,684
    
    
    
    636,566Total liabilities and stockholders equity
    
    $
    13,019,160
    
    
    $
    9,889,144


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

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##### Table of Contents



Kid Castle Educational Corporation

(Formerly King Ball International Technology Corporation)

Condensed Consolidated Statements of Operations

(Expressed in US Dollars)

Three Months Ended September 30,
    
    Nine Months Ended September 30,2003
    
    2002
    
    2003
    
    2002(Unaudited)
    
    (Unaudited)
    
    (Unaudited)
    
    (Unaudited)Operating RevenuesSales of goods
    
    $
    2,488,914
    
    
    $
    1,936,279
    
    
    $
    5,476,362
    
    
    $
    4,503,858Franchising income
    
    
    473,337
    
    
    
    266,321
    
    
    
    1,320,286
    
    
    
    617,621Other operating revenues
    
    
    126,295
    
    
    
    37,350
    
    
    
    261,814
    
    
    
    180,062Total net operating revenues
    
    
    3,088,546
    
    
    
    2,239,950
    
    
    
    7,058,462
    
    
    
    5,301,541Operating costsCost of goods sold
    
    
    (912,418
    )
    
    
    (1,323,001
    )
    
    
    (1,982,501
    )
    
    
    (2,343,911
    )Cost of franchising
    
    
    (139,913
    )
    
    
    (93,492
    )
    
    
    (409,307
    )
    
    
    (280,089
    )Other operating costs
    
    
    (116,050
    )
    
    
    (36,680
    )
    
    
    (220,885
    )
    
    
    (125,878
    )Total operating costs
    
    
    (1,168,381
    )
    
    
    (1,453,173
    )
    
    
    (2,612,693
    )
    
    
    (2,749,878
    )Gross profit
    
    
    1,920,165
    
    
    
    786,777
    
    
    
    4,445,769
    
    
    
    2,551,663Advertising costs
    
    
    (98,483
    )
    
    
    (54,185
    )
    
    
    (297,230
    )
    
    
    (174,705
    )Other operating expenses
    
    
    (1,764,537
    )
    
    
    (1,008,501
    )
    
    
    (4,887,230
    )
    
    
    (3,012,552
    )Income (loss) from operations
    
    
    57,145
    
    
    
    (275,909
    )
    
    
    (738,691
    )
    
    
    (635,594
    )Interest expenses, net
    
    
    (72,197
    )
    
    
    (79,502
    )
    
    
    (226,669
    )
    
    
    (195,181
    )Share of profit (loss) of an investment
    
    
    
    
    
    
    2,284
    
    
    
    (12,750
    )
    
    
    6,790Loss on write-off of an investment
    
    
    
    
    
    
    
    
    
    
    (132,842
    )
    
    
    Other non-operating income, net
    
    
    69,997
    
    
    
    43,401
    
    
    
    145,000
    
    
    
    125,051Income (loss) before income taxes
    
    
    54,945
    
    
    
    (309,726
    )
    
    
    (965,952
    )
    
    
    (698,934
    )(Provision) benefit for taxes
    
    
    (148,253
    )
    
    
    62,998
    
    
    
    (330,934
    )
    
    
    136,648Net loss
    
    $
    (93,308
    )
    
    $
    (246,728
    )
    
    $
    (1,296,886
    )
    
    $
    (562,286
    )Loss per share  basic and diluted
    
    $
    (0.005
    )
    
    $
    (0.021
    )
    
    $
    (0.080
    )
    
    $
    (0.047
    )Weighted-average shares used to
compute loss per share  basic
and diluted
    
    
    18,190,869
    
    
    
    11,880,000
    
    
    
    16,250,166
    
    
    
    11,880,000


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

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##### Table of Contents



Kid Castle Educational Corporation

(Formerly King Ball International Technology 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, January 1, 2002
    
    
    11,880,000
    
    
    $
    4,654,880
    
    
    $
    204,021
    
    
    $
    30,642
    
    
    $
    (2,175,217
    )
    
    $
    (183,034
    )
    
    $
    2,531,292Net loss for 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,906,996
    )
    
    
    
    
    
    
    (1,906,996
    )Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,270
    
    
    
    22,270Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,884,726
    )Merger acquisition
    
    
    3,194,329
    
    
    
    
    
    
    
    (10,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,000
    )Appropriation of legal reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,678
    
    
    
    (34,678
    )
    
    
    
    
    
    
    Balance, December 31, 2002
    
    
    15,074,329
    
    
    
    4,654,880
    
    
    
    194,021
    
    
    
    65,320
    
    
    
    (4,116,891
    )
    
    
    (160,764
    )
    
    
    636,566Net loss for the nine months ended
September 30, 2003 (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,296,886
    )
    
    
    
    
    
    
    (1,296,886
    )Cumulative translation adjustment
(unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    426
    
    
    
    426Comprehensive loss (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,296,460
    )Issuance of common stock for cash
(unaudited)
    
    
    3,116,540
    
    
    
    2,181,578
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,181,578Balance, September 30, 2003
(unaudited)
    
    
    18,190,869
    
    
    $
    6,836,458
    
    
    $
    194,021
    
    
    $
    65,320
    
    
    $
    (5,413,777
    )
    
    $
    (160,338
    )
    
    $
    1,521,684


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

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##### Table of Contents



Kid Castle Educational Corporation

(Formerly King Ball International Technology Corporation)

Condensed Consolidated Statements of Cash Flows

(Expressed in US Dollars)

Nine Months Ended September 30,2003
    
    2002(Unaudited)
    
