UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission file number: 333-39629

KID CASTLE EDUCATIONAL CORPORATION

(Exact name of registrant as specified in its Charter)

Issuer’s telephone number:

(011) 886-2-2218-5996

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

None

      Check 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 þ          No o

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

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes o          No þ

      The aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold as of the last day of the registrant’s most recently completed second fiscal quarter (June 30, 2004) was $66,498,960. The number of shares of common stock outstanding as of March 31, 2005 was 18,999,703.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the registrant’s definitive proxy statement to be delivered to shareholders in connection with the 2005 annual meeting of shareholders are incorporated by reference in response to Part III of this Form 10-K.

KID CASTLE EDUCATIONAL CORPORATION

FORM 10-K

TABLE OF CONTENTS

PART I

      When we use the terms “Kid Castle,” “we,” “us,” “our” and “the company,” we mean Kid Castle Educational Corporation, a Florida corporation, and its subsidiaries. Our principal subsidiaries are our wholly-owned subsidiary, Higoal Developments Limited (Higoal) and its wholly-owned subsidiaries, Kid Castle Internet Technologies Limited (KCIT) and Kid Castle Educational Software Development Company Limited (KCES). See page 6 for a chart of our subsidiaries.

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

Overview

      Kid Castle is a leading provider in China and Taiwan of English language instruction and educational services to children for whom Chinese is the primary language. Our focus is on children between 2 and 12 years old. In 2004 we taught or provided educational materials for approximately 700,000 students at over 4,000 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, 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. In July 2000, we launched our fully-developed Internet-based education program that provides an interactive environment in which Kindergarten through 12^th grade (K-12) students develop English language and computer skills.

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

Our Philosophy of Education

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

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

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

Foreign Teachers

      Kid Castle has worked with numerous universities to introduce foreign teachers into Taiwan from countries such as the United States, Canada and England. We provide comprehensive training regimens and supportive plans for teachers.

Innovative Publishing of Educational Materials

      A significant part of our philosophy is to design our own innovative educational materials. These include English publications for students 3 to 8 years old, supplemental English materials for students 7 to 8 years old, and children’s English materials for students 7 to 12 years old. We have won awards from major cities and educational bureaus including Taipei City, Taipei County, Taoyuan County, Taichung County and Kaohsiung County.

Kid Castle Computers — Prepare Our Children for the 21^st Century

      In the modern age, technology affects the way we live, work and play, and computers have become necessary tools for learning. Kid Castle Computer School provides both the instruction and the know-how to get children ready for the 21^st century. We incorporate computer learning and computer/ Internet familiarity into our curriculum.

      Through extensive research into both the latest technology as well as how it influences the way we learn, Kid Castle has designed a curriculum ideal for children. Using computers not only makes learning more interesting for them, it also expands their horizons.

      Outside of the classroom, learning continues at home with the help of Kid Castle’s Virtual Computer School. Launched with great fanfare in the millennial year 2000, the educational site is the place on the web for children to study a number of subjects including English, Chinese, science, math and social studies. With its vivid graphics and pictures, this easy-to-navigate Internet site is growing in popularity among Taiwan’s youth. Parents appreciate the Virtual Computer School’s educational content and the fact that it keeps track of the individual student’s progress.

Kid Castle’s Programs

      Professionally designed, in-depth research into curriculum and child development and experienced, caring teachers are some of the reasons why Kid Castle’s After-School Education Program is becoming one of the most recognized and respected institutions of its kind in Taiwan. The guiding principles behind the program are opening up students’ minds to a more international worldview and perspective with a focus on information and technology.

      The teachers in the After-School Education Program are patient, professional, caring and sincere. They foster an educational environment that is not only fun, but also safe for their students.

      Kid Castle’s curriculum includes computer courses that introduce and explain cutting-edge computer facilities and learning materials to the students. Children learn how to start-up their computers and, with a few clicks of the mouse, go on-line or start a program that opens the doors to the computer world and information age.

