UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





o QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For the
quarterly period ended: June 30, 2009


or


o TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





Commission
File Number: 333-39629





KID
CASTLE EDUCATIONAL CORPORATION


(Exact
name of Registrant as specified in its charter)





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




8th
Floor, No. 98 Min Chuan Road, Hsien Tien


Taipei,
Taiwan ROC


(Address
of principal executive offices)




011-886-2-2218
5996


(Registrant’s
telephone number, including area code)




NONE


(Former
name, former address and former fiscal year, if changed since last
report)




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




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




Large
      accelerated filer o
            Accelerated
      filer oNon-accelerated
      filer   o
            Smaller
      reporting company  x





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


Yes o    
No  x




As of
June 30, 2009, there were 30,000,000 shares of the Registrant’s common stock
outstanding.







FORM
10-Q





KID
CASTLE EDUCATIONAL CORPORATION





TABLE
OF CONTENTS




PagePART
      I
                          FINANCIAL
      INFORMATIONItem
      1.
                          Condensed
      Consolidated Financial Statements
                          2a)
      Condensed Consolidated Balance Sheets as of June 30, 2009 (unaudited) and
      December 31, 2008
                          2b)
      Condensed Consolidated Statements of Operations for the three months ended
      June 30, 2009 and June 30, 2008 (unaudited)
                          4c)
      Condensed Consolidated Statements of Operations for the six months ended
      June 30, 2009 and June 30, 2008 (unaudited)
                          5d)
      Condensed Consolidated Statements of Stockholders’ Equity
      (unaudited)
                          6e)
      Condensed Consolidated Statements of Cash Flows for the six months ended
      June 30, 2009 and June 30, 2008 (unaudited)
                          7f)
      Notes to Condensed Consolidated Financial Statements
                          9Item
      2.
                          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                          20Item
      3.
                          Quantitative
      and Qualitative Disclosures About Market Risk
                          25Item
      4.
                          Controls
      and Procedures
                          26PART
      II.
                          OTHER
      INFORMATION
                          27Item
      1.
                          Legal
      Proceedings
                          27Item
      1A
                          Risk
      Factors
                          27Item
      2.
                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                          27Item
      3.
                          Defaults
      upon Senior Securities
                          27Item
      4.
                          Submission
      of Matters to a Vote of Security Holders
                          27Item
      5.
                          Other
      Information
                          27Item
      6.
                          Exhibits
      and Reports on Form 8-K
                          27SIGNATURES
                          28




- 1
-





PART
I. FINANCIAL INFORMATION


ITEM
1.   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Kid
Castle Educational Corporation


Condensed
Consolidated Balance Sheets


(Expressed
in US Dollars)


(Unaudited)
                                June
      30,
                                2009
                              
                              
                              December 31,
                                2008ASSETSCurrent
      assetsCash
      and bank balances
                              
                              $
                              1,960,059
                              
                              
                              $
                              1,985,818Bank
      fixed deposits - pledged (Note 11)
                              
                              
                              8,054
                              
                              
                              
                              2,847Notes
      and accounts receivable, net (Note 5)
                              
                              
                              2,435,673
                              
                              
                              
                              2,171,768Inventories,
      net (Note 6)
                              
                              
                              1,748,728
                              
                              
                              
                              1,933,153Other
      receivables (Note 7)
                              
                              
                              949,276
                              
                              
                              
                              396,003Prepayments
      and other current assets (Note 8)
                              
                              
                              605,549
                              
                              
                              
                              475,617Pledged
      notes receivable (Note 11)
                              
                              
                              417,212
                              
                              
                              
                              416,238Deferred
      income tax assets
                              
                              
                              46,227
                              
                              
                              
                              45,617Total
      current assets
                              
                              
                              8,170,778
                              
                              
                              
                              7,427,061Deferred
      income tax assets
                              
                              
                              50,054
                              
                              
                              
                              49,528Prepayment
      of long-term investments
                              
                              
                              1,305,645
                              
                              
                              -Long-term
      investments (Note 9)
                              
                              
                              91,112
                              
                              
                              
                              68,336Property
      and equipment, net
                              
                              
                              2,791,892
                              
                              
                              
                              2,775,663Intangible
      assets, net of amortization (Note 10)
                              
                              
                              267,537
                              
                              
                              
                              371,056Long-term
      notes receivable
                              
                              
                              671,223
                              
                              
                              
                              356,901Pledged
      notes receivable (Note 11)
                              
                              
                              220,484
                              
                              
                              
                              283,469Other
      assets
                              
                              
                              266,878
                              
                              
                              
                              255,288Total
      assets
                              
                              $
                              13,835,603
                              
                              
                              $
                              11,587,302LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesBank
      borrowings - short-term and maturing within one year (Note
    11)
                              
                              $
                              1,282,044
                              
                              
                              $
                              242,879Notes
      and accounts payable
                              
                              
                              1,237,967
                              
                              
                              
                              1,017,552Accrued
      expenses
                              
                              
                              1,339,198
                              
                              
                              
                              1,617,717Other
      payables
                              
                              
                              418,616
                              
                              
                              
                              270,458Deposits
      received
                              
                              
                              73,067
                              
                              
                              
                              751,151Receipts
      in advance (Note 12)
                              
                              
                              2,706,214
                              
                              
                              
                              2,305,980Income
      tax payable
                              
                              
                              85,334
                              
                              
                              
                              39,115Total
      current liabilities
                              
                              
                              7,142,440
                              
                              
                              
                              6,244,852Bank
      borrowings maturing after one year (Note 11)
                              
                              
                              394,851
                              
                              
                              
                              1,583,968Receipts
      in advance (Note 12)
                              
                              
                              1,304,398
                              
                              
                              
                              1,001,801Deposits
      received
                              
                              
                              1,534,021
                              
                              
                              
                              839,295Deferred
      liability
                              
                              
                              41,820
                              
                              
                              
                              41,775Accrued
      pension liabilities (Note 13)
                              
                              
                              449,045
                              
                              
                              
                              446,038Other
      liabilities (Note 9)
                              
                              
                              20,488
                              
                              
                              -Total
      liabilities
                              
                              
                              10,887,063
                              
                              
                              
                              10,157,729




- 2
-




Kid
Castle Educational Corporation




Condensed
Consolidated Balance Sheets – Continued




(Expressed
in US Dollars)





(Unaudited)
                          June
      30,
                          2009
                        
                        
                        December 31,
                            2008Commitments
      and contingencies (Note 15)Minority
      interest
                        
                        
                        227,720
                        
                        
                        
                        216,754Shareholders’
      equityCommon
      stock, no par share:60,000,000
      shares authorized; 30,000,000 issued and outstanding at June 30, 2009;
      25,000,000 issued and outstanding at December 31, 2008
                        
                        
                        9,492,138
                        
                        
                        
                        8,592,138Additional
      paid-in capital
                        
                        
                        194,021
                        
                        
                        
                        194,021Legal
      reserve
                        
                        
                        65,320
                        
                        
                        
                        65,320Accumulated
      deficit
                        
                        
                        (5,730,155
                        )
                        
                        
                        (6,340,449
                        )Accumulated
      other comprehensive loss
                        
                        
                        (1,026,075
                        )
                        
                        
                        (1,026,713
                        )Net
      loss not recognized as pension cost
                        
                        
                        (274,429
                        )
                        
                        
                        (271,498
                        )Total
      shareholders’ equity
                        
                        
                        2,720,820
                        
                        
                        
                        1,212,819Total
      liabilities and shareholders’ equity
                        
                        $
                        13,835,603
                        
                        
                        $
                        11,587,302




See
accompanying Notes to Condensed Consolidated Financial Statements.