    (Unaudited)Cash flows from operating activitiesNet loss
    
    $
    (1,296,886
    )
    
    $
    (562,286
    )Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation of property, plant and equipment
    
    
    133,094
    
    
    
    68,165Amortization of intangible assets
    
    
    117,271
    
    
    
    117,577Allowance for sales returns
    
    
    77,077
    
    
    
    Allowance for doubtful accounts
    
    
    93,514
    
    
    
    136,543Provision for loss on market value decline and obsolescence
of inventories
    
    
    
    
    
    
    48,320Reversal of inventory reserves
    
    
    (163,831
    )
    
    
    Share of loss (profit) of an investment
    
    
    12,750
    
    
    
    (6,790
    )Loss on write-off of an investment
    
    
    132,842
    
    
    
    (Increase)/decrease in:Notes and accounts receivable
    
    
    (1,939,891
    )
    
    
    (958,212
    )Inventories
    
    
    (144,037
    )
    
    
    (136,850
    )Other receivables
    
    
    (301,096
    )
    
    
    373,092Prepayments and other current assets
    
    
    (223,779
    )
    
    
    172,665Deferred income tax assets
    
    
    330,283
    
    
    
    (246,916
    )Other assets
    
    
    (18,505
    )
    
    
    8,584Increase/(decrease) in:Notes and accounts payable
    
    
    (59,094
    )
    
    
    158,131Accrued expenses
    
    
    (22,668
    )
    
    
    (47,509
    )Other payables
    
    
    322,151
    
    
    
    53,843Receipts in advance
    
    
    613,267
    
    
    
    514,054Income taxes payable
    
    
    
    
    
    
    (146,306
    )Deposits received
    
    
    258,249
    
    
    
    127,974Accrued pension liabilities
    
    
    43,893
    
    
    
    39,807Net cash used in operating activities
    
    
    (2,035,396
    )
    
    
    (286,114
    )Cash flows from investing activitiesPurchase of property, plant and equipment
    
    
    (172,562
    )
    
    
    (78,618
    )Proceeds from disposal of property, plant and equipment
    
    
    13,416
    
    
    
    Prepayment of long-term investments
    
    
    (58,828
    )
    
    
    Amount due from stockholder/director
    
    
    122,973
    
    
    
    (39,161
    )Bank fixed deposits  pledged
    
    
    (8,719
    )
    
    
    23,349Pledged notes receivable
    
    
    38,081
    
    
    
    (112,571
    )Net cash used in investing activities
    
    
    (65,639
    )
    
    
    (207,001
    )


(to be continued)

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##### Table of Contents



Kid Castle Educational Corporation
(Formerly King Ball International Technology Corporation)

Condensed Consolidated Statements of Cash Flows  Continued

(Expressed in US Dollars)

Nine Months Ended September 30,2003
    
    2002(Unaudited)
    
    (Unaudited)Cash flows from financing activitiesProceeds from bank borrowings
    
    $
    2,240,020
    
    
    $
    18,845Repayment of bank borrowings
    
    
    (1,749,178
    )
    
    
    (38,103
    )Repayment of capital leases
    
    
    (13,409
    )
    
    
    (28,523
    )Amounts due to stockholders
    
    
    69,017
    
    
    
    608,671Issuance of common stock for cash
    
    
    2,181,578
    
    
    
    Stock subscriptions received in advance
    
    
    122,850
    
    
    
    Net cash provided by financing activities
    
    
    2,850,878
    
    
    
    560,890Net increase in cash and bank balances
    
    
    749,843
    
    
    
    67,775Effect of exchange rate changes on cash and
bank balances
    
    
    27,593
    
    
    
    (577
    )Cash and bank balances at beginning of period
    
    
    125,806
    
    
    
    32,842Cash and bank balances at end of period
    
    $
    903,242
    
    
    $
    100,040Supplemental disclosure of cash flow informationInterest paid
    
    $
    301,415
    
    
    $
    210,128Income taxes paid
    
    $
    1,738
    
    
    $
    254,116Supplemental disclosure of significant non-cash transactionsCapital lease of transportation equipment
    
    $
    57,887
    
    
    $
    Receipts of notes receivable and pledged notes receivable
corresponding to the increase (decrease) in the following
accounts:Other receivables  related parties
    
    $
    (260,734
    )
    
    $
    Receipts in advance
    
    $
    83,439
    
    
    $
    443,300Write-off of an associate investment against deferred income:Balance of an associate investment
    
    $
    299,752
    
    
    $
    Balance of deferred income
    
    
    (166,910
    )
    
    
    Loss on write-off of an associate investment
    
    $
    132,842
    
    
    $
    


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

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##### Table of Contents



Kid Castle Educational Corporation
(Formerly King Ball International Technology 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
(Taiwan) as a limited liability company which was originally named as
Wonderland Internet Technologies Limited. 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
video tapes 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 (Premier) 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, KCIT has undertaken a series of group restructuring. The
wholly-owned subsidiary of KCIT, Premier, which held the entire issued common
stock of Higoal has been removed. Thereafter, KCIT became the direct owner of
the outstanding shares of Higoal. Premier was subsequently 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 restructuring, KCIT became a wholly-owned subsidiary
of Higoal. This transaction was a reorganization as there was no change in the
stockholders of Higoal and KCIT before and after the transaction.

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 are being expanded in the PRC.

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The historical consolidated financial statements prior to October 1, 2002 are
those of Higoal. All shares and per share data prior to the acquisition have
been restated to reflect the stock issuance as a recapitalization of Higoal.