      The teaching materials of the After-School Education Program help our students learn basic conversational English through various themes and units. Beginning with the ABCs, by the time most students complete our program, they can say a lot! Fun activities that focus on speaking and listening are an integral part of each class.

      Kid Castle recognizes that children today are the adults of tomorrow. To prepare for the future, the program includes a series of moral stories for students that teach them basic life skills and how to be good people.

      The After-School Education Program is now online. This supplement to the growing virtual world of Internet education reviews the lessons that the children have learned in class. By taking learning home, Kid Castle fosters the interaction between children and parents, bringing everyone closer together.

      To prepare our students to be leaders has always been one of Kid Castle’s missions. We teach our children a number of different subjects in order to open their minds to the wonders of the world and what the future holds. Established island wide, the successful Kid Castle Pre-Schools are where children 3 to 6 years old can get their start.

      Kid Castle has incorporated an interactive teaching method into the pre-school curriculum, which helps children learn English more effectively. Our interactive multi-media and computer materials, including CD ROMs, make learning more fun.

      We recognize that going to pre-school is the first step many young children will take in their education, and that each student’s needs are unique. To aid our students in learning, Kid Castle incorporates a number of teaching tools into the pre-school curriculum, such as colorful books, educational videos, tapes of chants and songs, as well as posters with vivid words and pictures.

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

      Finally, Kid Castle stresses the interaction and relationship among the children, parents, teachers and administrators at the pre-schools. Regular reports help keep parents abreast of their children’s progress and help continue the lessons after school.

      Our specially designed educational materials are an essential part of our business. Kid Castle publishes a wide-range of successful teaching and learning materials for children such as Chinese textbooks for

kindergartens, English textbooks, workbooks, English magazines and accompanying guides, music CDs and tapes, and other supplemental materials for kindergarten and elementary levels. Our market includes individuals, organizations, elementary schools and chain schools — anyone who wants to learn! In addition to publications, Kid Castle provides relevant resources and services to its customers.

      The Internet is fast becoming the most powerful tool for learning. Asymmetric digital subscriber line, or ADSL, and cable modems will become more and more popular in the near future, speeding up access times and allowing exciting new learning tools to be used.

      Drawing on over ten years of experience in education and the contribution of professionals from many fields, Kid Castle has designed a comprehensive virtual education system in order to be at the forefront of the technical revolution. Our goal is to create an international, informative, technological and humanized virtual world which will motivate our students to develop English language skills in a quick and enjoyable manner. With these goals in mind, Kid Castle expects to have an impressive and comprehensive virtual world, designed for Chinese societies all over the world. It is also expected provide a comprehensive English language learning environment for our students.

      Our online learning tools have been developed to meet the varying needs of different age groups of children. We emphasize interaction between children to boost the children’s learning interest using the following methods:

      We are one of the leading online learning centers in Taiwan. Kid Castle has:

Company Organization Chart

The English Language Education Market

      Our target market in Taiwan consists of all elementary and pre-school age children. According to a study by the Taiwan Department of Education in 2001, approximately 52.7% of elementary school students are

receiving extra-curricular tutoring. In other words, one out of every two students in Taiwan is being tutored in some form of class or institution outside of their regular schooling.

      Pre-school Educational Market. Among the 1.2 million children in Taiwan between the ages of 2 and 6, 60% (approximately 720,000 children) attend pre-schools, and approximately 70% (about 840,000 children) purchase pre-school English learning materials.

      Elementary School English Language Materials. The Taiwan Department of Education has issued a directive that from the 2002 academic year onward, computer skills and English must be incorporated into the school curriculum for all students in third grade and above. As a result, we believe that over the next decade nearly 1.93 million students will require English language materials for remedial purposes. Taiwan’s schools have little experience in the new curriculums, few materials and a lack of qualified teachers.

      Elementary Remedial Education. We believe that children’s remedial education will move in the direction of diversification of products, increased dissemination of information and additional education that complements the school curriculum with English and computer skills. We estimate that approximately 50% of Taiwan’s 1.93 million 7 to 12-year-old elementary students will participate in remedial courses over the next decade.

