UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q/A


Amendment No. 1





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


SECURITIES
EXCHANGE ACT OF 1934





For the
quarterly period ended: September 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 or
                organization)
              (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
November 30, 2009, there were 30,000,000 shares of the Registrant’s common
stock outstanding.





EXPLANATORY
NOTE:
 
 Kid
Castle Educational Corporation (the “Company”) is filing this amendment to its
Quarterly Report on Form 10-Q filed with the SEC on November 13, 2009 to amend
the wording of the certifications pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 to precisely match the language set forth in Item 601(b)(31) of
Regulation S-K.  As a result of this amendment, the certifications pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002, filed as exhibits to the
original report, have been re-executed and re-filed as of the date of this
amendment.
 
 This
amendment does not reflect events occurring after the original report, or update
these disclosures. Accordingly, this amendment should be read in conjunction
with our filings with the SEC subsequent to the original
filing.


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 September 30, 2009 (unaudited)
      and December 31, 2008
                
                2b)
      Condensed Consolidated Statements of Operations for the three months ended
      September 30, 2009 and September 30, 2008 (unaudited)
                
                4c)
      Condensed Consolidated Statements of Operations for the nine months ended
      September 30, 2009 and September 30, 2008 (unaudited)
                
                5d)
      Condensed Consolidated Statements of Stockholders’ Equity
      (unaudited)
                
                6e)
      Condensed Consolidated Statements of Cash Flows for the nine months ended
      September 30, 2009 and September 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
                
                25PART
      II.
                OTHER
      INFORMATION
                
                26Item
      1. Legal Proceedings
                
                26Item
      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)
                          September
      30,
                          2009
                        
                        
                        December 31,
                          2008ASSETSCurrent
      assetsCash
      and bank balances
                        
                        $
                        2,423,266
                        
                        
                        $
                        1,985,818Bank
      fixed deposits - pledged (Note 12)
                        
                        
                        10,262
                        
                        
                        
                        2,847Notes
      and accounts receivable, net (Note 5)
                        
                        
                        3,175,407
                        
                        
                        
                        2,171,768Inventories,
      net (Note 6)
                        
                        
                        1,556,527
                        
                        
                        
                        1,933,153Other
      receivables (Note 7)
                        
                        
                        340,515
                        
                        
                        
                        396,003Prepayments
      and other current assets (Note 8)
                        
                        
                        871,633
                        
                        
                        
                        475,617Pledged
      notes receivable (Note 12)
                        
                        
                        428,189
                        
                        
                        
                        416,238Deferred
      income tax assets
                        
                        
                        54,882
                        
                        
                        
                        45,617Total
      current assets
                        
                        
                        8,860,681
                        
                        
                        
                        7,427,061Deferred
      income tax assets
                        
                        
                        49,921
                        
                        
                        
                        49,528Prepayment
      of long-term investments (Note 9)
                        
                        
                        1,717,149
                        
                        
                        -Long-term
      investments (Note 10)
                        
                        
                        100,087
                        
                        
                        
                        68,336Property
      and equipment, net
                        
                        
                        3,608,552
                        
                        
                        
                        2,775,663Intangible
      assets, net of amortization (Note 11)
                        
                        
                        227,008
                        
                        
                        
                        371,056Long-term
      notes receivable
                        
                        
                        469,708
                        
                        
                        
                        356,901Pledged
      notes receivable (Note 12)
                        
                        
                        220,855
                        
                        
                        
                        283,469Other
      assets
                        
                        
                        284,264
                        
                        
                        
                        255,288Total
      assets
                        
                        $
                        15,538,225
                        
                        
                        $
                        11,587,302LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesBank
      borrowings - short-term and maturing within one year (Note
    12)
                        
                        $
                        1,280,285
                        
                        
                        $
                        242,879Notes
      and accounts payable
                        
                        
                        1,545,838
                        
                        
                        
                        1,017,552Accrued
      expenses
                        
                        
                        1,507,330
                        
                        
                        
                        1,617,717Other
      payables
                        
                        
                        749,006
                        
                        
                        
                        270,458Deposits
      received
                        
                        
                        72,910
                        
                        
                        
                        751,151Receipts
      in advance (Note 13)
                        
                        
                        1,901,413
                        
                        
                        
                        2,305,980Income
      tax payable
                        
                        
                        147,027
                        
                        
                        
                        39,115Total
      current liabilities
                        
                        
                        7,203,809
                        
                        
                        
                        6,244,852Bank
      borrowings maturing after one year (Note 12)
                        
                        
                        381,590
                        
                        
                        
                        1,583,968Receipts
      in advance (Note 13)
                        
                        
                        1,992,073
                        
                        
                        
                        1,001,801Deposits
      received
                        
                        
                        1,453,149
                        
                        
                        
                        839,295Deferred
      liability
                        
                        
                        41,861
                        
                        
                        
                        41,775Accrued
      pension liabilities (Note 14)
                        