NOTE 2  BASIS OF PRESENTATION

The accompanying financial data as of September 30, 2003 and for the nine
months and three months ended September 30, 2003 and 2002 have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations. However, the
Company 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
Companys audited annual financial statements for the year ended December 31,
2002.

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

In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position as of
September 30, 2003 and the results of operations for the nine months and three
months ended September 30, 2003 and 2002 have been made. The results of
operations for the nine months and three months ended September 30, 2003 and
2002 are not necessarily indicative of the operating results for the full year.

NOTE 3  SUMMARY OF IMPORTANT ACCOUNTING POLICIES

REVENUE RECOGNITION

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

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.

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PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION

Property, plant 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
    
    4-10Transportation equipment
    
    2.5-5Miscellaneous equipment
    
    3-10


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 account for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109 Accounting for
Income Taxes. Under SFAS No. 109, deferred tax liabilities or assets at the
end of each period are determined using the tax rate expected to be in effect
when taxes are actually paid or recovered. Valuation allowances are established
when it is not considered more likely than not that the deferred tax assets
will 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.

NET EARNINGS (LOSS) PER COMMON SHARE

The Company computes net earnings (loss) per share in accordance with SFAS No.
128, Earnings per Share. Under the provisions of SFAS No. 128, basic net
earnings (loss) per share is computed by dividing the net earnings (loss)
available to common shareholders for the period by the weighted average number
of shares of common stock outstanding during the period. The calculation of
diluted net earnings (loss) per share gives effect to common stock equivalents.

RECLASSIFICATION

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

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NOTE 4  RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board (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. The Company believes the
adoption of SFAS No. 149 will have no material impact on the Companys
consolidated financial statements.

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

NOTE 5  NOTES AND ACCOUNTS RECEIVABLE

September 30,
    
    December 31,2003
    
    2002(Unaudited)Notes and accounts receivable Third parties
    
    $
    3,893,401
    
    
    $
    1,899,861 Related parties
    
    
    286,891
    
    
    
    12,285Total
    
    
    4,180,292
    
    
    
    1,912,146Allowance for doubtful accounts and sales returns
    
    
    (329,512
    )
    
    
    (283,791
    )Notes and accounts receivable, net
    
    $
    3,850,780
    
    
    $
    1,628,355


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NOTE 6  INVENTORIES

September 30,
    
    December 31,2003,
    
    2002(Unaudited)Work in process
    
    $
    52,423
    
    
    $
    39,211Finished goods and other merchandises
    
    
    2,341,387
    
    
    
    2,158,5332,393,810
    
    
    
    2,197,744Less: Allowance for obsolete inventories and
lower of cost or market
    
    
    (600,929
    )
    
    
    (751,668
    )$
    1,792,881
    
    
    $
    1,446,076


NOTE 7  PREPAYMENTS AND OTHER CURRENT ASSETS

September 30,
    
    December 31,2003
    
    2002(Unaudited)Prepayments
    
    $
    402,883
    
    
    $
    148,881Temporary payments
    
    
    156,898
    
    
    
    297,212VAT tax recoverable
    
    
    
    
    
    
    18,866Tax recoverable
    
    
    29,442
    
    
    
    28,796Others
    
    
    18,641
    
    
    
    $
    607,864
    
    
    $
    493,755


NOTE 8  INTEREST IN AN ASSOCIATE

September 30,
    
    December 31,2003
    
    2002(Unaudited)Global International Education Investment Ltd.
(Global International)Investment cost
    
    $
    
    
    
    $
    300,000Translation adjustment
    
    
    
    
    
    
    3,035Share of profit
    
    
    
    
    
    
    9,016$
    
    
    
    $
    312,051


On May 16, 2001, the Group entered into an agreement with other subscribers of
Global International, a company incorporated in the British Virgin Islands
which is principally engaged in operation of kindergartens and schools under
the franchise of the Group in the PRC, whereby the Group is required to be
responsible for the management and operation of Global Internationals
English-teaching schools. In return, six shares of common stock valued at
$50,000 each of Global International were allotted to the

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Group. As the six shares of common stock account for 15% equity interest in
Global International and the chairman of the Group has been appointed as the
chairman of Global International, it has been determined that the Group has
significant influence and should therefore account for its interest on the
equity method.

The cost of investment in Global International is accounted for in the
financial statements based on the amount of the cash per share that was
contributed by the other investors.

On June 5, 2003, pursuant to a special resolution adopted by the Companys
board of directors, the Group resolved to amend the aforementioned agreement
entered into on May 16, 2001 to change the Groups cooperation relationship
with Global International. On June 10, 2003, the Group entered into a letter of
intent with Global International to change the payment structure on their
strategic alliance from equity ownership to franchising fees and such amendment
to the original agreement should be completed by the end of August 2003. Due to
the change on the payment structure, the Group was to give up the 15% ownership
in Global International at the effective date of the change of the agreement.
Accordingly, management of the Group evaluated the future economic benefit of
the investment and believed that it has been impaired. Hence, during the three
months ended June 30, 2003, the investment was written off and a loss of
$132,842 was recorded in the current periods operation results. On August 25,
2003, the Group entered into a revised agreement with Global International to
provide consulting services to Global International. Pursuant to this revised
agreement, the Group charges 15% of Global Internationals annual net income as
consulting fees. The service period covered by the revised agreement began on
July 1, 2003. As of September 30, 2003, Global International was in a loss
position for the quarter, and therefore the Group has not accrued any
consulting fee income from Global International under the revised agreement.