      Other Favorable Factors. We believe that every first to fourth grade class will have some form of English language education in its curriculum. Under Taiwan’s National Development Plan, the government plans to budget US $970,000,000 from 2002 to 2007 for English education and online education. In our view these factors make the market for English education services in Taiwan particularly favorable.

China Market Overview

      According to the 2003 market survey by the National Bureau of Statistics of China (NBSC), the English education market is comprised of 25 million children for the kindergarten education market and 122 million elementary students for the after-school tutoring market.

      Yet, despite such a large market and business opportunity, it is still difficult to establish private children’s education businesses in China. Foreign companies have difficulties operating in China due to differences in cultural background and educational methods. We believe that we are an ideal candidate to operate in China because we started in Taiwan, which has similarities to China in terms of culture, educational methods and expectations.

      In the past ten years, China has seen an impressive economic growth rate. With this economic growth, consumers have greatly increased their expenditures. And with the government motto of “children are our treasure,” parents are heavily investing in their children’s education, including putting their children into premium kindergartens, enrolling them in after-school tutoring institutions to improve their English language skills and providing computers and other educational technologies. A large portion of parents’ investment in their children is to place them into prominent schools and internationally recognized universities so that they may become the leaders of society.

      Currently, according to the 2003 NBSC survey, the educational industry that serves China’s children has six core markets worth a total of approximately US $40 billion per year: Pre-school Education, Children’s English Remedial Education, Children’s English Teaching Material, Private Primary School, International Primary School, and Children’s Internet-based Education.

      Remedial English Education. The teaching materials and methods of the People’s Republic of China (PRC) government-sponsored kindergartens are not able to satisfy the demanding needs of parents searching for a high quality learning environment. At the same time, Chinese society has begun to demand that the kindergarten curriculum be taught in English and Chinese. At 25 million pre-schoolers, we believe the current size of China’s pre-school education market is still only at its nascent stages. In 2002, China began to aggressively incorporate English into its elementary school curriculum. The mentality that “English language

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

      Privately Operated Elementary School Market. The Chinese government has recently been encouraging development of privately operated elementary schools. The Chinese government has also launched a China/ Foreign education co-operative operation with the plan to raise the level of its own educational systems by using foreign know-how and resources. We believe this type of government policy will greatly expand the Private Elementary School Market and create impressive market potential.

      Technology Advancements. China currently has 100 million cable television subscribers according to the Ministry of Information Industry of the PRC. This set-up has allowed the government to connect the people with up-to-date information. The government has already begun a cable/optics and networking system that would expedite the exchange of information more quickly and more reliably. With such technology and the increasing value of Internet-based education, we believe the Children’s Internet-based Education Market will have the technology and the demand to experience significant growth.

      Other Favorable Factors.. We believe the following additional factors make the market for English language education services attractive:

Strategy

      We have substantially increased, and expect to further increase, our sales and marketing efforts in order to market more aggressively our franchises in China and thereby increase distribution of our English learning materials. Recognizing the importance parents place on brand names when making decisions with respect to their children’s education, we will continue to use our franchise, publishing and Internet operations, as well as various advertising channels, trade shows, and conventions to improve and publicize the “Kid Castle” brand name.

      Our main strategy for growth is to increase our franchises in China from 90 to 700 or more, thereby increasing our student enrollment from 12,000 to 105,000 or more. Each enrolled student in a franchise spends on average approximately $100 per year on our publications. This expansion target would therefore increase

our publications revenue by nine times. Of course, as our brand name becomes more established, there will be a corollary effect in increasing sales. Once we have achieved the goal of 700 franchises, which will take up to three to four years, we will include Company owned and operated schools in our operation.

      We carefully consider the choice of location for each of our franchise schools. We first consider whether a particular location is saturated with our franchise schools or other schools. In the process we conduct market research, analysis and surveys. Then, once we have identified a region, we begin a marketing campaign — attending school fairs and expositions, conducting seminars and employing news print, media and other marketing methods. The increase in the number of franchises has required us to hire more personnel, including management personnel and personnel who provide staff training and teacher training, in order to ensure that each franchise has the proper oversight and that the quality of our franchised operations is maintained. We are planning to put in place an effective Enterprise Resource Planning (ERP) system to internally monitor and manage the franchise schools that we intend to set up in China using the same internal system that we use in Taiwan.