                        
                        451,856
                        
                        
                        
                        446,038Other
      liabilities (Note 10)
                        
                        
                        48,791
                        
                        
                        -Total
      liabilities
                        
                        
                        11,573,129
                        
                        
                        
                        10,157,729




- 2
-


Kid
Castle Educational Corporation


Condensed
Consolidated Balance Sheets – Continued


(Expressed
in US Dollars)





(Unaudited)
                          September
      30,
                          2009
                        
                        
                        December 31,
                            2008Commitments
      and contingencies (Note 16)Minority
      interest
                        
                        
                        316,637
                        
                        
                        
                        216,754Shareholders’
      equityCommon
      stock, no par share:60,000,000
      shares authorized; 30,000,000 issued and outstanding at September 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
                        
                        
                        (4,802,355
                        )
                        
                        
                        (6,340,449
                        )Accumulated
      other comprehensive loss
                        
                        
                        (1,024,518
                        )
                        
                        
                        (1,026,713
                        )Net
      loss not recognized as pension cost
                        
                        
                        (276,147
                        )
                        
                        
                        (271,498
                        )Total
      shareholders’ equity
                        
                        
                        3,648,459
                        
                        
                        
                        1,212,819Total
      liabilities and shareholders’ equity
                        
                        $
                        15,538,225
                        
                        
                        $
                        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 September
      30,2009
                    
                    
                    2008Operating
      RevenueSales
      of goods
                    
                    $
                    3,155,791
                    
                    
                    $
                    2,764,230Franchising
      income
                    
                    
                    561,787
                    
                    
                    
                    562,351Other
      operating revenue
                    
                    
                    863,745
                    
                    
                    
                    744,000Total
      net operating revenue
                    
                    
                    4,581,323
                    
                    
                    
                    4,070,581Operating
      costsCost
      of goods sold
                    
                    
                    (1,165,286
                    )
                    
                    
                    (1,123,317
                    )Cost
      of franchising
                    
                    
                    (84,468
                    )
                    
                    
                    (73,496
                    )Other
      operating costs
                    
                    
                    (801,365
                    )
                    
                    
                    (512,824
                    )Total
      operating costs
                    
                    
                    (2,051,119
                    )
                    
                    
                    (1,709,637
                    )Gross
      profit
                    
                    
                    2,530,204
                    
                    
                    
                    2,360,944Advertising
      costs
                    
                    
                    (1,975
                    )
                    
                    
                    (1,236
                    )Other
      operating expenses
                    
                    
                    (1,516,132
                    )
                    
                    
                    (1,525,122
                    )Income
      from operations
                    
                    
                    1,012,097
                    
                    
                    
                    834,586Interest
      expense, net
                    
                    
                    (9,257
                    )
                    
                    
                    (21,470
                    )Share
      of income (loss) of investments
                    
                    
                    (19,377
                    )
                    
                    
                    25,429Other
      non-operating income, net
                    
                    
                    80,276
                    
                    
                    
                    13,537Income
      before income taxes
                    
                    
                    1,063,739
                    
                    
                    
                    852,082Provision
      for taxes
                    
                    
                    (135,127
                    )
                    
                    
                    (15,893
                    )Income
      after income taxes
                    
                    
                    928,612
                    
                    
                    
                    836,189Minority
      interest income
                    
                    
                    (812
                    )
                    
                    
                    (19,713
                    )Net
      income
                    
                    $
                    927,800
                    
                    
                    $
                    816,476Loss
      per share - basic and diluted
                    
                    $
                    0.035
                    
                    
                    $
                    0.03Weighted-average
      shares used to compute earnings per share - basic and
    diluted
                    
                    
                    26,666,667
                    
                    
                    
                    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)




Nine months ended September
      30,2009
                                      
                                      
                                      2008Operating
      RevenueSales
      of goods
                                      
                                      $
                                      6,907,232
                                      
                                      
                                      $
                                      6,718,848Franchising
      income
                                      
                                      
                                      1,633,713
                                      
                                      
                                      
                                      1,703,194Other
      operating revenue
                                      
                                      
                                      2,200,322
                                      
                                      
                                      
                                      1,713,125Total
      net operating revenue
                                      
                                      
                                      10,741,267
                                      
                                      
                                      
                                      10,135,167Operating
      costsCost
      of goods sold
                                      
                                      
                                      (2,772,082
                                      )
                                      
                                      
                                      (2,844,771
                                      )Cost
      of franchising
                                      
                                      
                                      (244,427
                                      )
                                      
                                      
                                      (260,292
                                      )Other
      operating costs
                                      
                                      
                                      (1,771,161
                                      )
                                      
                                      
                                      (1,211,993
                                      )Total
      operating costs
                                      
                                      
                                      (4,787,670
                                      )
                                      
                                      
                                      (4,317,056
                                      )Gross
      profit
                                      
                                      
                                      5,953,597
                                      
                                      
                                      