NOTE 9  RELATED PARTY TRANSACTIONS

OTHER RECEIVABLES

As of December 31, 2002, the balance of amount due from KCE, which was recorded
as other receivables on the balance sheet, was $13,188. As of September 30,
2003, total outstanding balance of amount due from KCE was $518,218, $298,168
of which was recorded as other receivables on the balance sheet. The remaining
balance of $220,050 represented the post-dated checks that KCE issued to the
Group to repay a portion of its debts and was recorded as notes receivable on
the balance sheet. The Group expects that these post-dated checks will be
cleared by the end of 2003. The amounts due from KCE are unsecured, bear no
interest and have no fixed repayment term.

As of December 31, 2002, the balance of amount due from Global International,
which was recorded as other receivables on the balance sheet, was $247,169.
The amounts due from Global International are unsecured, carry interest at 6%
per annum and have no fixed repayment term. During the nine months ended
September 30, 2003, Global International repaid the full amounts of the
outstanding balances to the Group.

AMOUNT DUE FROM STOCKHOLDER/DIRECTOR

As of December 31, 2002, the balance of $122,795 represented an amount due from
a stockholder, who is also an officer of the Company. The amount was loaned to
the officer to finance his individual investment in Global International. The
loan was unsecured, bore interest at 6% per annum and had no fixed payment
term. During the nine months ended September 30, 2003, the officer repaid the
full amount of the loan to the Group in the form of post-dated checks. As of
September 30, 2003, $46,025 of the post-dated checks remained outstanding and
was recorded as notes receivable on the balance sheet. The Group expects that
these post-dated checks will be cleared by the end of 2003.

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AMOUNT DUE TO STOCKHOLDER

As of September 30, 2003 and December 31, 2002, the outstanding balances of
amount due to one stockholder, which are unsecured and bear interest at 25.2%
per annum, were $619,823 and $606,208, respectively. The loan does not have
fixed repayment terms.

NOTE 10  INTANGIBLE ASSETS

September 30,
    
    December 31,2003
    
    2002(Unaudited)Gross carrying amountFranchise
    
    $
    1,005,405
    
    
    $
    983,321Copyrights
    
    
    591,017
    
    
    
    578,0341,596,422
    
    
    
    1,561,355Less: Accumulated amortizationFranchise
    
    
    (351,892
    )
    
    
    (270,414
    )Copyrights
    
    
    (206,856
    )
    
    
    (158,959
    )(558,748
    )
    
    
    (429,373
    )Net
    
    $
    1,037,674
    
    
    $
    1,131,982


Amortization charged to operations was $117,271 and $117,577 for the nine
months ended September 30, 2003 and 2002, respectively.

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

2004
    
    $
    156,3622005
    
    
    156,3622006
    
    
    156,3622007
    
    
    156,3622008
    
    
    156,362$
    781,810


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NOTE 11  BANK BORROWINGS

September 30,
    
    December 31,Notes
    
    2003
    
    2002(unaudited)Bank term loans
    
    
    (i
    )
    
    $
    938,554
    
    
    $
    943,004Mortgage loan
    
    (ii)
    
    
    
    
    
    
    663,292Long-term bank loan
    
    (iii)
    
    
    407,085
    
    
    
    Short-term secured bank loan
    
    (iv)
    
    
    945,626
    
    
    
    375,723Short-term unsecured bank loan
    
    
    (v
    )
    
    
    236,407
    
    
    
    2,527,672
    
    
    
    1,982,019Less: Balances maturing within one year included
in current liabilitiesBank term loans
    
    
    
    
    
    
    735,573
    
    
    
    411,501Mortgage loan
    
    
    
    
    
    
    
    
    
    
    55,357Long-term bank loan
    
    
    
    
    
    
    407,085
    
    
    
    Short-term secured bank loan
    
    
    
    
    
    
    945,626
    
    
    
    375,723Short-term unsecured bank loan
    
    
    
    
    
    
    236,407
    
    
    
    2,324,691
    
    
    
    842,581Bank borrowings maturing after one year
    
    
    
    
    
    $
    202,981
    
    
    $
    1,139,438


Notes:



|(i) |  | The balance represents bank loans with which are pledged by post-dated
checks amounting to $1,460,678 and $1,304,521 received from franchisees
and the Groups bank deposits of $42,430 and $61,693 as of September 30,
2003 and December 31, 2002, 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 5.83% to 8.67% per annum for the nine months
ended September 30, 2003. For the nine months ended September 30, 2003
and 2002, the interest expenses charged to operations amounted to $53,384
and $59,266, respectively.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(ii) |  | The loan was granted by a bank on October 5, 2001 to finance the purchase
of the Groups land and buildings, which were pledged to the bank. The
loan was fully repayable within 10 years subject to review every three
years and bore interest at the Taiwan basic borrowing rate minus 0.43% per
annum. In August 2003, the Group repaid the total outstanding balance of
the loan by means of new loans obtained from another bank. The applicable
interest rate was 7.36% per annum for the period from January 1, 2003 to
the repayment date in August 2003. For the period from January 1, 2003 to
the repayment date in August 2003 and the nine months ended September 30,
2002, the interest expenses charged to operations amounted to $28,419 and
$35,517, respectively.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(iii) |  | On March 31, 2003, the Group obtained a loan of $576,203 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 falls due on September 30, 2004. As of
September 30, 2003, the loan was pledged by the Groups time deposits of
$118,203 and guaranteed by two directors/stockholders of the Company. For
the period from March 31, 2003, the commencement
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | date of the loan, to September 30, 2003, the interest expenses charged to
operations amounted to $34,094.
| |  | ---------------------------------------------------------------------------------------------------------