Operations

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

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

      Franchises and Cooperating Schools. Our classroom-based courses and tutoring services are provided through company-operated locations, cooperating schools and our independent franchisees. Our franchisees provide Kid Castle courses and tutoring services under the “Kid Castle” brand name within a specified territory in accordance with their franchise agreements with us. The revenues from our franchisees are comprised of annual licensing fees for using the Kid Castle brand name and consulting services, and the purchase of Kid Castle teaching/learning materials. Our franchisees are typically under exclusive agreements to purchase our course and marketing materials, which they use in conducting and promoting their classes.

      Franchisees must obtain our approval for the location and design of a Kid Castle school and must operate the franchised school in accordance with our methods, standards and specifications. The franchisee is usually required to purchase all of its instructional materials, as well as student explanatory and promotional brochures, from us. We specify requirements for other items necessary for operation of a franchise school, such as computers, instructional materials and furniture.

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

      The initial training seminar is designed to familiarize teachers with the three Kid Castle teaching methods (Audio-Lingual, Total Physical Response and Communicative Language Teaching), to introduce our materials, and to help them incorporate our three teaching methods into the daily teaching plan.

      We employ division directors who act as “consultants” to provide assistance to franchisees in technology implementation, business development, marketing, education and operations. These employees also facilitate regular communications between franchisees and Kid Castle.

      We believe there is significant potential for additional franchised schools both in Taiwan and China. We are actively seeking to expand franchisees in these territories.

      In addition to franchise schools, our operations also include cooperating schools, which are not affiliated with our company but contract with us to use our teaching/learning materials. Unlike the franchisees, the cooperating schools are not required to use only our materials and are not required to participate in our Kid Castle training seminars.

      The third type of school, cooperating care-taking schools, serve children of pre-school and elementary school age in a care-taker, as well as an educational, role. These schools are not affiliated with our company but contract with us to use our materials, although on a much smaller scale than the cooperating schools.

      Currently, there are approximately 250 Kid Castle franchisees in Taiwan and 90 in China and approximately 4,000 cooperating schools, including Kid Castle Kindergarten, Kid Castle Computer School and Kid Castle Remedial School. The following table shows the number of our franchisees, cooperating schools and cooperating caretaking schools as of the dates indicated.

* includes Care-Taking schools

      Publishing. Our years of experience in the education field have enabled us to carefully develop what we believe to be superior and effective products, with diversified and innovative content. In addition to our established and proven teaching materials, we have incorporated computer technology into our teaching materials. We have developed Internet, multimedia and audio publications, educational videos/ VCDs, and a complete series of products for the purpose of educating children. We are also developing interactive education programs that engage the senses of hearing, sight and touch.

      Published materials make up approximately 70% of our revenue. The three main channels for distributing our published education materials are franchise schools, kindergartens and elementary schools. Our franchise schools are obligated to exclusively use Kid Castle teaching materials. There are approximately 181,000 kindergartens and 553,000 elementary schools in China, all of whom are potential customers for our teaching materials.

      Internet/ Computer. Our Internet program combines English education, computer education, pre-school and multimedia into a complete specialized package. We combine these materials and Internet networking technology, together with animation, entertainment games and multimedia, to establish a specialized children’s education network program. This interactive network includes our Kid Castle Internet Education for Children and Kid Castle Internet English Schooling Program, in which students 2 to 12 years old choose among a variety of learning methods, programs and program content. We see the Internet service as an added value complementing our teaching materials and our schools. Currently, our Internet products and services are exclusively available to franchisees and cooperating schools through an educational website at no additional charge. However, we are beginning to make our Internet content fee-based for non-Kid Castle students.