                                      5,818,111Advertising
      costs
                                      
                                      
                                      (24,412
                                      )
                                      
                                      
                                      (24,316
                                      )Other
      operating expenses
                                      
                                      
                                      (4,208,206
                                      )
                                      
                                      
                                      (4,547,616
                                      )Income
      from operations
                                      
                                      
                                      1,720,979
                                      
                                      
                                      
                                      1,246,179Interest
      expense, net
                                      
                                      
                                      (35,746
                                      )
                                      
                                      
                                      (70,214
                                      )Share
      of income (loss) of investments
                                      
                                      
                                      (17,164
                                      )
                                      
                                      
                                      55,216Other
      non-operating income, net
                                      
                                      
                                      129,547
                                      
                                      
                                      
                                      174,385Income
      before income taxes
                                      
                                      
                                      1,797,616
                                      
                                      
                                      
                                      1,405,566Provision
      for taxes
                                      
                                      
                                      (247,984
                                      )
                                      
                                      
                                      (75,258
                                      )Income
      after income taxes
                                      
                                      
                                      1,549,632
                                      
                                      
                                      
                                      1,330,308Minority
      interest income
                                      
                                      
                                      (11,538
                                      )
                                      
                                      
                                      (48,379
                                      )Net
      income
                                      
                                      $
                                      1,538,094
                                      
                                      
                                      $
                                      1,281,929Earnings
      per share - basic and diluted
                                      
                                      $
                                      0.058
                                      
                                      
                                      $
                                      0.05Weighted-average
      shares used to compute earnings per share - basic and
    diluted
                                      
                                      
                                      26,666,667
                                      
                                      
                                      
                                      25,000,000





See
accompanying Notes to Condensed Consolidated Financial
Statements.


- 5
-


Kid
Castle Educational Corporation


Condensed
Consolidated Statements of Stockholders’ Equity


(Expressed
in U.S. 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 nine months ended September 30, 2009
      (Unaudited)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,538,094
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,538,094Cumulative
      translation adjustment (Unaudited)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,195
                  
                  
                  
                  
                  
                  
                  
                  2,195Comprehensive
      income (Unaudited)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,540,289Net
      income not recognized as pension cost
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (4,649
                  )
                  
                  $
                  (4,649
                  )Balance,
      September 30, 2009 (Unaudited)
                  
                  
                  30,000,000
                  
                  
                  $
                  9,492,138
                  
                  
                  $
                  194,021
                  
                  
                  $
                  65,320
                  
                  
                  $
                  (4,802,355
                  )
                  
                  $
                  (1,024,518
                  )
                  
                  $
                  (276,147
                  )
                  
                  $
                  3,648,459




See
accompanying Notes to Condensed Consolidated Financial
Statements.


- 6
-





Kid
Castle Educational Corporation


Condensed
Consolidated Statements of Cash Flows


(Unaudited)


(Expressed
in US Dollars)




Nine months ended September
      30,2009
                      
                      
                      2008Cash
      flows from operating activitiesNet
      income
                      
                      $
                      1,538,094
                      
                      
                      $
                      1,281,929Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
      of property and equipment
                      
                      
                      337,395
                      
                      
                      
                      224,999Impairment
      of goodwill
                      
                      
                      44,947
                      
                      
                      
                      43,946Amortization
      of intangible assets
                      
                      
                      121,660
                      
                      
                      
                      130,486Allowance
      for sales returns
                      
                      -
                      
                      
                      
                      80,455Allowance
      for doubtful debts
                      
                      
                      62,571
                      
                      
                      
                      74,760Reversal
      of allowance for loss on inventory obsolescence and slow-moving
      items
                      
                      
                      (61,700
                      )
                      
                      
                      (11,253
                      )Loss
      on disposal of PP&E
                      
                      -
                      
                      
                      
                      726Minority
      interests
                      
                      
                      11,538
                      
                      
                      
                      48,379Share
      of gain of investments
                      
                      
                      17,164
                      
                      
                      
                      (55,216
                      )(Increase)/decrease
      in:Notes
      and accounts receivable
                      
                      
                      (1,272,684
                      )
                      
                      
                      (926,701
                      )Inventories
                      
                      
                      462,623
                      
                      
                      
                      508,846Other
      receivables
                      
                      
                      315,939
                      
                      
                      
                      (113,487
                      )Prepayments
      and other current assets
                      
                      
                      (379,538
                      )
                      
                      
                      (267,809
                      )Deferred
      income tax assets
                      
                      
                      (7,857
                      )
                      
                      
                      (3,519
                      )Other
      assets
                      
                      
                      (24,075
                      )
                      
                      
                      (86,244
                      )Increase/(decrease)
      in:Notes
      and accounts payable
                      
                      
                      499,886
                      
                      
                      
                      551,797Accrued
      expenses
                      
                      
                      (133,287
                      )
                      