|(iv) |  | As of December 31, 2002, the outstanding balance of the loan amounting to
$375,723 was obtained to finance the Groups operations and was secured by
the Groups time deposits of $86,705, together with personal guarantees
provided by two directors and stockholders of the Company. The loan,
which bore interest at the Taiwan basic borrowing rate minus 0.92% per
annum, was wholly repaid in August 2003. The applicable interest rate was
approximately 7.92% per annum for the period from January 1, 2003 to the
loan repayment date. For the period from January 1, 2003 to the loan
repayment date and for the nine months ended September 30, 2002, the
interest expenses charged to operations amounted to $12,415 and $22,099,
respectively.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In August 2003, the Group obtained a loan with principal amount of
$945,626 from a bank to repay its mortgage loan as described in note (ii) 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 1.46% per annum, is wholly repayable in
August 2004. The applicable interest rate was approximately 4.95% per annum
during the current period. For the period from the loan commencement date
in August 2003 to September 30, 2003, the interest expenses charged to
operations amounted to $7,169.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(v) |  | The unsecured short-term loan with principal amount of $236,407,
guaranteed by two directors and stockholders of the Group, was obtained
together with the secured short-term loan as described in note (iv) in
August 2003 to finance the Groups operations. The loan, which bears
interest at the Taiwan basic borrowing rate plus 1.66% per annum, is
wholly repayable in August 2004. The applicable interest rate was
approximately 5.15% per annum during the current period. For the period
from the loan commencement date in August 2003 to September 30, 2003, the
interest expenses charged to operations amounted to $2,230.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 12  RECEIPTS IN ADVANCE

The balance comprises:

September 30,
    
    December 31,Notes
    
    2003
    
    2002(Unaudited)Sales deposits received
    
    
    (i
    )
    
    $
    301,653
    
    
    $
    325,233Franchising income received
    
    (ii)
    
    
    3,221,714
    
    
    
    2,497,476Subscription fees received
    
    (iii)
    
    
    311,171
    
    
    
    225,162Others
    
    
    
    
    
    
    42,964
    
    
    
    70$
    3,877,502
    
    
    $
    3,047,941


Notes:



|(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.
|----- |  | ------------------------------------------------------------------------------------------------------------------

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NOTE 13  COMMON STOCK

Pursuant to a special Board resolution passed on April 2, 2003, the Company
resolved to issue 6,000,000 shares of common stock at a subscription price of
$0.70 per share to certain investors in reliance on Regulation S under the
Securities Act. During the quarter ended June 30, 2003, 3,116,540 shares were
issued and sold to certain persons in offshore transactions in reliance on
Regulation S under the Securities Act. The Company received net proceeds of
$2,181,578.

In August 2003, the Company received stock subscriptions totaling $122,850 from
Globe Wisdom Investments Limited. As of September 30, 2003, the Company has
not issued any shares to this investor with respect to its subscription.
Accordingly, stock subscriptions received in advance of $122,850 was accounted
for as liabilities on the balance sheet.

As of September 30, 2003, the Company was authorized to issue 25,000,000 shares
of common stock with no par value. As of September 30, 2003 and December 31,
2002, the total issued and outstanding shares were 18,190,869 shares and
15,074,329 shares, respectively.

NOTE 14  GEOGRAPHICAL SEGMENTS

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

Taiwan
    
    The PRC
    
    Total
    
    Corporate
    
    Eliminations
    
    ConsolidatedNine
    
    Nine
    
    Nine
    
    Nine
    
    Nine
    
    Nine
    
    Nine
    
    Nine
    
    Nine
    
    Nine
    
    Nine
    
    Ninemonths
    
    months
    
    months
    
    months
    
    months
    
    months
    
    months
    
    months
    
    months
    
    months
    
    months
    
    monthsended
    
    ended
    
    ended
    
    ended
    
    ended
    
    ended
    
    ended
    
    ended
    
    ended
    
    ended
    
    ended
    
    endedSept. 30,
    
    Sept. 30,
    
    Sept. 30,
    
    Sept. 30,
    
    Sept. 30,
    
    Sept. 30,
    
    Sept. 30,
    
    Sept. 30,
    
    Sept. 30,
    
    Sept. 30,
    
    Sept. 30,
    
    Sept. 30,2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002RevenueExternal revenue
    
    $
    6,227,909
    
    
    $
    5,126,460
    
    
    $
    830,553
    
    
    $
    175,081
    
    
    $
    7,058,462
    
    
    $
    5,301,541
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    7,058,462
    
    
    $
    5,301,541Inter-segment revenue
    
    
    5,739
    
    
    
    311,134
    
    
    
    
    
    
    
    
    
    
    
    5,739
    
    
    
    311,134
    
    
    
    
    
    
    
    
    
    
    
    (5,739
    )
    
    
    (311,134
    )
    
    
    
    
    
    
    $
    6,233,648
    
    
    $
    5,437,594
    
    
    $
    830,553
    
    
    $
    175,081
    
    
    $
    7,064,201
    
    
    $
    5,612,675
    
    
    $
    
    
    
    $
    
    
    
    $
    (5,739
    )
    
    $
    (311,134
    )
    
    $
    7,058,462
    
    
    $
    5,301,541Profit (loss) from Operations
    
    $
    471,758
    
    
    $
    268,461
    
    
    $
    (708,312
    )
    
    $
    (1,025,377
    )
    
    $
    (236,554
    )
    
    $
    (756,916
    )
    
    $
    (454,451
    )
    
    $
    (46,159
    )
    
    $
    (47,686
    )
    
    $
    167,481
    
    
    $
    (738,691
    )
    