Teaching Features and Curriculum

      Our Curriculum for Children’s English Learning is summarized as follows:

Kid Castle Teaching Materials for Young Children:

Sales and Marketing

      The majority of our students’ parents choose our education programs and materials based on the recommendations of other parents and teachers. We also build awareness of our brand and promote our products through our franchisees and relationships with the cooperating schools. Kid Castle maintains an internal sales force and engages in some international, national and local advertising.

      We engage in a broad range of activities to inform potential students and franchisees about our teaching/learning model and the programs we offer. These activities include print and broadcast advertising and direct sales at targeted demographics. A substantial portion of new students and franchisees are referred by parents of students, current franchisees and current users of our published materials.

      Advertising is centrally monitored and is directed primarily at local markets in which a kindergarten is located. Kid Castle approves and monitors all advertising. In addition, all responses are analyzed to provide data for future marketing efforts.

      We market our programs and products primarily through advertising and direct mail. Our marketing activity is primarily directed at parents of potential students. All marketing activity is tracked to measure effectiveness and to provide information for future activities.

      Individual franchisees have their own marketing methodologies for students. However, we monitor and provide general marketing strategies to help our franchisees. Policies, standards, and procedures for new franchisees and cooperating schools are established centrally, but are implemented at the local level through an employee in the marketing department.

      Cooperating schools also create more exposure for our company. By having these schools use our teaching/learning materials, we believe parents and children will be more exposed to the “Kid Castle” brand name, as well as to the after-school education we provide through our care-taking schools.

Competition

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

COMPETITOR ANALYSIS IN TAIWAN

COMPETITOR ANALYSIS IN CHINA

Competitors in Taiwan

Competitors in China

Employees

      As of December 31, 2004, we had 273 full-time employees and 6 part-time employees. We intend to hire additional employees on a part-time or independent contractor basis in connection with certain projects in

China. We do not intend to hire additional U.S.-based employees in the foreseeable future. None of our employees is represented by a labor union and we consider our relationships with our employees to be good.

Regulatory Environment

      Taiwan. The Ministry of Education of Taiwan (MOE) requires that teaching/learning materials that are to be used by elementary schools and junior high schools for compulsory education first be submitted to the MOE for review. The material submission process is as follows: following the submission of materials, the MOE will review the materials and submit a decision within 90 days, subject to an extension of 30 days. If the MOE approves the materials, the applicant must send five copies of the final version to the MOE. The MOE performs a final review and makes a final decision within 60 days. If the MOE does not approve the initial submission, the applicant has 45 days to resubmit the materials with any corrections that the MOE deems necessary. The MOE reviews the resubmitted materials and makes its decision within 45 days. If the materials are not approved, or the corrections are not satisfactory to the MOE, the applicant has 30 days to make additional corrections and submit the corrected materials to the MOE. The MOE will then return its decision within 30 days. If the MOE does not approve the corrections on the third re-submission, the applicant may appeal within 30 days and MOE will review the appeal and make a decision within 30 days after its receipt of the appeal. If the appeal is rejected by MOE, the applicant will have to start the approval process over.

      The Employment Service Act of Taiwan and relevant regulations require all foreign remedial education instructor applicants to be above 20 years of age, to have a diploma from a college or above, and the language to be taught by the foreign employees should be the national language used in the country specified on the passport of such foreign employees.

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

      The China Ministry of Education (CMOE) has general guidelines for every province and major city, but each province and some major cities, such as Shanghai and Beijing, have their own administrative body for education and their own regulations and requirements. Teaching/learning materials should be recorded with the governmental approval authority.

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

      The following violations will result in penalties, including reorganization/correction (with deadline), suspension of student enrollment, and/or suspension of operation:

Intellectual Property and Property Rights

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

Corporate History

      We are a Florida corporation that was incorporated on July 19, 1985 as Omni Doors, Inc. From inception through June 30, 1998, our primary business was the assembly and distribution of industrial doors for sale to building contractors in the South Florida geographic market. Until April 6, 1998, we were a wholly-owned subsidiary of Millennia, Inc., a publicly-owned Delaware corporation. On April 6, 1998, the Board of Directors of Millennia declared the payment of a stock dividend to Millennia’s stockholders. Millennia stockholders received one share of our common stock for each four shares of Millennia common stock owned. This distribution of approximately 570,000 shares of our company represented approximately five percent (5.0%) of the total issued and outstanding shares of our common stock.