                      
                      186,367Other
      payables
                      
                      
                      464,305
                      
                      
                      
                      (334,131
                      )Receipts
      in advance
                      
                      
                      271,360
                      
                      
                      
                      253,755Income
      taxes payable
                      
                      
                      104,938
                      
                      
                      
                      (21,786
                      )Deferred
      liability
                      
                      
                      (615
                      )
                      
                      
                      2,537Deposits
      received
                      
                      
                      (89,652
                      )
                      
                      
                      26,628Accrued
      pension liabilities
                      
                      
                      (1,780
                      )
                      
                      
                      671Other
      liabilities
                      
                      
                      47,742
                      
                      
                      -Net
      cash provided by operating activities
                      
                      
                      2,328,974
                      
                      
                      
                      1,596,135Cash
      flows from investing activitiesPurchase
      of property and equipment
                      
                      
                      (1,105,885
                      )
                      
                      
                      (362,284
                      )Proceeds
      from disposal of property and equipment
                      
                      -
                      
                      
                      
                      2,236Prepayment
      of long-term investments
                      
                      
                      (1,436,765
                      )
                      
                      -Bank
      fixed deposits-pledged
                      
                      
                      (7,208
                      )
                      
                      
                      297,493Pledged
      notes receivable
                      
                      
                      61,299
                      
                      
                      
                      155,998Net
      cash provided by (used in) investing activities
                      
                      
                      (2,488,559
                      )
                      
                      
                      93,443




- 7
-


Kid
Castle Educational Corporation


Condensed
Consolidated Statements of Cash Flows – Continued


(Unaudited)


(Expressed
in US Dollars)





Nine months ended September
      30,2009
                                    
                                    
                                    2008Cash
      flows from financing activitiesProceeds
      from bank borrowings
                                    
                                    $
                                    1,084,102
                                    
                                    
                                    $
                                    -Proceeds
      from loan from related parties
                                    
                                    
                                    
                                    
                                    
                                    
                                    127,993Repayment
      of bank borrowings
                                    
                                    
                                    (1,276,139
                                    )
                                    
                                    
                                    (1,177,680
                                    )Repayment
      of loan from stockholders and transactions of related
    parties
                                    
                                    
                                    (178,630
                                    )
                                    
                                    
                                    (42,426
                                    )Issuance
      of common stock for cash
                                    
                                    
                                    900,000
                                    
                                    
                                    -Net
      cash provided by (used in) financing activities
                                    
                                    
                                    529,333
                                    
                                    
                                    
                                    (1,092,113
                                    )Net
      increase in cash and cash equivalents
                                    
                                    
                                    369,748
                                    
                                    
                                    
                                    597,465Effect
      of exchange rate changes on cash and cash equivalents
                                    
                                    
                                    67,700
                                    
                                    
                                    
                                    (93,501
                                    )Cash
      and cash equivalents at beginning of period
                                    
                                    
                                    1,985,818
                                    
                                    
                                    
                                    1,238,212Cash
      and cash equivalents at end of period
                                    
                                    $
                                    2,423,266
                                    
                                    
                                    $
                                    1,742,176





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 September 30, 2009, KCEI had total registered capital of
RMB3,500,000.





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.





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 September 30, 2009 and for the nine months
ended September 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 its
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 September 30,
2009, our accumulated deficit was $4,802,355. Although we have an accumulated
deficit, we have positive cash flow from operations. Barring significant,
unforeseen development in the 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
collectability 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 portion 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 nine
months ended September 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 of September 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
September 30, 2009, we reviewed events occurring through the filing date of this
document. See Note 17 for our subsequent events disclosure.





In
September 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





September
      30,
                            2009
                          
                          
                          December 31,
                            2008(Unaudited)Notes
      and accounts receivable-
      Third parties
                          
                          $
                          3,720,942
                          
                          
                          $
                          2,492,199-
      Related parties
                          
                          
                          99,251
                          
                          
                          
                          183,597Total
                          
                          
                          3,820,193
                          
                          
                          
                          2,675,796Allowance
      for doubtful accounts and sales returns
                          
                          
                          (644,786
                          )
                          
                          
                          (504,028
                          )Notes
      and accounts receivable, net
                          
                          $
                          3,175,407
                          
                          
                          $
                          2,171,768





NOTE
6 - INVENTORIES





September
      30,
                          2009
                        
                        
                        December 31,
                          2008(Unaudited)Work
      in process
                        
                        $
                        188,499
                        
                        
                        $
                        109,163Finished
      goods and other merchandises
                        
                        
                        1,616,341
                        
                        
                        
                        2,130,1161,804,840
                        
                        
                        
                        2,239,279Less:
      Allowance for obsolete inventories and decline of market
    value
                        
                        
                        (248,313
                        )
                        