- 3
-




Kid
Castle Educational Corporation




Condensed
Consolidated Statements of Operations (Unaudited)




(Expressed
in US Dollars)




Three months ended June
      30,2009
                  
                  
                  2008Operating
      RevenueSales
      of goods
                  
                  $
                  1,387,757
                  
                  
                  $
                  1,590,509Franchising
      income
                  
                  
                  551,557
                  
                  
                  
                  584,614Other
      operating revenue
                  
                  
                  775,609
                  
                  
                  
                  489,939Total
      net operating revenue
                  
                  
                  2,714,923
                  
                  
                  
                  2,665,062Operating
      costsCost
      of goods sold
                  
                  
                  (683,466
                  )
                  
                  
                  (714,218
                  )Cost
      of franchising
                  
                  
                  (93,448
                  )
                  
                  
                  (88,487
                  )Other
      operating costs
                  
                  
                  (517,806
                  )
                  
                  
                  (629,212
                  )Total
      operating costs
                  
                  
                  (1,294,720
                  )
                  
                  
                  (1,431,917
                  )Gross
      profit
                  
                  
                  1,420,203
                  
                  
                  
                  1,233,145Advertising
      costs
                  
                  
                  (1,584
                  )
                  
                  
                  (1,567
                  )Other
      operating expenses
                  
                  
                  (1,461,200
                  )
                  
                  
                  (1,508,823
                  )Loss
      from operations
                  
                  
                  (42,581
                  )
                  
                  
                  (277,245
                  )Interest
      expense, net
                  
                  
                  (10,668
                  )
                  
                  
                  (25,643
                  )Share
      of income (loss) of investments
                  
                  
                  (5,960
                  )
                  
                  
                  31,856Other
      non-operating income (loss), net
                  
                  
                  (25,633
                  )
                  
                  
                  28,690Loss
      before income taxes
                  
                  
                  (84,842
                  )
                  
                  
                  (242,342
                  )Provision
      for taxes
                  
                  
                  (37,452
                  )
                  
                  
                  (22,468
                  )Loss
      after income taxes
                  
                  
                  (122,294
                  )
                  
                  
                  (264,810
                  )Minority
      interest income
                  
                  
                  8,430
                  
                  
                  
                  36Net
      loss
                  
                  $
                  (113,864
                  )
                  
                  $
                  (264,774
                  )Loss
      per share - basic and diluted
                  
                  $
                  (0.005
                  )
                  
                  $
                  (0.01
                  )Weighted-average
      shares used to compute earnings per share - basic and
    diluted
                  
                  
                  25,416,667
                  
                  
                  
                  25,000,000





See
accompanying Notes to Condensed Consolidated Financial
Statements.


- 4
-




Kid
Castle Educational Corporation





Condensed
Consolidated Statements of Operations (Unaudited)





(Expressed
in US Dollars)




Six months ended June
      30,2009
                                            
                                            
                                            2008Operating
      RevenueSales
      of goods
                                            
                                            $
                                            3,751,441
                                            
                                            
                                            $
                                            3,954,618Franchising
      income
                                            
                                            
                                            1,071,926
                                            
                                            
                                            
                                            1,140,843Other
      operating revenue
                                            
                                            
                                            1,336,577
                                            
                                            
                                            
                                            969,125Total
      net operating revenue
                                            
                                            
                                            6,159,944
                                            
                                            
                                            
                                            6,064,586Operating
      costsCost
      of goods sold
                                            
                                            
                                            (1,606,796
                                            )
                                            
                                            
                                            (1,721,454
                                            )Cost
      of franchising
                                            
                                            
                                            (159,959
                                            )
                                            
                                            
                                            (186,796
                                            )Other
      operating costs
                                            
                                            
                                            (969,796
                                            )
                                            
                                            
                                            (699,169
                                            )Total
      operating costs
                                            
                                            
                                            (2,736,551
                                            )
                                            
                                            
                                            (2,607,419
                                            )Gross
      profit
                                            
                                            
                                            3,423,393
                                            
                                            
                                            
                                            3,457,167Advertising
      costs
                                            
                                            
                                            (22,437
                                            )
                                            
                                            
                                            (23,080
                                            )Other
      operating expenses
                                            
                                            
                                            (2,692,074
                                            )
                                            
                                            
                                            (3,022,494
                                            )Income
      from operations
                                            
                                            
                                            708,882
                                            
                                            
                                            
                                            411,593Interest
      expense, net
                                            
                                            
                                            (26,489
                                            )
                                            
                                            
                                            (48,744
                                            )Share
      of income of investments
                                            
                                            
                                            2,213
                                            
                                            
                                            
                                            29,787Other
      non-operating income (loss), net
                                            
                                            
                                            49,271
                                            
                                            
                                            
                                            160,848Income
      before income taxes
                                            
                                            
                                            733,877
                                            
                                            
                                            
                                            553,484Provision
      for taxes
                                            
                                            
                                            (112,857
                                            )
                                            
                                            
                                            (59,365
                                            )Income
      after income taxes
                                            
                                            
                                            621,020
                                            
                                            
                                            
                                            494,119Minority
      interest income
                                            
                                            
                                            (10,726
                                            )
                                            
                                            
                                            (28,666
                                            )Net
      income
                                            
                                            $
                                            610,294
                                            
                                            
                                            $
                                            465,453Earnings
      per share - basic and diluted
                                            
                                            $
                                            0.024
                                            
                                            
                                            $
                                            0.019Weighted-average
      shares used to compute earnings per share - basic and
    diluted
                                            
                                            
                                            25,416,667
                                            
                                            
                                            
                                            25,000,000





See
accompanying Notes to Condensed Consolidated Financial
Statements.


- 5
-


Kid
Castle Educational Corporation





Condensed
Consolidated Statements of Stockholders’ Equity





(Expressed
in US Dollars)





Common StockNumber of
                            shares
                          
                          
                          Amount
                          
                          
                          Additional
                            paid-in
                            capital
                          
                          
                          Legal
                            reserve
                          
                          
                          Accumulated
                            deficit
                          
                          
                          Accumulated
                            other
                            comprehensive
                            loss
                          
                          
                          Net loss not
                            recognized as
                            pension cost
                          
                          
                          TotalBalance,
      December 31, 2007
                          
                          
                          25,000,000
                          
                          
                          $
                          8,592,138
                          
                          
                          $
                          194,021
                          
                          
                          $
                          65,320
                          
                          
                          $
                          (7,179,418
                          )
                          
                          $
                          (932,027
                          )
                          
                          $
                          (220,032
                          )
                          
                          $
                          520,002Net
      income for 2008
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          838,969
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          838,969Cumulative
      translation adjustment
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (94,686
                          )
                          
                          
                          
                          
                          
                          
                          (94,686
                          )Comprehensive
      income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          744,283Net
      loss not recognized as pension cost
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          (51,466
                          )
                          
                          $
                          (51,466
                          )Balance,
      December 31, 2008
                          
                          
                          25,000,000
                          
                          
                          $
                          8,592,138
                          
                          
                          $
                          194,021
                          
                          
                          $
                          65,320
                          
                          
                          $
                          (6,340,449
                          )
                          
                          $
                          (1,026,713
                          )
                          
                          $
                          (271,498
                          )
                          
                          $
                          1,212,819Issuance
      of common stock for cash
                          
                          
                          5,000,000
                          
                          
                          
                          900,000
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          900,000Net
      income for the six months ended June 30, 2009 (Unaudited)
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          610,294
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          610,294Cumulative
      translation adjustment (Unaudited)
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          638
                          
                          
                          
                          
                          
                          
                          
                          638Comprehensive
      income (Unaudited)
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          610,392Net
      income not recognized as pension cost
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          (2,931
                          )
                          
                          $
                          (2,931
                          )Balance,
      June 30, 2009 (Unaudited)
                          
                          
                          30,000,000
                          
                          
                          $
                          9,492,138
                          
                          
                          $
                          194,021
                          
                          
                          $
                          65,320
                          
                          
                          $
                          (5,730,155
                          )
                          
                          $
                          (1,026,075
                          )
                          
                          $
                          (274,429
                          )
                          
                          $
                          2,720,820




See
accompanying Notes to Condensed Consolidated Financial
Statements.