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

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

      On June 19, 2002, pursuant to a stock purchase agreement dated June 6, 2002, Powerlink International Finance, Inc., a British Virgin Islands corporation (Powerlink), purchased 2,830,926 shares of our common stock from Halter Capital Corporation, representing approximately 57% of our issued and outstanding shares of common stock.

      Simultaneously with the purchase, the then officers and directors of the Company resigned and the following three persons were elected to replace them: Chin-Chung Hsu, President, Treasurer and Director; Wen-Hao Hsu, Secretary and Director; and Chien-Hwa Liu, Director.

      On June 25, 2002, we changed our name to King Ball International Technology Corporation and on August 22, 2002, to Kid Castle Educational Corporation. On October 1, 2002, we acquired all of the issued and outstanding stock of Higoal Developments Limited, a Cayman Islands company (Higoal), pursuant to an Exchange Agreement dated as of October 1, 2002 (the Exchange Agreement), among Higoal, the shareholders of Higoal, Kuo-An Wang and Kid Castle. Higoal, which is based in Taipei, Taiwan, is the parent company of Kid Castle Internet Technologies Limited and Kid Castle Educational Software Development Company Limited.

      Pursuant to the Exchange Agreement, Higoal became our wholly-owned subsidiary, and in exchange for the Higoal shares, we issued 11,880,000 shares of our common stock to the shareholders of Higoal in exchange for 100% of the issued and fully paid-up capital of Higoal. As a result of the share exchange, the former shareholders of Higoal hold a majority of our outstanding capital stock.

Where You Can Find More Information

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

      We lease many of our facilities, consisting principally of administrative office space, warehouse space and sales offices. In addition, we lease housing accommodations for our employees in China.

      Our principal executive offices consist of 530 square meters of office space that we own and which are located at the 8th Floor, No. 98, Min Chuan Road, Hsien Tien, Taipei, Taiwan, Republic of China (R.O.C.).

      We believe that our current space is adequate for our current needs.

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

Kid Castle Internet Technologies Limited

Kid Castle Education Software Development Limited

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

      None.

PART II

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

      At March 25, 2005, the Company had approximately 1,700 shareholders of record.

      The Company has never paid any dividends on its common stock and does not have any plans to pay any dividends in the foreseeable future.

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

      Not applicable.

Purchases of Equity Securities by Registrant and Affiliated Purchasers

      Not applicable.

Four-Year Selected Financial Data

      This report contains certain forward-looking statements and information relating to us that are based on the beliefs and assumptions made by our management as well as information currently available to the management. When used in this document, the words “anticipate,” “believe,” “estimate,” and “expect” and similar expressions, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected.

GENERAL

      We are engaged in the business of children’s education, focusing on the publication and sale of kindergarten language school and primary school teaching materials and magazines. We also provide management and consulting services to our franchised kindergarten and language schools. Our teaching materials include books, audio tapes, video tapes and compact discs. A major portion of our educational materials focuses on English language education. We also sell educational tools and equipment that are complementary to our business. Our major business originally started in Taiwan. In 2001, we started to expand our business in the People’s Republic of China (PRC). We officially launched our operations in Shanghai in April 2002. As in Taiwan, we offer advanced teaching materials and tools, and monthly and bi-weekly magazines to provide children ranging from 2 to 12 years of age a chance to learn exceptional English language and computer skills, and to provide a pre-school education program.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

      Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to product returns, bad debts, inventories, equity investments, income taxes, financing operations, pensions,

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.