                        
                        (306,126
                        )$
                        1,556,527
                        
                        
                        $
                        1,933,153





NOTE
7 - OTHER RECEIVABLES





September
      30,
                            2009
                          
                          
                          December 31,
                            2008(Unaudited)Other
      receivables - third parties:Advances
      to staff
                          
                          $
                          91,003
                          
                          
                          $
                          90,521Other
      receivables
                          
                          
                          164,477
                          
                          
                          
                          304,416Sub-total
                          
                          
                          255,480
                          
                          
                          
                          394,937Other
      receivables - related parties
                          
                          
                          85,035
                          
                          
                          
                          1,066$
                          340,515
                          
                          
                          $
                          396,003




- 13
-




NOTE
8 - PREPAYMENTS AND OTHER CURRENT ASSETS




September
      30,
                                  2009
                                
                                
                                December 31,
                                  2008(Unaudited)Prepayments
                                
                                $
                                862,228
                                
                                
                                $
                                467,414Temporary
      payments
                                
                                -
                                
                                
                                
                                62Others
                                
                                
                                9,405
                                
                                
                                
                                8,141$
                                871,633
                                
                                
                                $
                                475,617




NOTE 9-
PREPAYMENT OF LONG TERM INVESTMENTS





As of
September 30, 2009, the Group has made the following prepaid investments:
$87,884 in Tianjin Kid Castle Educational Investment Consulting Co., Ltd.,
$73,237 in Shanghai Putuo District Kid Castle Yin Cyun Language and Education
Center in the PRC, and $574,935 and $981,093 in Chengdu Preschool and Nanchang
Preschool, respectively, for refurbishment and equipment purchases.





NOTE
10- INTEREST IN ASSOCIATES




September
      30,
                              2009
                            
                            
                            December 31,
                              2008(Unaudited)21st
      Century Kid Castle Language and Education Center (“Education Center”)
      (Note (i))Investment
      cost
                            
                            $
                            109,855
                            
                            
                            $
                            109,628Share
      of loss
                            
                            
                            (9,768
                            )
                            
                            
                            (42,696
                            )$
                            100,087
                            
                            
                            $
                            66,932Tianjin
      Kid Castle Educational Investment Consulting Co., Ltd. (“Tianjin
      Consulting”) (Note (ii))Investment
      cost
                            
                            $
                            102,431
                            
                            
                            $
                            102,319Share
      of loss
                            
                            
                            (151,322
                            )
                            
                            
                            (100,915
                            )(Note(ii)(A))
                            
                            $
                            (48,791
                            )
                            
                            $
                            1,404Total
                            
                            $
                            100,087
                            
                            
                            $
                            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
nine months ended September 30, 2009 and 2008, the Group recognized investment
income from Education Center of $32,985 and $50,097, 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 September 30, 2009, the Group’s share of Tianjin Consulting’s $151,322
      loss exceeded the Groups’ investment cost of $102,431. The $48,791
      difference has been reclassified as Other
  liabilities.





For the
nine months ended September 30, 2009, the Group recognized an investment loss of
$50,147 and an investment revenue of $5,119 for the nine months ended September
30, 2008, in Tianjin Consulting, accounted for using the equity
method.





NOTE
11 - INTANGIBLE ASSETS




September
      30,
                                    2009
                                  
                                  
                                  December 31,
                                    2008(Unaudited)Gross
      carrying amountFranchise
                                  
                                  $
                                  1,044,030
                                  
                                  
                                  $
                                  1,026,455Copyrights
                                  
                                  
                                  613,723
                                  
                                  
                                  
                                  603,391Goodwill
                                  
                                  
                                  235,526
                                  
                                  
                                  
                                  235,0391,893,279
                                  
                                  
                                  
                                  1,864,885Less:
      Accumulated amortizationFranchise
                                  
                                  
                                  (991,829
                                  )
                                  
                                  
                                  (898,148
                                  )Copyrights
                                  
                                  
                                  (583,036
                                  )
                                  
                                  
                                  (527,967
                                  )(1,574,865
                                  )
                                  
                                  
                                  (1,426,115
                                  )Less:
      impairment of goodwill
                                  
                                  
                                  (91,406
                                  )
                                  
                                  
                                  (67,714
                                  )(91,406
                                  )
                                  
                                  
                                  (67,714
                                  )Net
                                  
                                  $
                                  227,008
                                  
                                  
                                  $
                                  371,056




Amortization
charged to operations was $121,660 and $130,486 for the nine months ended
September 30, 2009 and 2008, respectively, and the impairment of goodwill
charged to operations was $44,947 and $43,946 for the nine months ended
September 30, 2009 and 2008, respectively.