- 6
-




Kid
Castle Educational Corporation


Condensed
Consolidated Statements of Cash Flows


(Unaudited)


(Expressed
in US Dollars)


Six months ended June
      30,2009
                      
                      
                      2008Cash
      flows from operating activitiesNet
      income
                      
                      $
                      610,294
                      
                      
                      $
                      465,453Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
      of property and equipment
                      
                      
                      196,127
                      
                      
                      
                      112,392Impairment
      of goodwill
                      
                      
                      44,936
                      
                      
                      
                      11,386Amortization
      of intangible assets
                      
                      
                      80,495
                      
                      
                      
                      87,179Allowance
      for sales returns
                      
                      
                      21,206
                      
                      
                      
                      15,460Allowance
      for doubtful debts
                      
                      
                      65,112
                      
                      
                      
                      42,341Reversal
      of allowance for loss on inventory obsolescence and slow-moving
      items
                      
                      
                      (4,773
                      )
                      
                      
                      (27,657
                      )Loss
      on disposal of PP&E
                      
                      -
                      
                      
                      
                      728Minority
      interests
                      
                      
                      10,726
                      
                      
                      
                      28,666Share
      of gain of investments
                      
                      
                      (2,213
                      )
                      
                      
                      (29,787
                      )(Increase)/decrease
      in:Notes
      and accounts receivable
                      
                      
                      (603,073
                      )
                      
                      
                      (521,104
                      )Inventories
                      
                      
                      205,388
                      
                      
                      
                      175,657Other
      receivables
                      
                      
                      (390,000
                      )
                      
                      
                      (231,287
                      )Prepayments
      and other current assets
                      
                      
                      (121,954
                      )
                      
                      
                      (150,623
                      )Deferred
      income tax assets
                      
                      
                      (107
                      )
                      
                      
                      (3,527
                      )Other
      assets
                      
                      
                      (8,631
                      )
                      
                      
                      (51,511
                      )Increase/(decrease)
      in:Notes
      and accounts payable
                      
                      
                      204,656
                      
                      
                      
                      704,574Accrued
      expenses
                      
                      
                      (288,133
                      )
                      
                      
                      156,927Other
      payables
                      
                      
                      141,714
                      
                      
                      
                      (276,747
                      )Receipts
      in advance
                      
                      
                      416,040
                      
                      
                      
                      556,481Income
      taxes payable
                      
                      
                      44,753
                      
                      
                      
                      (22,270
                      )Deferred
      liability
                      
                      
                      (396
                      )
                      
                      
                      18Deposits
      received
                      
                      
                      (516
                      )
                      
                      
                      16,921Accrued
      pension liabilities
                      
                      
                      (1,767
                      )
                      
                      
                      673Other
      liabilities
                      
                      
                      20,020
                      
                      
                      -Net
      cash provided by operating activities
                      
                      
                      639,904
                      
                      
                      
                      1,060,343Cash
      flows from investing activitiesPurchase
      of property and equipment
                      
                      
                      (182,708
                      )
                      
                      
                      (131,431
                      )Proceeds
      from disposal of property and equipment
                      
                      -
                      
                      
                      
                      2,241Prepayment
      of long-term investments
                      
                      
                      (1,047,480
                      )
                      
                      
                      (26,535
                      )Bank
      fixed deposits-pledged
                      
                      
                      (5,059
                      )
                      
                      
                      353,178Pledged
      notes receivable
                      
                      
                      67,979
                      
                      
                      
                      (4,551
                      )Net
      cash provided by (used in) investing activities
                      
                      
                      (1,167,268
                      )
                      
                      
                      192,902




- 7
-


Kid
Castle Educational Corporation





Condensed
Consolidated Statements of Cash Flows – Continued





(Unaudited)


(Expressed
in US Dollars)





Six months ended June
      30,2009
                        
                        
                        2008Cash
      flows from financing activitiesProceeds
      from bank borrowings
                        
                        $
                        1,056,004
                        
                        
                        $
                        108,569Proceeds
      from loan from related parties
                        
                        
                        
                        
                        
                        
                        100,049Repayment
      of bank borrowings
                        
                        
                        (1,221,809
                        )
                        
                        
                        (1,069,693
                        )Repayment
      of loan from stockholders and transactions of related
    parties
                        
                        
                        (178,677
                        )
                        
                        
                        (42,196
                        )Issuance
      of common stock for cash
                        
                        
                        900,000
                        
                        
                        -Net
      cash provided by (used in) financing activities
                        
                        
                        555,518
                        
                        
                        
                        (903,271
                        )Net
      increase in cash and cash equivalents
                        
                        
                        28,154
                        
                        
                        
                        349,974Effect
      of exchange rate changes on cash and cash equivalents
                        
                        
                        (53,913
                        )
                        
                        
                        (31,544
                        )Cash
      and cash equivalents at beginning of period
                        
                        
                        1,985,818
                        
                        
                        
                        1,238,212Cash
      and cash equivalents at end of period
                        
                        $
                        1,960,059
                        
                        
                        $
                        1,556,642





See
accompanying Notes to Condensed Consolidated Financial
Statements.


- 8
-




Kid
Castle Educational Corporation





Notes
to Condensed Consolidated Financial Statements





(Expressed
in US Dollars)





NOTE 1 - ORGANIZATION AND DESCRIPTION
OF BUSINESS




Kid
Castle Internet Technologies Limited (“KCIT”) was incorporated on December 17,
1999 under the provisions of the Company Law of the Republic of China (“ROC”) as
a limited liability company. KCIT is engaged in the business of children’s
education focusing on the English language. The business comprises publication,
sales and distribution of related books, magazines, audio and videotapes and
compact disc, franchising and sales of merchandises complementary to the
business. KCIT commenced operations in April 2000 when it acquired the above
business from Kid Castle Enterprises Limited which was formerly owned by Mr.
Kuo-An Wang and Mr. Yu-En Chiu. Kid Castle Enterprises Limited ceased operations
on December 25, 2003.




On March
9, 2001, KCIT formed a wholly-owned subsidiary, Premier Holding Investment
Property Limited incorporated in the British Virgin Islands, which held the
entire common stock of Higoal Developments Limited (“Higoal”) incorporated in
the Cayman Islands on March 8, 2001. On September 10, 2001, Higoal
established a wholly owned subsidiary, Kid Castle Educational Software
Development Company Limited (“KCES”) in the People’s Republic of China (the
“PRC”). The existing operations of Higoal are principally located in Taiwan and
are being expanded in the PRC. In June 2002, after KCIT undertook a series of
group restructurings, KCIT became the direct owner of the outstanding shares of
Higoal. Premier Holding Investment Property Limited was then liquidated in June
2003.




On
September 18, 2002, Higoal issued 11,880,000 shares of common stock to the
stockholders of KCIT in exchange for 100% of the outstanding common stock of
KCIT. As a result of this reorganization, KCIT became a wholly owned subsidiary
of Higoal. On October 1, 2002, Kid Castle Educational Corporation (the
“Company”), formerly King Ball International Technology Limited Corporation,
entered into an exchange agreement with Higoal whereby the Company issued to the
stockholders of Higoal 11,880,000 shares of common stock of the Company in
exchange for 100% of the issued and fully paid up capital of
Higoal.




As a
result of the share exchange, the former stockholders of Higoal hold a majority
of the Company’s outstanding capital stock. Generally accepted accounting
principles require in certain circumstances that a company whose stockholders
retain the majority voting interest in the combined business to be treated as
the acquirer for financial reporting purposes. Accordingly, the acquisition has
been accounted for as a “reverse acquisition” whereby Higoal is deemed to have
purchased the Company. However, the Company remains the legal entity and the
registrant for Securities and Exchange Commission (“SEC”) reporting
purposes.




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




On
December 27, 2006, KCES established a wholly-owned subsidiary, Shanghai Kid
Castle Educational Info Constitution Company Limited (“KCEI”) in the PRC, with
registered total capital of RMB1,200,000, in order to operate schools controlled
by us in the PRC. As of June 30, 2009, KCEI had total registered capital of
RMB3,500,000.





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




- 9
-




NOTE
2 - BASIS OF PRESENTATION




The
accompanying financial data as of June 30, 2009 and for the six months ended
June 30, 2009 and 2008 have been prepared by the Group, without audit, pursuant
to the rules and regulations of the SEC using generally accepted accounting
principles in the United States. 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 Group believes that
the disclosures are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Group’s audited annual
financial statements for the year ended December 31, 2008.




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.