      As of December 31, 2004, the balance of our amortizable intangible assets was $894,419, including franchise-related intangible assets of $563,293 and copyrights of $331,126. The amortizable intangible assets are amortized on a straight-line basis over estimated useful lives of 10 years. In determining the useful lives and recoverability of the intangibles, assumptions must be made regarding estimated future cash flows and other factors to determine the fair value of the assets, which may not represent the true fair value. If these estimates or their related assumptions change in the future, there may be significant impact on our results of operations in the period of the change incurred.

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

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

RESULTS OF OPERATIONS

      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 $1,137,730, or 13%, to $9,729,113 for the year ended December 31, 2004 (fiscal year 2004) from $8,591,383 for the year ended December 31, 2003 (fiscal year 2003), including the increase in sales of goods of $384,134 and the franchising income of $675,659 and other operating revenues of $77,937.

      Sales of goods. The increase in sales of goods, from $6,438,286 for fiscal year 2003 to $6,822,420 for fiscal year 2004, or 6%, was mainly due to the increase in net sales of goods generated from our Shanghai operations of $803,112, or 117%, to $1,487,033 for fiscal year 2004 from $683,921 for fiscal year 2003.

      Franchising income. The increase in franchising income, from $1,767,087 for fiscal year 2003 to $2,442,746 for fiscal year 2004, or 38%, was mainly due to the increase in the number of our franchised schools in Shanghai. Franchising income for Shanghai increased by $455,619 from $399,771 for fiscal year 2003 to $855,390 for fiscal year 2004.

      Other operating revenue. Our other operating revenues represents revenue from other activities and services such as training of teachers, arranging for personal English language tutors, organizing field trips and educational fairs, and fees for designing the school layout of our franchised schools. Other operating revenue increased by $77,937, or 20%, to $463,947 for fiscal year 2004 from $386,010 for fiscal year 2003. The increase was mainly due to revenue generated from our services rendered in connection with the construction and design layout of our franchised schools and sales of education-related equipment to our franchised schools.

      Gross Profit. Gross profit increased by $726,536, or 13%, to $6,295,555 for fiscal year 2004 from $5,569,019 for fiscal year 2003. The increase in gross profit was attributable to the fact that the rate of increase in our franchising costs from December 31, 2003 to December 31, 2004 was lower than the rate of increase in our franchising income for the same period.

      Total Operating Costs. Total operating costs decreased by $65,326, or 1%, to $7,078,859 for fiscal year 2004 from $7,013,533 for fiscal year 2003. Advertising costs increased by $125,796, or 31%, to $532,015 for fiscal year 2004 from $406,219 for fiscal year 2003. This increase was mainly due to the additional expenses incurred with respect to the filming of commercials for our new promotional campaign for our products and franchised schools.

      Other Operating Expenses. Other operating expenses decreased by $60,470, or 1%, to $6,546,844 for fiscal year 2004 from $6,607,314 for fiscal year 2003, principally due to decreases in salary expenditures resulting from a reduction in employee headcount in our Taiwan operations.

      Interest Expenses, Net. Net interest expenses decreased by $128,527, or 46%, to $150,704 for fiscal year 2004 from $279,231 for fiscal year 2003, primarily due to the repayment of a loan due to a shareholder in 2003 (please refer to Note 20 to our Condensed Consolidated Financial Statements for more information).

      Loss on Write-Off of an Investment. Loss on write-off of an investment in fiscal year 2003 was due to an agreement to restructure our relationship with Global International Education Investment Ltd. (Global International) from one of equity ownership to a franchising fee arrangement. As a result, during fiscal year 2003, we recognized a loss of $133,267 in our operating results.

      Provision for Taxes. Provision for taxes for fiscal years 2004 and 2003 were $430,729 and $209,434, respectively. These provisions for income taxes mainly represent the use of net operating loss carry-forwards to offset the income generated for our operations in Taiwan and an increase in the valuation allowance charged against deferred tax assets generated from our PRC operations in order to reduce the deferred tax assets to the extent that the tax benefit is more likely than not to be realized.

      Total Net Operating Revenue. Total net operating revenue increased by $2,018,409, or 31%, to $8,591,383 for fiscal year 2003 from $6,572,974 for the year ended December 31, 2002 (fiscal year 2002), including the increases in sales of goods of $1,099,318, franchising income of $744,535 and other operating revenue of $174,556.