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




2010
                    
                    $
                    41,444$
                    41,444


- 15
-


NOTE
12 - BANK BORROWINGS




September 30,
                    2009
                  
                  
                  December 31,
                    2008(Unaudited)Bank
      term loans (Note (i))
                  
                  $
                  495,800
                  
                  
                  $
                  514,471Mid-term
      secured bank loan (Note (ii))
                  
                  
                  1,166,075
                  
                  
                  
                  1,312,3761,661,875
                  
                  
                  
                  1,826,847Less:
      Balances maturing within one year included in current
      liabilitiesBank
      term loans
                  
                  
                  114,210
                  
                  
                  
                  76,946Mid-term
      secured bank loan
                  
                  
                  1,166,075
                  
                  
                  
                  165,9331,280,285
                  
                  
                  
                  242,879Bank
      borrowings maturing after one year
                  
                  $
                  381,590
                  
                  
                  $
                  1,583,968




Note:




(i)
            This
      line item represents bank loans that have been secured by a pledge of
      post-dated checks amounting to $649,547 and $755,824 that we have received
      from franchisees and the Group’s bank deposits of $9,949 and $2,839 as of
      September 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 14, 2009 and will be due on September 30, 2010. The
      weighted average interest rate was 5.86% per annum as of September
      30, 2009 and 2008, respectively.




For the
nine months ended September 30, 2009 and 2008, interest expense charged to
operations in respect of bank loans was $15,827 and $25,134,
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
nine months ended September 30, 2009 and 2008, interest expense charged to
operations amounted to $21,391 and $42,592, respectively.


- 16
-


NOTE
13 - RECEIPTS IN ADVANCE




The
balance comprises:





September 30,
                    2009
                  
                  
                  December 31,
                    2008(Unaudited)Current
      liabilities:Sales
      deposits received (Note (i))
                  
                  $
                  526,632
                  
                  
                  $
                  277,823Franchising
      income received (Note (ii))
                  
                  
                  836,763
                  
                  
                  
                  1,480,947Subscription
      fees received (Note (iii))
                  
                  
                  457,364
                  
                  
                  
                  471,088Related
      party
                  
                  
                  636
                  
                  
                  
                  414Others
                  
                  
                  80,018
                  
                  
                  
                  75,7081,901,413
                  
                  
                  
                  2,305,980Long-term
      liabilities:Franchising
      income received (Note (ii))
                  
                  
                  1,992,073
                  
                  
                  
                  1,001,801$
                  3,893,486
                  
                  
                  $
                  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
14 - 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:




Nine months ended September
      30,2009
                                                      
                                                      
                                                      2008(Unaudited)Service
      cost
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -Interest
      cost
                                                      
                                                      
                                                      11,916
                                                      
                                                      
                                                      
                                                      9,684Expected
      return on assets
                                                      
                                                      
                                                      (4,770
                                                      )
                                                      
                                                      
                                                      (1,569
                                                      )Amortization
      of unrecognized loss
                                                      
                                                      
                                                      7,392
                                                      
                                                      
                                                      
                                                      2,424Net
      periodic pension cost
                                                      
                                                      $
                                                      14,538
                                                      
                                                      
                                                      $
                                                      10,539


- 18
-




NOTE
15 - 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
                      
                      
                      ConsolidatedNine months
                        ended
                        September 30,
                        2009
                      
                      
                      Nine months
                        ended
                        September 30,
                        2008
                      
                      
                      Nine months
                        ended
                        September 30,
                        2009
                      
                      
                      Nine months
                        ended
                        September 30,
                        2008
                      
                      
                      Nine months
                        ended
                        September 30,
                        2009
                      
                      
                      Nine months
                        ended
                        September 30,
                        2008
                      
                      
                      Nine months
                        ended
                        September 30,
                        2009
                      
                      
                      Nine months
                        ended
                        September 30,
                        2008
                      
                      
                      Nine months
                        ended
                        September 30,
                        2009
                      
                      
                      Nine months
                        ended
                        September 30,
                        2008
                      
                      
                      Nine months
                        ended
                        September 30,
                        2009
                      
                      
                      Nine months
                        ended
                        September 30,
                        2008RevenueExternal
      revenue
                      
                      $
                      4,819,416
                      
                      
                      $
                      5,193,759
                      
                      
                      $
                      5,921,851
                      
                      
                      $
                      4,941,408
                      
                      
                      $
                      10,741,267
                      
                      
                      $
                      10,135,167
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      10,741,267
                      
                      
                      $
                      10,135,167Inter-segment
      revenue
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —$
                      4,819,416
                      
                      
                      $
                      5,193,759
                      
                      
                      $
                      5,921,851
                      
                      
                      $
                      4,941,408
                      
                      
                      $
                      10,741,267
                      
                      
                      $
                      10,135,167
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      10,741,267
                      
                      
                      $
                      10,135,167Profit
      fromOperations
                      
                      $
                      583,820
                      
                      
                      $
                      673,668
                      
                      
                      $
                      1,171,944
                      
                      
                      $
                      683,818
                      
                      
                      $
                      1,755,764
                      
                      
                      $
                      1,357,486
                      
                      
                      $
                      (34,785
                      )
                      
                      $
                      (111,307
                      )
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      1,720,979
                      