Since
inception, the Group incurred operating losses during most of its reporting
periods until 2007 when it became profitable, and has remained so through the
present.  Our accumulated deficit has improved since Messrs. Pai and
Yang have assumed their respective management roles, and as of June 30, 2009,
our accumulated deficit was $5,730,155. Although we have an accumulated deficit,
we have positive cash flow from operations. Barring significant, unforeseen
development in PRC, we believe we can decrease our reliance on loans from
shareholders and banks to meet our funding requirements in the future. Despite
our expectation to decrease reliance on loans, we may be required to seek
additional financing to meet our future funding requirements and no assurances
can be given that bank loans or loans from shareholders will be available in the
future. If we are unable to secure sufficient financing, our liquidity position
would be adversely affected, and we may need to seek a more expensive source of
funding to finance our operations.




NOTE
3 - SUMMARY OF IMPORTANT ACCOUNTING POLICIES




REVENUE
RECOGNITION




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




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




ALLOWANCE
FOR DOUBTFUL ACCOUNTS




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




INVENTORIES




Inventories
are stated at the lower of cost or market. Cost includes all costs of purchase,
cost of conversion and other costs incurred in bringing the inventories to their
present location and condition, and is calculated using the weighted average
method. Market value is determined by reference to the sales proceeds of items
sold in the ordinary course of business after the balance sheet date or to
management estimates based on prevailing market conditions.




- 10
-





PROPERTY
AND EQUIPMENT AND DEPRECIATION




Property
and equipment are stated at cost. Depreciation is computed using the
straight-line method to allocate the cost of depreciable assets over the
estimated useful lives of the assets as follows:




Estimated useful life
                      (in years)Land
                    
                    IndefiniteBuildings
                    
                    50Furniture
      and fixtures
                    
                    3-10Transportation
      equipment
                    
                    2.5-5Miscellaneous
      equipment
                    
                    5-10




Maintenance,
repairs and minor renewals are charged directly to the statement of operations
as incurred. When assets are disposed of, the related cost and accumulated
depreciation thereon are removed from the financial statements and any resulting
gain or loss is included in the statement of operations.




LONG-LIVED
ASSETS




Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets might not be recoverable. The
Group does not perform a periodic assessment of assets for impairment in the
absence of such information or indicators. Conditions that would necessitate an
impairment assessment include a significant decline in the observable market
value of an asset, a significant change in the extent or manner in which an
asset is used, or a significant adverse change that would indicate that the
carrying amount of an asset or group of assets is not recoverable. For
long-lived assets to be held and used, the Group measures fair value based on
quoted market prices or based on discounted estimates of future cash
flows.




INCOME
TAXES




We
account for income taxes using the asset and liability approach. Under this
approach, deferred tax assets and liabilities are established for the temporary
differences between the financial reporting basis and the tax basis of our
assets and liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to be in effect when such amounts are realized or
settled. We must assess the likelihood that a protion or all of the deferred tax
assets will not be realized. In doing so, judgments and estimates must be made
regarding the projection of future taxable income. If necessary, a valuation
allowance is established to reduce the deferred tax assets to the amount that is
more likely than not to be realized.





In
computing the income tax provision, estimates and assumptions must be made
regarding the deductibility of certain expenses. It is possible that these
estimates and assumptions may be disallowed as part of an examination by the
various taxing authorities that we are subject to, resulting in additional
income tax expense in future periods. In addition, we maintain a reserve related
to uncertain tax position. These uncertain tax positions are evaluated each
reporting period to determine the level of reserve that is
appropriate.





INTANGIBLE
ASSETS




Franchises
and copyrights are stated at cost and amortized on the straight-line method over
their estimated useful lives of 10 years, the goodwill is tested for impairment
on a recurring basis.




COMPREHENSIVE
INCOME (LOSS)




Comprehensive
income (loss) is defined as the change in equity of a company during a
period from transactions and other events and circumstances excluding
transactions resulting from investments from owners and distributions to owners.
Comprehensive income (loss) is disclosed in the condensed consolidated
statement of stockholders’ equity.




- 11
-




NET
EARNINGS (LOSS) PER COMMON SHARE




The Group
computes net earnings (loss) per share in accordance with SFAS No. 128,
“Earnings per Share”. Under the provisions of SFAS No. 128, basic net earnings
(loss) per share is computed by dividing the net earnings (loss) available to
common shareholders for the period by the weighted average number of shares of
common stock outstanding during the period. The calculation of diluted net
earnings (loss) per share gives effect to common stock equivalents. For the six
months ended June 30, 2009 and 2008, the Group did not have any potential common
stock shares.




RECLASSIFICATION




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




NOTE
4 - RECENT ACCOUNTING PRONOUNCEMENTS




In April
2009, the FASB released FSP FAS 157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identify Transactions That Are Not Orderly.” This position provides
additional guidance for estimating fair value in accordance with SFAS No. 157,
“Fair Value Measurements,” when the volume and level of activity for the asset
or liability have significantly decreased as well as identifying circumstances
that indicate a transaction is not orderly. Effective for our interim financial
statements as fo June 30, 2009, the implementation of this guidance did not have
a material impact on our Consolidated Financial Statements.





In May
2009, the FASB released SFAS No. 165, “Subsequent Events,” which establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before the financial statements are issued or
available to be issued. Effective for our interim financial statements as of
June 30, 2009, we reviewed events occurring through the filing date of this
document. See Note 16 for our subsequent events disclosure.





In June
2009, the FASB released SFAS No. 167, “Amendments to FASB Interpretation No.
46(R), “ which addresses the effects on certain provisions of FASB
Interpretation No. 46, “Consolidation of Variable Interest Entities,” as a
result of the elimination of the qualifying special-purpose entity concept in
SFAS No. 166, “Accounting for Transfers of Financial Assets.” It addresses
concerns about the application of certain key provisions of Interpretation
46(R), including those in which the accounting and disclosures under the
Interpretation do not always provide timely and useful information about a
company’s involvement in a variable interest entity. This statement requires us
to perform an analysis to determine whether any of our variable interests give
us a controlling financial interest in a variable interest entity. In addition,
this statement requires ongoing assessments of whether we are the primary
beneficiary of a variable interest entity. SFAS No. 167 is effective for fiscal
years, and interim periods within those fiscal years, beginning after November
15, 2009. We are in the process of evaluating the impact of this new guidance on
our Consolidated Financial Statements.


- 12
-




NOTE
5 - NOTES AND ACCOUNTS RECEIVABLE





June
      30,
                            2009
                          
                          
                          December 31,
                            2008(Unaudited)Notes
      and accounts receivable-
      Third parties
                          
                          $
                          2,822,623
                          
                          
                          $
                          2,492,199-
      Related parties
                          
                          
                          207,718
                          
                          
                          
                          183,597Total
                          
                          
                          3,030,341
                          
                          
                          
                          2,675,796Allowance
      for doubtful accounts and sales returns
                          
                          
                          (594,668
                          )
                          
                          
                          (504,028
                          )Notes
      and accounts receivable, net
                          
                          $
                          2,435,673
                          
                          
                          $
                          2,171,768





NOTE
6 - INVENTORIES





June
      30,
                          2009
                        
                        
                        December 31,
                          2008(Unaudited)Work
      in process
                        
                        $
                        156,130
                        
                        
                        $
                        109,163Finished
      goods and other merchandises
                        
                        
                        1,897,145
                        
                        
                        
                        2,130,1162,053,275
                        
                        
                        
                        2,239,279Less:
      Allowance for obsolete inventories and decline of market
    value
                        
                        
                        (304,547
                        )
                        
                        
                        (306,126
                        )$
                        1,748,728
                        
                        
                        $
                        1,933,153





NOTE
7 - OTHER RECEIVABLES





June
      30,
                            2009
                          
                          
                          December 31,
                            2008(Unaudited)Other
      receivables - third parties:Advances
      to staff
                          
                          $
                          131,063
                          
                          
                          $
                          90,521Other
      receivables
                          
                          
                          211,682
                          
                          
                          
                          304,416Sub-total
                          
                          
                          342,745
                          
                          
                          
                          394,937Other
      receivables - related parties (Note (i))
                          
                          
                          606,531
                          
                          
                          
                          1,066$
                          949,276
                          
                          
                          $
                          396,003


Note:


(i)
            In
      July 2009, the Group obtained the PRC government’s approval to co-found
      Kid Castle Xinxuhui Preschool with Shanghai Xinxuhui Co., Ltd. in the PRC.
      In 2009, Kid Castle Xinxuhui’s total registered capital was RMB
      2,000,000.  KCEI and Shanghai Xinxuhui Co., Ltd. own,
      respectively, 70% and 30% of Kid Castle Xinxuhui
  Preschool.