    $
    (635,594
    )Capital expenditures
    
    $
    150,338
    
    
    $
    13,681
    
    
    $
    80,111
    
    
    $
    64,937
    
    
    $
    230,449
    
    
    $
    78,618
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    230,449
    
    
    $
    78,618


Sept. 30,
    
    December 31,
    
    Sept. 30,
    
    December 31,
    
    Sept. 30,
    
    December 31,
    
    Sept. 30,
    
    December 31,
    
    Sept. 30,
    
    December 31,
    
    Sept. 30,
    
    December 31,2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002Total assets
    
    $
    12,171,526
    
    
    $
    8,696,608
    
    
    $
    2,474,784
    
    
    $
    1,296,912
    
    
    $
    14,646,310
    
    
    $
    9,993,520
    
    
    $
    2,069,210
    
    
    $
    870
    
    
    $
    (3,696,360
    )
    
    $
    (105,246
    )
    
    $
    13,019,160
    
    
    $
    9,889,144


NOTE 15  COMMITMENT

During the three months ended March 31, 2003, the Company entered into an
agreement with two PRC parties to establish a subsidiary in Beijing, the PRC.
Pursuant to the agreement, the total registered capital of the subsidiary which
will be 65% owned by the Group is approximately $1,381,000. The Group has
agreed to contribute 65% of the registered capital totaling $898,000
attributable to its equity interest and 5% of the registered capital totaling
$69,000 for one of the PRC parties. However, the formation of the subsidiary
was postponed due to the adverse impact caused by Severe Acute Respiratory
Syndrome (SARS) during the second quarter of 2003. The Company recently
started the talks with the two PRC parties again. However, as of September 30,
2003, no capital has been contributed by the Group to the subsidiary.

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NOTE 16  SUBSEQUENT EVENT

On November 4, 2003, the Company submitted Common Stock Listing Application
with American Stock Exchange LLC (AMEX) for the listing of its issued and
outstanding shares of common stock. As of November 13, 2003, the Company had
not received approval for the listing application from AMEX.

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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, 2002. 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.

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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 minority 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 September 30, 2003, the balance of our amortizable intangible assets was
$1,037,674, including franchise-related intangible assets of $653,513 and
copyrights of $384,161. 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

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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 (KCIT). 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 (KCES), 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 such
effects.

RESULTS OF OPERATIONS

Nine months ended September 30, 2003 and 2002

Total net operating revenues increased by $1,756,921, or 33%, to $7,058,462 for
the nine months ended September 30, 2003 from $5,301,541 for the nine months
ended September 30, 2002, including the increases in sales of goods of
$972,504, franchising income of $702,665 and other operating revenues of
$81,752. The increase in sales of goods, from $4,503,858 for the nine months
ended September 30, 2002 to $5,476,362 for the nine months ended September 30,
2003, or 22%, was mainly due to we generated net sales of goods of $496,168 for
the nine months ended September 30, 2003 from our new distribution channel of
direct marketing, which began in the end of 2002. In addition, net sales of
goods generated from our Shanghai operations increased by $424,659, or 328%, to
$554,100 for the nine months ended September 30, 2003 from $129,441 for the
nine months ended September 30, 2002. The increase in franchising income, from
$617,621 for the nine months ended September 30, 2002 to $1,320,286 for the
nine months ended September 30, 2003, was mainly due to the increase in numbers
of our franchised schools, both in Taiwan and Shanghai, and the increase in the
annual franchising fees. In addition, franchising income generated from our
Shanghai operations were $261,279 for the nine months ended September 30, 2003,
in comparison with $0 for the same period in prior year. 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 $81,752, or 45%, to $261,814
for the nine months ended September 30, 2003 from $180,062 for the nine months
ended September 30, 2002. The increase was mainly due to the new service
provided to the franchised schools for the design of their school layout of
$113,695 for the nine months ended September 30, 2003.

Gross profit increased by $1,894,106, or 74%, to $4,445,769 for the nine months
ended September 30, 2003 from $2,551,663 for the nine months ended September
30, 2002. Gross margin increased to 63% for the nine months ended September
30, 2003 from 48% for the same period in prior year. The increase in gross
profit corresponded to the increase in net operating revenues. In addition,
the Group was able to negotiate more favorable terms with its vendors, leading
to a significant reduction of purchasing costs and the increase of gross margin
from period to period.

Total operating expenses increased by $1,997,203, or 63% to $5,184,460 for the
nine months ended September 30, 2003 from $3,187,257 for the nine months ended
September 30, 2002. Advertising costs increased by $122,525, or 70% to
$297,230 for the nine months ended September 30, 2003 from $174,705 for the
nine months ended September 30, 2002. The increase was mainly due to we spent
more advertising costs on the promotion of our new magazines and franchised
schools. Other operating

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expenses increased by $1,874,678, or 62% to $4,887,230 for the nine months
ended September 30, 2003 from $3,012,552 for the nine months ended September
30, 2002, principally due to an increase in commission fees to distributors and
an increase in expenses as a result of the expansion in Shanghai, PRC.
Commission fees increased by $118,416, or 68% to $293,162 for the nine months
ended September 30, 2003 from $174,746 for the nine months ended September 30,
2002, which were corresponding to the increase in numbers of our distributors
as well as a result of the change of out strategy to increase the commission
ratio granted to primary school distributors, in order to stabilize the sales
prices of the products sold to them. The incremental expenses incurred in
maintaining the Shanghai office, established in April 2002, was approximately
$611,000. In addition, we recruited senior officers to strengthen our
management team and enlarge our work force in Taiwan, leading to the increase
in employees compensation and benefits by approximately $617,000. We also
incurred additional professional fees in relation to SEC filings of
approximately $191,000. Furthermore, on January 27, 2003 we entered into a
sponsorship agreement with a PRC entity whereby we paid the sponsorship fee of
approximately $231,000 to a PRC charity fund to ameliorate the psychology,
nutrition and constitution of children in the PRC.