                      
                      $
                      1,246,179Capital
      expenditures
                      
                      $
                      154,604
                      
                      
                      $
                      75,863
                      
                      
                      $
                      1,000,262
                      
                      
                      $
                      207,126
                      
                      
                      $
                      1,154,866
                      
                      
                      $
                      282,989
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      1,154,866
                      
                      
                      $
                      282,989September
      30,
                        2009
                      
                      
                      December 31,
                        2008
                      
                      
                      September
      30,
                        2009
                      
                      
                      December 31,
                        2008
                      
                      
                      September
      30,
                        2009
                      
                      
                      December 31,
                        2008
                      
                      
                      September
      30,
                        2009
                      
                      
                      December 31,
                        2008
                      
                      
                      September
      30,
                        2009
                      
                      
                      December 31,
                        2008
                      
                      
                      September
      30,
                        2009
                      
                      
                      December 31,
                        2008Total
      assets
                      
                      $
                      7,505,436
                      
                      
                      $
                      6,840,662
                      
                      
                      $
                      8,125,207
                      
                      
                      $
                      5,305,329
                      
                      
                      $
                      15,630,643
                      
                      
                      $
                      12,145,991
                      
                      
                      $
                      305,627
                      
                      
                      $
                      2,860
                      
                      
                      $
                      (398,045
                      )
                      
                      $
                      (561,549
                      )
                      
                      $
                      15,538,225
                      
                      
                      $
                      11,587,302


- 19
-


NOTE
16 - COMMITMENT AND CONTINGENCIES





A.
Lease Commitment





As of September 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
                
                $
                418,6572011
                
                
                389,3692012
                
                
                771,2482013
                
                
                562,411Years
      2014 to 2027
                
                
                2,656,032$
                4,797,717





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
17 – SUBSEQUENT EVENTS





None.





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 “Risk Factors” in 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.





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.




- 20
-




CRITICAL
ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES





Our
discussion and analysis of our financial condition and results of operations is
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.





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.


- 21
-


As
of September 30, 2009, the balance of our amortizable intangible assets was
$82,888, including franchise-related intangible assets of $52,201 and copyrights
of $30,687. The amortizable intangible assets are amortized on a straight-line
basis over estimated useful lives of 10 years, and the balance of goodwill
was $144,120, 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 September 30, 2009
compared to Three Months Ended September 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
$510,742, or 13%, to $4,581,323 for the three months ended September 30, 2009
from $4,070,581 for the three months ended September 30, 2008.  The
increase in net operating revenue comprises the increase in the sales of goods
of $391,561, of other operating revenue of $119,745, and decrease in franchising
income of $564.




Sales of goods.The increase
in sales of goods, from $2,764,230 for the three months ended September 30, 2008
to $3,155,791 for the three months ended September 30, 2009 (a 14% increase),
was mainly due to the increase in sales in PRC operations.




Franchising income.The
decrease in franchising income, from $562,381 for the three months ended
September 30, 2008 to $561,787 for the three months ended September 30, 2009 (a
0.1% decrease), was mainly due to the difference in the exchange rates between
the two periods.




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 schools controlled by us.
Other operating revenue increased by $119,745, to $863,745 for the three months
ended September 30, 2009 from $744,000 for the three months ended September 30,
2008. The increase was mainly due to operating revenue from schools controlled
by us in the PRC.




Gross Profit.Gross profit
increased by $169,260, or 7%, to $2,530,204 for the three months ended September
30, 2009, from $2,360,944 for the three months ended September 30,
2008.  The increase was mainly due to the increase in sales of goods
and other operating revenue from PRC operations.




Total Operating Expenses.Total operating expenses decreased by $8,251, or 0.5%, to $1,518,107 for
the three months ended September 30, 2009 from $1,526,358 for the three months
ended September 30, 2008.  The decrease was principally due to the
difference in the exchange rates between the two periods.




Other Operating Expenses.Other operating expenses decreased by $8,990, or 0.5%, to $1,516,132 for
the three months ended September 30, 2009, from $1,525,122 for the three months
ended September 30, 2008, principally due to the difference in the exchange
rates between the two periods.




Interest Expenses, Net.Net
interest expenses decreased by $12,213, or 57%, to $9,257 for the three months
ended September 30, 2009 from $21,470 for the three months ended September 30,
2008, primarily due to the decrease of the borrowings during the three months
ended September 30, 2009 compared to the three months ended September 30,
2008.


- 22
-




Provision for Taxes.Provisions for taxes for the three months ended September 30, 2009 and
2008 were $135,127 and $15,893, respectively. These provisions for income taxes
relate to income taxes resulting from our operations in Taiwan.




Nine
Months Ended September 30, 2009 compared to Nine Months Ended September 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 $606,100, or 6%, to $10,741,267 for the nine months ended September
30, 2009 from $10,135,167 for the nine months ended September 30, 2008. This was
mainly due to the increase in sales of goods of $188,384 and other operating
revenues of $487,197, decrease in franchising income of $69,481.