As of
June 30, the balance due from related parties was $606,531, comprised of
$594,507 due from Kid Castle Xinxuhui Preschool (“Xinxuhui Preshcool”), $325 due
from English Center and $11,699 due from Tianjin Consulting. The amount due from
Xinxuhui Preschool to KCEI is to repay KCEI for refurbishment and equipment
purchases for Xinxuhui Preschool.




- 13
-




NOTE
8 - PREPAYMENTS AND OTHER CURRENT ASSETS




June
      30,
                            2009
                          
                          December 31,
                            2008(Unaudited)Prepayments
                          
                          $
                          580,387
                          
                          
                          $
                          467,414Temporary
      payments
                          
                          
                          75
                          
                          
                          
                          62Others
                          
                          
                          25,087
                          
                          
                          
                          8,141$
                          605,549
                          
                          
                          $
                          475,617




NOTE
9- INTEREST IN ASSOCIATES




June
      30,
                                2009
                              
                              
                              December 31,
                                2008(Unaudited)21st
      Century Kid Castle Language and Education Center (“Education Center”)
      (Note (i))Investment
      cost
                              
                              $
                              109,748
                              
                              
                              $
                              109,628Share
      of loss
                              
                              
                              (18,636
                              )
                              
                              
                              (42,696
                              )$
                              91,112
                              
                              
                              $
                              66,932Tianjin
      Kid Castle Educational Investment Consulting Co., Ltd. (“Tianjin
      Consulting”) (Note (ii))Investment
      cost
                              
                              $
                              102,431
                              
                              
                              $
                              102,319Share
      of loss
                              
                              
                              (122,919
                              )
                              
                              
                              (100,915
                              )(Note(ii)(A))
                              
                              $
                              (20,488
                              )
                              
                              $
                              1,404Total
                              
                              $
                              91,112
                              
                              
                              $
                              68,336




Note:




(i)
            In
      October 2003, the Group obtained the PRC government’s approval to co-found
      Education Center with 21st
      Century Publishing House in the PRC. In 2004, Education Center’s total
      registered capital was RMB 1,500,000, with KCES and 21st
      Century Publishing House each owning 50%. We have determined that the
      Group has significant influence and should therefore account for its
      investment using the equity method.





For the
six months ended June 30, 2009 and 2008, the Group recognized investment income
from Education Center of $24,101 and $40,665, respectively, accounted for using
the equity method.


- 14
-





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





(A)
            As
      of June 30, 2009, the Group’s share of Tianjin Consulting’s $122,919 loss
      exceeded the Groups’ investment cost of $102,431. The $20,488 difference
      has been reclassified as Other
liabilities.





For the
six months ended June 30, 2009 and 2008, the Group recognized an investment loss
of $21,888 and $10,878, respectively, in Tianjin Consulting, accounted for using
the equity method.




NOTE
10 - INTANGIBLE ASSETS




June
      30,
                                    2009
                                  
                                  
                                  December 31,
                                    2008(Unaudited)Gross
      carrying amountFranchise
                                  
                                  $
                                  1,037,535
                                  
                                  
                                  $
                                  1,026,455Copyrights
                                  
                                  
                                  609,905
                                  
                                  
                                  
                                  603,391Goodwill
                                  
                                  
                                  235,296
                                  
                                  
                                  
                                  235,0391,882,736
                                  
                                  
                                  
                                  1,864,885Less:
      Accumulated amortizationFranchise
                                  
                                  
                                  (959,721
                                  )
                                  
                                  
                                  (898,148
                                  )Copyrights
                                  
                                  
                                  (564,162
                                  )
                                  
                                  
                                  (527,967
                                  )(1,523,883
                                  )
                                  
                                  
                                  (1,426,115
                                  )Less:
      impairment of goodwill
                                  
                                  
                                  (91,316
                                  )
                                  
                                  
                                  (67,714
                                  )(91,316
                                  )
                                  
                                  
                                  (67,714
                                  )Net
                                  
                                  $
                                  267,537
                                  
                                  
                                  $
                                  371,056




Amortization
charged to operations was $80,495 and $87,179 for the six months ended June 30,
2009 and 2008, respectively, and the impairment of goodwill charged to
operations was $23,524 and $11,386 for the six months ended June 30, 2009 and
2008, respectively.




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




2010
                    
                    $
                    41,186$
                    41,186


- 15
-




NOTE
11 - BANK BORROWINGS




June
      30,
                        2009
                      
                      
                      December 31,
                        2008(Unaudited)Bank
      term loans (Note (i))
                      
                      $
                      441,838
                      
                      
                      $
                      514,471Mid-term
      secured bank loan (Note (ii))
                      
                      
                      1,235,057
                      
                      
                      
                      1,312,3761,676,895
                      
                      
                      
                      1,826,847Less:
      Balances maturing within one year included in current
      liabilitiesBank
      term loans
                      
                      
                      46,987
                      
                      
                      
                      76,946Mid-term
      secured bank loan
                      
                      
                      1,235,057
                      
                      
                      
                      165,9331,282,044
                      
                      
                      
                      242,879Bank
      borrowings maturing after one year
                      
                      $
                      394,851
                      
                      
                      $
                      1,583,968




Note:




(i)
            This
      line item represents bank loans that have been secured by a pledge of
      post-dated checks amounting to $670,908 and $755,824 that we have received
      from franchisees and the Group’s bank deposits of $8,010 and $2,839 as of
      June 30, 2009 and December 31, 2008, 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, which were
      extended on October 18, 2008 and will be due on September 30, 2009. The
      weighted average interest rates were 5.4% and 5.86% per annum as of
      June 30, 2009 and 2008,
respectively.




For the
six months ended June 30, 2009 and 2008, interest expense charged to operations
in respect of bank loans was $11,972 and $17,672, respectively.





(ii)
            In
      November 28, 2007, KCIT obtained a new bank loan of $1,542,401. The loan
      is secured by the Group’s land and buildings and is personally guaranteed
      by two directors of the Group. It bears interest at the lending bank’s
      basic fixed deposit rate plus 1.45% per annum. Of the principal, $370,176
      is repayable in 24 equal monthly installments. A final balloon payment of
      $1,172,225 is due on November 28, 2009. The applicable interest rate is
      approximately 3.76% per annum.




For the
six months ended June 30, 2009 and 2008, interest expense charged to operations
amounted to $15,747 and $28,787, respectively.


- 16
-


NOTE
12 - RECEIPTS IN ADVANCE




The
balance comprises:





June
      30,
                                2009
                              
                              
                              December 31,
                                2008(Unaudited)Current
      liabilities:Sales
      deposits received (Note (i))
                              
                              $
                              541,589
                              
                              
                              $
                              277,823Franchising
      income received (Note (ii))
                              
                              
                              1,438,381
                              
                              
                              
                              1,480,947Subscription
      fees received (Note (iii))
                              
                              
                              633,230
                              
                              
                              
                              471,088Related
      party
                              
                              -
                              
                              
                              
                              414Others
                              
                              
                              93,014
                              
                              
                              
                              75,7082,706,214
                              
                              
                              
                              2,305,980Long-term
      liabilities:Franchising
      income received (Note (ii))
                              
                              
                              1,304,398
                              
                              
                              
                              1,001,801$
                              4,010,612
                              
                              
                              $
                              3,307,781


Note:




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




(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.