Net interest expense increased by $31,488, or 16%, to $226,669 for the nine
months ended September 30, 2003 from $195,181 for the nine months ended
September 30, 2002, primarily due to a loan borrowed from a stockholder in
April 2002 (please refer to Note 9 to the condensed consolidated financial
statements) that bears a monthly interest rate of 2.1%, and a new loan obtained
from a financial institution in an amount of $576,203 in March 2003.

On June 5, 2003, pursuant to a special resolution adopted by our board of
directors, we resolved to amend the agreement we entered into on May 16, 2001
with Global International Education Investment Ltd. (Global International) to
change our cooperation relationship. On June 10, 2003, we entered into a
letter of intent with Global International to change the payment structure on
the strategic alliance from equity ownership to franchising fees and such
amendment to the original agreement should be completed by the end of August
2003. Pursuant to the change on the payment structure, we were to give up the
15% ownership in Global International at the effective date of the change of
the agreement. As of June 30, 2003, our management evaluated the future
economic benefit of the investment and believed that it has been impaired.
Hence, during the three months ended June 30, 2003, the investment was written
off and a loss of $132,842 was recorded in the current periods operation
results. On August 25, 2003, the Group entered into a revised agreement with
Global International to provide consulting services to Global International and
the Group charges 15% of Global Internationals annual net income as consulting
fees. The service period covered by the agreement began on July 1, 2003. As
of September 30, 2003, Global International was in a loss position for the
quarter, and therefore the Group has not accrued any consulting fee income from
Global International under the revised agreement.

Income tax provision for the nine months ended September 30, 2003 was $330,934.
This income tax provision mainly represents the use of net operating loss
carry-forwards to offset the income generated from operations in Taiwan and 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 likely than not to be realized. Income tax
benefit for the nine months ended September 30, 2002 was $136,648. This income
tax benefit mainly represents the net operating loss carry forward on the
periods tax losses.

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Three months ended September 30, 2003 and 2002

Total net operating revenues increased by $848,596, or 38%, to $3,088,546 for
the three months ended September 30, 2003 from $2,239,950 for the three months
ended September 30, 2002, including the increases in sales of goods of
$552,635, franchising income of $207,016, and other operating revenues of
$88,945. The increase in sales of goods, from $1,936,279 for the three months
ended September 30, 2002 to $2,488,914 for the three months ended September 30,
2003, or 29%, was mainly due to we generated net sales of goods of $195,207 for
the three months ended September 30, 2003 from our new distribution channel of
direct marketing, which began in the end of 2002. In addition, net sales of
goods generated from our Shanghai operations increased by $299,253, or 1028%,
to $328,363 for the three months ended September 30, 2003 from $29,110 for the
three months ended September 30, 2002. The increase in franchising income was
mainly due to the increase in numbers of our franchised schools, both in Taiwan
and Shanghai, and the increase in the annual franchising fees. In addition,
franchising income generated from our Shanghai operations were $115,898 for the
three months ended September 30, 2003, in comparison with $0 for the same
period in prior year. Other operating revenues increased by $88,945, or 238%,
to $126,295 for the three months ended September 30, 2003 from $37,350 for the
three months ended September 30, 2002, mainly due to the new service provided
to the franchised schools for the design of their school layout of $86,295 for
the three months ended September 30, 2003.

Gross profit increased by $1,133,388, or 144%, to $1,920,165 for the three
months ended September 30, 2003 from $786,777 for the three months ended
September 30, 2002. Gross margin increased to 62% for the three months ended
September 30, 2003 from 35% for the same period in prior year. The increase in
gross profit corresponded to the increase in net operating revenues. In the
meanwhile, the Group effectively improved its negotiation power with the
vendors, leading to a significant reduction of purchasing costs and the
increase of gross margin from period to period.

Total operating expenses increased by $800,334, or 75%, to $1,863,020 for the
three months ended September 30, 2003 from $1,062,686 for the three months
ended September 30, 2002. Advertising costs increased by $44,298, or 82% to
$98,483 for the three months ended September 30, 2003 from $54,185 for the
three months ended September 30, 2002 as a result of the advertising costs
incurred on the promotion of our new magazines and franchised schools. Other
operating expenses increased by $756,036, or 75%, to $1,764,537 for the three
months ended September 30, 2003 from $1,008,501 for the three months ended
September 30, 2002, principally because of an increase in commission fees to
distributors and an increase in expenses as a result of the expansion in
Shanghai, PRC. Commission fees increased by approximately $120,500, or 192% to
approximately $183,200 for the three months ended September 30, 2003 from
approximately $62,700 for the three months ended September 30, 2002, which were
corresponding to the increase in numbers of our distributors as well as a
result of the change of our strategy to increase the commission ratio granted
to primary school distributors, in order to stabilize the sales prices of the
products sold to them. The incremental expenses incurred in maintaining the
Shanghai office, established in April 2002, was approximately $277,000. In
addition, we recruited senior officers to strengthen our management team and
enlarge our work force in Taiwan, leading to the increase in employees
compensation and benefits by approximately $205,000. Furthermore we incurred
additional professional fees for SEC filings of approximately $70,000 from
period to period.