Sales of goods. Sales of
goods increased by $188,384, from $6,718,848 for the nine months ended September
30, 2008 to $6,907,232 for the nine months ended September 30,
2009.  The increase was mainly due to the increase in sales in PRC
operations.





Franchising income. The
4% decrease in franchising income, from $1,703,194 for the nine months ended
September 30, 2008 to $1,633,713, for the nine months ended September 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 $487,197, or 28%, to $2,200,322 for the nine months ended
September 30, 2009, from $1,713,125 for the nine months ended September 30,
2008. The increase was mainly due to revenue from schools controlled by us in
the PRC.





Gross Profit. Gross
profit increased by $135,486, or 2%, to $5,953,597 for the nine months ended
September 30, 2009, from $5,818,111 for the nine months ended September 30,
2008. The increase in Gross Profit was mainly due to the increase in sales of
goods and other operating revenue from PRC operations the operating costs of
schools controlled by us in the PRC.





Total Operating
Expenses. Total operating expenses decreased by $339,314 to $4,232,618
for the nine months ended September 30, 2009, from $4,571,932 for the nine
months ended September 30, 2008, a 7% 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 $339,410, or 7%, to
$4,208,206 for the nine months ended September 30, 2009, from $4,547,616 for the
nine months ended September 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 $34,468, or 49%, to $35,746 for the nine
months ended September 30, 2009 from $70,214 for the nine months ended September
30, 2008. The decrease in net interest expenses was mainly due to the decrease
of interest rates during the nine months ended September 30, 2009, compared to
the nine months ended September 30, 2008. (See Note 12 to our Condensed
Consolidated Financial Statements for more information.)





Other Non-operating Income,
Net. Net other non-operating income decreased by $44,838, or 26%, to
$129,547 for the nine months ended September 30, 2009, from $174,385 for the
nine months ended September 30, 2008. The decrease in net other non-operating
income was mainly due to the difference in exchange rates between the two
periods.





Provision for Taxes.
Provision for taxes for the nine months ended September 30, 2009 and 2008 were
$247,984 and $75,258, respectively. These provisions for income taxes relate to
income taxes resulting from our operations in Taiwan.


- 23
-


LIQUIDITY
AND CAPITAL RESOURCES





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.  As of September 30, 2009, our principal sources of
liquidity included cash and bank balances of $2,423,266, which increased
$437,375 from the balance of $1,985,818 at December 31, 2008. The increase
was mainly due to the capital injection of $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 and
subsequently amended on September 9, 2009 and November 2, 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 12 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 $2,328,973 and $1,596,135 during the
nine months ended September 30, 2009 and 2008, respectively. The $732,838
increase was primarily due to (i) net income in the amount of 1,538,094 during
the nine months ended September 30, 2009, compared to net income in the amount
of $1,281,929 during the nine months ended September 30, 2008, and (ii) an
increase of other payables in the amount of $464,305 during the nine months
ended September 30, 2009, compared to an decrease of other payables in the
amount of $334,131 during the nine months ended September 30,
2008,.





Net
cash used in investing activities was $2,488,559 during the nine months ended
September 30, 2009, and net cash provided by investing activities was $93,443
during the nine months ended September 30, 2008. The $2,395,116 difference was
primarily attributable to increase in cash used in the property and equipment
purchase of $1,105,885 and the prepayment of long-term investments of $1,436,765
during the nine months ended September 30, 2009, compared to cash used in
property and equipment purchases of $362,284 during the nine months ended
September 30, 2008, for a net negative difference in cash of
$2,180,366.





Net
cash provided by financing activities was $529,333 during the nine months ended
September 30, 2009, and net cash used in financing activities was $1,092,113
during the nine months ended September 30, 2008. The $1,621,446 difference was
primarily attributable to issuance of common stock for cash of
$900,000.





Off-Balance
Sheet Arrangements





As
of September 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.





Bank
Borrowing





We
currently utilize bank loans as one of our financing sources.  As of
September 30, 2009 and 2008, the balances of bank borrowings, including current
and non-current portions, were $1,661,875 and $1,826,847,
respectively.





- 24
-




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 September 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 nine
months ended September 30, 2009 and 2008 amounted to $55,290, and $41,865,
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 $15,961. 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.





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.


- 25
-


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 September 30,
2009 our disclosure controls and procedures are 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 September 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.





PART
II OTHER INFORMATION





ITEM 1. LEGAL
PROCEEDINGS





We have no material pending legal proceedings.


- 26
-


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 September 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





None.





ITEM
3. DEFAULTS UPON SENIOR SECURITIES





None.





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





None.





ITEM
5. OTHER INFORMATION





None.





ITEM
6. EXHIBITS





A.
                  
                  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


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





Dated: December
22, 2009





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


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