- 17
-




NOTE
13 - RETIREMENT PLANS




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





The net
periodic pension cost is as follows:




Six months ended June
      30,2009
                                  
                                  
                                  2008(Unaudited)Service
      cost
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Interest
      cost
                                  
                                  
                                  7,944
                                  
                                  
                                  
                                  6,456Expected
      return on assets
                                  
                                  
                                  (3,180
                                  )
                                  
                                  
                                  (1,046
                                  )Amortization
      of unrecognized loss
                                  
                                  
                                  4,928
                                  
                                  
                                  
                                  1,616Net
      periodic pension cost
                                  
                                  $
                                  9,692
                                  
                                  
                                  $
                                  7,026
  - 18
-




NOTE
14 - GEOGRAPHICAL SEGMENTS




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





Taiwan
                  
                  
                  PRC
                  
                  
                  Total
                  
                  
                  Corporate
                  
                  
                  Eliminations
                  
                  
                  ConsolidatedSix months
                    ended
                    June
      30,
                    2009
                  
                  
                  Six months
                    ended
                    June
      30,
                    2008
                  
                  
                  Six months
                    ended
                    June
      30,
                    2009
                  
                  
                  Six months
                    ended
                    June
      30,
                    2008
                  
                  
                  Six months
                    ended
                    June
      30,
                    2009
                  
                  
                  Six months
                    ended
                    June
      30,
                    2008
                  
                  
                  Six months
                    ended
                    June
      30,
                    2009
                  
                  
                  Six months
                    ended
                    June
      30,
                    2008
                  
                  
                  Six months
                    ended
                    June
      30,
                    2009
                  
                  
                  Six months
                    ended
                    June
      30,
                    2008
                  
                  
                  Six months
                    ended
                    June
      30,
                    2009
                  
                  
                  Six months
                    ended
                    June
      30,
                    2008RevenueExternal
      revenue
                  
                  $
                  2,770,247
                  
                  
                  $
                  3,116,020
                  
                  
                  $
                  3,389,697
                  
                  
                  $
                  2,948,566
                  
                  
                  $
                  6,159,944
                  
                  
                  $
                  6,064,586
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  6,159,944
                  
                  
                  $
                  6,064,586Inter-segment
      revenue
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —$
                  2,770,247
                  
                  
                  $
                  3,116,020
                  
                  
                  $
                  3,389,697
                  
                  
                  $
                  2,948,566
                  
                  
                  $
                  6,159,944
                  
                  
                  $
                  6,064,586
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  6,159,944
                  
                  
                  $
                  6,064,586Profit
      from
                    Operations
                  
                  $
                  185,175
                  
                  
                  $
                  297,645
                  
                  
                  $
                  553,291
                  
                  
                  $
                  186,397
                  
                  
                  $
                  738,466
                  
                  
                  $
                  484,042
                  
                  
                  $
                  (29,584
                  )
                  
                  $
                  (72,449
                  )
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  708,882
                  
                  
                  $
                  411,593Capital
      expenditures
                  
                  $
                  120,464
                  
                  
                  $
                  60,609
                  
                  
                  $
                  82,423
                  
                  
                  $
                  71,209
                  
                  
                  $
                  202,887
                  
                  
                  $
                  131,818
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  202,887
                  
                  
                  $
                  131,818





June
      30,
                  2009
                
                
                December 31,
                  2008
                
                
                June
      30,
                  2009
                
                
                December 31,
                  2008
                
                
                June
      30,
                  2009
                
                
                December 31,
                  2008
                
                
                June
      30,
                  2009
                
                
                December 31,
                  2008
                
                
                June
      30,
                  2009
                
                
                December 31,
                  2008
                
                
                June
      30,
                  2009
                
                
                December 31,
                  2008Total
      assets
                
                $
                7,301,861
                
                
                $
                7,770,317
                
                
                $
                5,942,048
                
                
                $
                4,459,044
                
                
                $
                13,243,909
                
                
                $
                12,229,361
                
                
                $
                904,928
                
                
                $
                2,950
                
                
                $
                (313,234
                )
                
                $
                (434,919
                )
                
                $
                13,835,603
                
                
                $
                11,797,392


- 19
-


NOTE
15 - COMMITMENT AND CONTINGENCIES





A.
Lease Commitment





As of June 30, 2009, the Company’s future minimum lease
payments under a non-cancelable operating lease expiring in excess of one year
are as follows:




Years
      ending December 31,2010
                    
                    $
                    406,5702011
                    
                    
                    378,1282012
                    
                    
                    748,9822013
                    
                    
                    546,174Years
      2014 to 2027
                    
                    
                    2,579,447$
                    4,659,301





B.
Going concern





The
accompanying financial statements have been prepared assuming the Group will
continue as a going concern. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.





NOTE
16 – SUBSEQUENT EVENTS





In July
2009, the Group obtained the PRC government’s approval to co-found Kid Castle
Xinxuhui Preschool with Shanghai Xinxuhui Co., Ltd. in the PRC. In 2009, Kid
Castle Xinxuhui’s total registered capital was RMB 2,000,000. KCEI and Shanghai
Xinxuhui Co., Ltd. own, respectively, 70% and 30% of Kid Castle Xinxuhui
Preschool.





In July
2009, the Group established a wholly-owned school, Shanghai Putuo District Kid
Castle Yin Cyun Language and Education Center in the PRC, with registered total
capital of RMB 500,000.





As of
June 30, 2009, the Group has prepaid amounts of $389,558 and $638,059 invested
in Chengdu Preschool and Nanchang Preschool, respectively, for refurbishment and
equipment purchases.





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





This
report contains certain forward-looking statements within the meaning of Section
21E of the Securities and Exchange Act of 1934, as amended, and information
relating to us that are based on the beliefs and assumptions made by our
management as well as information currently available to the management. When
used in this document, the words “anticipate,” “believe,” “estimate,” “expect”
and similar expressions, are intended to identify forward-looking statements.
Such statements reflect our current views with respect to future events and are
subject to certain risks, uncertainties and assumptions. If one or more of these
risks or uncertainties materialize, or if underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated or expected. 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 SEC including, but not limited to our Annual
Report on Form 10-K for the year ended December 31, 2008. We do not intend
to update these forward-looking statements.




OVERVIEW




We are a leading provider in the PRC and Taiwan of English-language
instruction and educational services to children for whom Chinese is the primary
language. Our focus is on children between two and twelve years old. In 2008 we
taught or provided educational materials for approximately 1,460,000 students at
over 7,550 locations through our franchise and cooperative school
operations.


- 20
-




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




CRITICAL
ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES





Our
discussion and analysis of our financial condition and results of operations are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to product returns, bad
debts, inventories, equity investments, income taxes, financing operations,
pensions, commitments and contingencies. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe the following
critical accounting policies affect our more significant judgments and estimates
used in the preparation of our financial statements.





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




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





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





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





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


- 21
-





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





As
of June 30, 2009, the balance of our amortizable intangible assets was $123,557,
including franchise-related intangible assets of $77,814 and copyrights of
$45,743. The amortizable intangible assets are amortized on a straight-line
basis over estimated useful lives of 10 years, and the balance of goodwill
was $143,980, which is tested for impairment on a recurring basis. In
determining the useful lives and recoverability of the intangibles, assumptions
must be made regarding estimated future cash flows and other factors to
determine the fair value of the assets, which may not represent the true fair
value. If these estimates or their related assumptions change in the future,
there may be significant impact on our results of operations in the period of
the change incurred.





Income Taxes. We account
for income taxes under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, and tax loss carry-forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Deferred tax assets are subject to
valuation allowances based upon management’s estimates of realizability. Actual
results may differ significantly from management’s estimate.





RESULTS
OF OPERATIONS




Three Months Ended June 30, 2009
compared to Three Months Ended June 30, 2008




Total Net Operating Revenue.Total net operating revenue consists of sales of goods, franchising
income and other operating revenue. Total net operating revenues increased by
$49,861, or 2%, to $2,714,923 for the three months ended June 30, 2009 from
$2,665,062 for the three months ended June 30, 2008, including the increase in
other operating revenue of $285,670, the decrease in the sales of goods of
$202,752 and franchising income of $33,057.




Sales of goods.The decrease
in sales of goods, from $1,509,509 for the three months ended June 30, 2008 to
$1,387,757 for the three months ended June 30, 2009 (a 13% decrease), was mainly
due to the decrease in sales in our Taiwan operations.