Net interest expense decreased by $7,305, or 9%, to $72,197 for the three
months ended September 30, 2003 from $79,502 for the three months ended
September 30, 2002, primarily due to the interest rates of our bank borrowings
decreased significantly in the second quarter of 2003. In addition, our
interest income, which was offset against interest expense, increased by $9,528
due to the increase in our cash and bank deposits balances.

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Income tax provision for the three months ended September 30, 2003 was
$148,253. This income tax provision mainly represents the use of net operating
loss carry-forwards to offset the income generated from our operations in
Taiwan and 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 likely than not to be realized.
Income tax benefit for the three months ended September 30, 2002 was $62,998.
The income tax benefit for the three months ended September 30, 2002 represents
mainly the net operating loss carry forward on the periods tax losses.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2003, our principal sources of liquidity included cash and
bank balances of $903,242, which increased from $125,806 at December 31, 2002.
The increase was mainly due to the net proceeds of $2,181,578 we received from
our investors for the issuance of 3,116,540 shares of our common stock in June
2003, partially offset by the use of our working capital in the normal course
of our business.

Net cash used in operating activities was $2,035,396 and $286,114 during the
nine months ended September 30, 2003 and 2002, respectively. Net cash used in
operating activities during the nine months ended September 30, 2003 was mainly
due to the net loss, increases in notes and accounts receivable, inventories,
other receivable and prepayments and other current assets, offset by a decrease
in deferred tax assets and increases in other payables and receipts in advance.

Net cash used in investing activities amounted to $65,639 and 207,001 during
the nine months ended September 30, 2003 and 2002, respectively. During the
nine months ended September 30, 2003, amounts due from stockholder/director and
pledged notes receivables decreased by $122,973 and $38,081, respectively,
compared to increases of $39,161 and 112, 571, respectively, for the same
period in prior year. In addition, capital expenditures were $230,449 for the
nine months ended September 30, 2003, of which $57,887 was financed via a
capital lease arrangement, compared to $78,618 for the nine months ended
September 30, 2002. We also prepaid the investments totaling $58,828 in two
PRC companies, which are currently in the organizational stage, during the nine
months ended September 30, 2003 to satisfy the cash requirements for these
companies establishment process.

Net cash provided by financing activities during the nine months ended
September 30, 2003 was $2,850,878 as compared to $560,890 during the nine
months ended September 30, 2002. The $2,289,988 difference was primarily
attributed to the net proceeds of $2,181,578 we received from the issuance of
3,116,540 shares of common stock in June 2003.

As of September 30, 2003, the Company has a total line of credit of $2,216,312
from certain banks and the unused credit facility was $95,725.

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.

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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.

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.

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 be
unable 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 Hess, 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 than us to development and
sale of teaching/learning products and services, which could result in reducing
our market share.

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Because we depend upon a small number of key management personnel, the loss of
such persons could have a negative impact on our business.

Our success is dependent upon the personal efforts and abilities of our
executive officers, Kuo-An Wang, Chief Executive Officer and Yu-En Chui, 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.

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 Renminbi (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 New Taiwan 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:



| |  |  | 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.
| | - |  | -----------------------------------------

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If we are unable to maintain, improve and develop our products and services, we
may not achieve profitability.

In order to turn profitable, we need to maintain and improve our current
products and services and to develop or license new ones on a timely basis. 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.

If we lose key management or other personnel, we may experience delays in our
product development and our growth prospects.

Our growth and success also depends 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 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 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.

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

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



| |  |  | our inability to adapt our products and services to local cultural
traits, 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 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 an agreement in July 2003 to establish a joint venture, 21st Century Kid
Castle Cultural Media Company, with a local Chinese party, 21st Century
Publishing Company, in Jiangxi Province. The joint venture is being
established to engage mainly in the publication and distribution of English
language education materials and the operation of kindergarten and language
schools. We intend to use this joint venture as one of the primary vehicles
for our expansion into the PRC market. Although we have applied for a license
from the applicable government authorities to conduct the business of the joint
venture in the PRC, the regulations with respect to operation of
businesses
by foreign-owned entities are still in flux. There is no assurance
that we will obtain a license for the joint venture to conduct
business in the PRC or, if we do, that the
license will
not be challenged by the PRC authorities.

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

Unlike the 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.




ITEM 3. CONTROLS AND PROCEDURES

We have carried out an evaluation, under the supervision and with the
participation of our Chief Executive Officer (CEO) and our Chief Financial
Officer (CFO), of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on this evaluation, our CEO and our
CFO concluded that, as of September 30, 2003, our disclosure controls and
procedures are effective in timely alerting us to material information required
to be included in our periodic reports filed with the Securities and Exchange
Commission. It should be noted that the design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote.

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PART II

OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

None.




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 November 13, 2003, we had not
yet issued any shares to GWIL pursuant to the August 18, 2003 stock purchase
agreement.




ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.




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

None.




ITEM 5. OTHER INFORMATION

None.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

A.
    
    Exhibits10.1
    
    Stock Purchase Agreement dated August 18, 200310.2
    
    Summary of Joint Venture Agreement dated July 8, 200331.1
    
    Certification of Kuo-An Wang, Chief Executive Officer of the
registrant, pursuant to Rule 13a-14(a)/15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Yu-En Chiu, Chief Financial Officer of the
registrant, pursuant to Rule 13a-14(a)/15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Kuo-An Wang, Chief Executive Officer of the
registrant, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Yu-En Chiu, Chief Financial Officer of the
registrant, pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.B.
    
    Reports on Form 8-KNot applicable.


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SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

Dated: November 14, 2003By:
    
    /s/ Kuo-An Wang
Name: Kuo-An Wang
Title: Chief Executive Officer


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