Franchising income.The
decrease in franchising income, from $584,614 for the three months ended June
30, 2008 to $551,557 for the three months ended June 30, 2009 (a 6% decrease),
was mainly due to the decrease in franchising income in Taiwan
operations.




Other operating revenue.Our
other operating revenues represent revenues from other activities and services
such as training of teachers, arranging for personal English language tutors,
organizing field trips and educational fairs, fees for designing the school
layout of our franchised schools, and tuition from school controlled by us.
Other operating revenue increased by $285,670, to $775,609 for the three months
ended June 30, 2009 from $489,939 for the three months ended June 30, 2008. The
increase was mainly due to operate schools controlled by us in the
PRC.




Gross Profit.Gross profit
increased by $187,058, or 15%, to $1,420,203 for the three months ended June 30,
2009, from $1,233,145 for the three months ended June 30, 2008.  The
increase was mainly due to increase in other operating revenue from PRC
operations.


- 22
-




Total Operating Expenses.Total operating expenses decreased by $47,606, or 3%, to $1,462,784 for
the three months ended June 30, 2009 from $1,510,390 for the three months ended
June 30, 2008.  The decrease was principally due to decreases in
expenditures to fund daily operations in the PRC.




Other Operating Expenses.Other operating expenses increased by $47,623, or 3%, to $1,461,200 for
the three months ended June 30, 2009 from $1,508,823 for the three months ended
June 30, 2008, principally due to decreases in daily expenditures in operations
in the PRC.




Interest Expenses, Net.Net
interest expenses decreased by $14,975, or 58%, to $10,668 for the three months
ended June 30, 2009 from $25,643 for the three months ended June 30, 2008,
primarily due to the decrease of the borrowings during the three months ended
June 30, 2009 compared to the three months ended June 30, 2008.




Provision for Taxes.Provision
for taxes for the three months ended June 30, 2009 and 2008 were $37,452 and
$22,468, respectively. These provisions for income taxes relate to income taxes
resulting from our operations in Taiwan.





Six
Months Ended June 30, 2009 compared to Six Months Ended June 30,
2008





Total Net Operating
Revenue. Total net operating revenue consists of sales of goods,
franchising income and other operating revenue. Total net operating revenue
increased by $95,358, or 2%, to $6,159,944 for the six months ended June 30,
2009 from $6,064,586 for the six months ended June 30, 2008. This was mainly due
to the increase in other operating revenues of $367,452, decrease in sales of
goods of $203,177 and decrease in franchising income of $68,917.





Sales of goods. Sales of
goods decreased by $203,177, from $3,954,618 for the six months ended June 30,
2008 to $3,751,441 for the six months ended June 30, 2009.  The
decrease was mainly due to the decrease in sales our Taiwan
operations.





Franchising income. The
6% decrease in franchising income, from $1,140,843 for the six months ended June
30, 2008 to $1,071,926, for the six months ended June 30, 2009, was mainly due
to the decrease in franchising income in our Taiwan operations.





Other operating revenue.
Our other operating revenues represent revenues from other activities and
services such as training of teachers, arranging for personal English language
tutors, organizing field trips and educational fairs, fees for designing the
school layout of our franchised schools, and school tuition. Other operating
revenue increased by $367,452, or 38%, to $1,336,577 for the six months ended
June 30, 2009, from $969,125 for the six months ended June 30, 2008. The
increase was mainly due to revenue from schools controlled by us in the
PRC.





Gross Profit. Gross
profit decreased by $33,774, or 1%, to $3,423,393 for the six months ended June
30, 2009, from $3,457,167 for the six months ended June 30, 2008. The decrease
in Gross Profit was mainly due to the increase in the operating costs of schools
controlled by us in the PRC.





Total Operating
Expenses. Total operating expenses decreased by $331,063 to $2,714,511
for the six months ended June 30, 2009, from $3,045,574 for the six months ended
June 30, 2008, an 11% decrease. The decrease in total operating expenses was
mainly due to decreases in expenditures to fund daily operations.





Other Operating
Expenses. Other operating expenses decreased by $330,420, or 11%, to
$2,692,074 for the six months ended June 30, 2009, from $3,022,494 for the six
months ended June 30, 2008. The decrease in operating expenses was mainly due to
decreases in expenditures to fund daily operations.





Interest Expense, Net.
Net interest expenses decreased by $22,255, or 46%, to $26,489 for the six
months ended June 30, 2009 from $48,744 for the six months ended June 30, 2008.
The decrease in net interest expenses was mainly due to the decrease of interest
rates during the six months ended June 30, 2009, compared to the six months
ended June 30, 2008. (See Note 11 to our Condensed Consolidated Financial
Statements for more information.)





Other Non-operating Income,
Net. Net other non-operating income decreased by $111,577, or 69%, to
$49,271 for the six months ended June 30, 2009, from $160,848 for the six months
ended June 30, 2008. The decrease in net other non-operating income was mainly
due to the difference in exchange rates between the two
periods.


- 23
-




Provision for Taxes. Provision
for taxes for the six months ended June 30, 2009 and 2008 were $112,857 and
$59,365, respectively. These provisions for income taxes relate to income taxes
resulting from our operations in Taiwan.





LIQUIDITY
AND CAPITAL RESOURCES




As of
June 30, 2009, our principal sources of liquidity included cash and bank
balances of $1,960,059, (including the $900,000 capital injection contributed by
Mr. Yang on June 17, 2009) which decreased $25,759 from the balance of
$1,985,818 at December 31, 2008. The decrease was mainly due to the
increase in the net cash used in the prepayment of long term investments of
$1,305,645, comprised of the following investments: $204,863 for Xinxuhui
Preschool, $73,165 for Shanghai Putuo District Kid Castle Yin Cyun Language and
Education Center, $389,558 for Chengdu Preschool, and $638,059 for Nanchang
Preschool. In June 2009, the Company issued 5,000,000 shares of common stock to
our Chief Executive Officer and largest shareholder, Min-Tan Yang, for
$900,000.  The primary purpose of the capital injection was to finance
the Company’s privatization plan, announced by the Company’s Report on Form 8-K
filed with the Commission on June 18, 2009.  The privatization plan is
pending review by the Commission of the Company’s preliminary Schedule 13E-3 and
preliminary Information Statement on Schedule 14C, each filed with the
Commission on June 18, 2009.




We have
assertively expanded our business in the PRC. Our operations in the PRC turned
profitable in 2006, and the Group turned profitable in the first quarter of
2007. We anticipate continued expansion of the demand for learning materials and
an increase in the number of franchise schools. Furthermore, we foresee better
utilization of capital and funds as we identify and implement alternatives for
restructuring and refinancing. In order to increase its profit margin, the Group
has operated direct-owned schools since 2007. Due to the rapid expansion of our
operations in the PRC, the Group foresees additional need for funds in the near
future to facilitate its expansion plans during 2009. As discussed in Note 11 to
our Condensed Consolidated Financial Statements, the majority of the Group’s
existing loans are guaranteed by two directors of the Group who have expressed
their willingness to continue to support the Group until other sources of funds
have been obtained. Moreover, management believes that, with the support of the
directors and continuous PRC sales, the Company would have sufficient funds for
its operations, but may need new a bank facility to fulfill its business plan to
expand its operations in the future.




Net cash
provided by operating activities was $639,904 and $1,060,343 during the six
months ended June 30, 2009 and 2008, respectively. The $420,439 decrease was
primarily due to (i) an increase of notes and accounts payable in the amount of
204,656 during the six months ended June 30, 2009, compared to an increase of
notes and accounts payable in the amount of $704,574 during the six months ended
June 30, 2008, and (ii) a decrease of accrued expenses in the amount of $288,133
during the six months ended June 30, 2009, compared to an increase of accrued
expenses in the amount of $156,927 during the six months ended June 30, 2008, a
net cash decrease of $445,060.




Net cash
used in investing activities was $1,167,268 during the six months ended June 30,
2009, and net cash provided by investing activities was $192,902 during the six
months ended June 30, 2008. The $1,360,170 difference was primarily attributable
to increase in cash used in prepayment of long-term investments of $1,047,480
during the six months ended June 30, 2009, compared to cash used in the
prepayment of long-term investments of $26,535 during the six months ended June
30, 2008, for a net negative difference in cash of $1,020,945.




Net cash
provided by financing activities was $555,518 during the six months ended June
30, 2009, and net cash used in financing activities was $903,271 during the six
months ended June 30, 2008. The $1,458,789 difference was primarily attributable
to issuance of common stock for cash of $900,000.





Off-Balance
Sheet Arrangements




As of
June 30, 2009, we did not engage in any off-balance sheet arrangements as
defined in Item 303(a)(4) of Regulation S-K promulgated by the SEC
under the Securities Exchange Act of 1934.


- 24
-




Bank
Borrowing





We currently utilize bank loans as one of our financing sources.  As
of June 30, 2009 and 2008, the balances of bank borrowings, including current
and non-current portions, were $1,676,895 and $2,184,911,
respectively.





Pension
Benefit





As of July 1, 2005, the Group maintains two different
retirement plans, according to the ROC Labor Standard Law, a non-contributory
and funded defined contribution retirement plan (the “New Plan”) covering all
regular employees of KCIT, our subsidiary in Taiwan, and the benefit retirement
plan (the “Old Plan”) which commenced in September 2003, and only applies to the
regular employees of KCIT who were employed prior to June 2005, as described in
Note14 to our Condensed Consolidated Financial Statements. The benefits expected
to be paid in each of the next five fiscal years, and in the aggregate for the
five fiscal years thereafter, are $0 and $16,735, respectively. We also make
defined contributions to a retirement benefits plan for our employees in the PRC
in accordance with local regulations. The contributions made by us for the six
months ended June 30, 2009 and 2008 amounted to $39,963, and $28,547,
respectively.





New
Accounting Pronouncements





See Note
4 to the Consolidated Financial Statements





Non-GAAP
Financial Measures





None.





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





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





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





Interest
rate exposure





We are exposed to fluctuating interest rates related to variable rate bank
borrowings. In analyzing the effect of interest rate fluctuations based on the
average balances of our outstanding bank borrowings for fiscal year 2009, we
have projected that, if interest rates were to increase by one percent, the
result would be an annual increase in our interest expense of $16,228. This
analysis does not take into consideration the effect of changes in the level of
overall economic activity on interest rate fluctuations.





Foreign
currency exposure




We have operations in both Taiwan and the PRC. The functional currency of Higoal
and its subsidiary, KCIT, is NT Dollars and the financial records are
maintained and the financial statements are prepared for these entities in NT
Dollars. The functional currency of KCES and its consolidated
investee, Culture Media and KCEI is RMB and the financial records
are maintained and the financial statements are prepared for these entities in
RMB. In the normal course of business, these operations are not exposed to
fluctuations in currency values. We do not generally enter into derivative
financial instruments in the normal course of business, nor do we use such
instruments for speculative purposes. The translation from the applicable local
currency assets and liabilities to the U.S. Dollar is performed using exchange
rates in effect at the balance sheet date except for shareholders’ equity, which
is translated at historical exchange rates. Revenue and expense accounts are
translated using average exchange rates during the period. Gains and losses
resulting from such translations are recorded as a cumulative translation
adjustment, a separate component of shareholders’ equity.


- 25
-




ITEM
4. CONTROLS AND PROCEDURES





Conclusion Regarding the
Effectiveness of Disclosure Controls and Procedures




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




Management
has concluded, based on deficiencies noted by our auditors in past reviews, and
other issues noted by management in its evaluation, that as of June 30, 2009 our
disclosure controls and procedures were ineffective. Several quarters ago we
began taking measures to improve our disclosure controls and procedures. We
initiated the installment of a new Enterprise Resource Planning (“ERP”) system
and engaged an outside accounting firm to advise the Company with respect to
setting up internal auditing and other controls and procedures. The ERP system,
when fully operational, will enable the centralization of all information
required to be disclosed pursuant to the Exchange Act to be digitally recorded,
processed, summarized and reported in a timely and secured manner. During the
final phase of ERP system integration, certain difficulties have been
encountered that have prevented the ERP system to be satisfactorily declared
effective and independently operational by management. One cause of the delay
was that the company hired to assist with our implementation of the new ERP
system unexpectedly ceased its operation in September 2008. We are currently
searching for the right consulting company to assist us with integration of the
RRP system as well as provide on-going monitoring, guidance and supervisory
support. Management anticipates that the new system will become fully
operational in the fourth fiscal quarter 2010. The old system used by the
Company will then be phased out.




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





The certifications required by Section 302 of the Sarbanes-Oxley Act of
2002 are filed as exhibits 31.1 and 31.2, respectively, to this Form
10-Q.





Changes
in Internal Control over Financial Reporting




There were no changes in the Company’s internal control over financial reporting
during the quarter ended June 30, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.





During the last quarter, we have continued the efforts to implement the
integration of a comprehensive ERP system that, when fully operational, will
enhance our internal controls over financial reporting. The ERP system has been
fully installed and the system has been running in parallel with the old system
since 2007.  The system is expected to be fully operational in the
fourth fiscal quarter 2010. The ERP system will perform the following
functions:





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





o
            Place
      different check-points on the progression of ordinary monetary activities
      of the business; and





o
            Delineate
      individual and/departmental responsibilities and effectively separate
      respective departmental transactions so as to prevent occurrence of
      intentional misappropriation of
funds.




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PART
II OTHER INFORMATION





ITEM 1. LEGAL PROCEEDINGS




We have
no material pending legal proceedings.





ITEM
1A. RISK FACTORS




In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part 1, “Item 1A. Risk Factors” in
our Annual Report on Form 10-K for the year ended December 31, 2008, which
could materially affect our business, financial condition or future results. We
caution the reader that these risk factors may not be exhaustive. We operate in
a continually changing business environment and new risk facts emerge from time
to time. Management cannot predict such new risk factors, nor can we assess the
impact, if any, of such new risk factors on our business or the extent to which
any factor, or combination of factors, may impact our business. There have not
been any material changes during the quarter ended June 30, 2009 from the risk
factors disclosed in the above-mentioned Form 10-K for the year ended
December 31, 2008.





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





On June
17, 2009, pursuant to a Stock Subscription Agreement dated the same date, we
sold 5,000,000 newly issued shares of our common stock to our Chief Executive
Officer, Min-Tan Yang.  The stock was sold for $0.18 per share for an
aggregate purchase price of $900,000.  Mr. Yang paid for the stock in
cash.  The stock was issued without registration under the Securities
Act of 1933 in reliance on the exemption under Section 4(2) of the Securities
Act.  The Stock Subscription Agreement is attached as an exhibit to
the Company’s report on Form 8-K, filed with the Commission on June 18,
2009.





ITEM
3. DEFAULTS UPON SENIOR SECURITIES




None.





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




On June
17, 2009, in accordance with the relevant sections of the Florida Business
Corporations Act and our articles of incorporation, two senior members of our
management who collectively own 67% of our common stock, acting in their
capacity as shareholders, approved amendments to our articles of incorporation
that will effect a 5,000 for 1 reverse stock split of our common stock, followed
immediately by a 1 for 5,000 forward stock split (the
“Transaction”).  The vote was taken by written consent in conjunction
with the Company’s proposed privatization plan described more fully in the
Company’s preliminary Schedule 13E-3 and preliminary Information Statement on
Schedule 14C, each filed with the Commission on June 18, 2009, and each of which
is pending review by the Commission.





ITEM
5. OTHER INFORMATION




None.





ITEM
6. EXHIBITS





A.
                    
                    Exhibits31.1
                    
                    Rule 13a-14(a)
      Certification of Principal Executive Officer31.2
                    
                    Rule 13a-14(a)
      Certification of Principal Financial Officer32.1
                    
                    Section 1350
      Certification of Principal Executive Officer and Principal Financial
      Officer




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SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.




Dated:
August 13, 2009





By:
                            /s/
      Suang-Yi PaiSUANG-YI
      PAICHIEF
      FINANCIAL OFFICER




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