      Sales of goods. The increase in sales of goods, from $5,338,968 for fiscal year 2002 to $6,438,286 for fiscal year 2003, or 21%, was mainly due to net sales of goods totaling $844,926 that was derived during 2003 from our new distribution channel of direct marketing, which we launched at the end of 2002. In addition, net sales of goods generated from our Shanghai operations increased by $543,614, or 387%, to $683,921 for fiscal year 2003 from $140,307 for fiscal year 2002.

      Franchising income. The increase in franchising income, from $1,022,552 for fiscal year 2002 to $1,767,087 for fiscal year 2003, was mainly due to the increase in the number of our franchise schools, both in Taiwan and Shanghai, and the increase in our annual franchising fees. In addition, franchising income generated from our Shanghai operations totaled $399,771 for fiscal year 2003, in comparison with $173,696 for the prior fiscal year.

      Other operating revenue. Our other operating revenue represents revenue from other activities and services such as training of teachers, arranging for personal English language tutors, organizing field trips and educational fairs and designing school layouts for franchised schools. Other operating revenue increased by $174,556, or 83%, to $386,010 for the fiscal year 2003 from $211,454 for fiscal year 2002. The increase was mainly due to the new service provided to the franchise schools for the design of their school layout of $195,571 for fiscal year 2003.

      Gross Profit. Gross profit increased by $1,891,613, or 51%, to $5,569,019 for fiscal year 2003 from $3,677,406 for fiscal year 2002. Our gross margin increased to 65% for fiscal year 2003 from 56% for the same period in the prior fiscal year. The increase in gross profit corresponded to the increase in net operating revenue. In addition, we were able to negotiate more favorable terms with our vendors, leading to a significant reduction in our purchasing costs and an increase in our gross margin from period to period.

      Total Operating Costs. Total operating costs increased by $1,456,725, or 26%, to $7,013,533 for fiscal year 2003 from $5,556,808 for fiscal year 2002. Our advertising costs increased by $289,855, or 249%, to $406,219 for fiscal year 2003 from $116,364 for the prior fiscal year. This increase was mainly due to the increased spending on advertising costs in filming our new commercials for franchised schools and on the promotion of our new magazines.

      Other Operating Expenses. Other operating expenses increased by $1,166,870, or 21% to $6,607,314 for fiscal year 2003 from $5,440,444 for fiscal year 2002, principally due to an increase in commission fees paid to distributors and an increase in expenses as a result of our expansion in Shanghai, PRC. The incremental expenses incurred in maintaining our Shanghai office, which was established in April 2002, were approximately $760,000. In addition, we recruited senior officers to strengthen our management team and enlarge our work force in Taiwan, leading to an increase in employee compensation and benefits by approximately $604,000 during 2003. Furthermore, on January 27, 2003 we entered into a sponsorship agreement with a PRC entity pursuant to which we paid a sponsorship fee of approximately $241,000 to a PRC charity fund to ameliorate the “psychology, nutrition and constitution” of children in the PRC.

      Interest Expenses, Net. Net interest expense increased by $22,828, or 9%, to $279,231 for fiscal year 2003 from $256,403 for fiscal year 2002, primarily due to a loan from a shareholder in April 2002 that bears a monthly interest rate of 2.1%, and a new loan obtained from a financial institution in the amount of $586,338 in March 2003.

      Loss on Write-Off of an Investment. On June 5, 2003, pursuant to a special resolution adopted by our board of directors, we resolved to amend the agreement we entered into on May 16, 2001 with Global International to change our cooperation relationship. On June 10, 2003, we entered into a letter of intent with Global International to change the structure of our strategic alliance from one of equity ownership to a franchising fee arrangement. Pursuant to our agreement with Global International, we gave up our 15% ownership in Global International in exchange for the revised payment structure. As of June 30, 2003, we evaluated the future economic benefit of the investment and concluded that it had been impaired. Hence, as of December 31, 2003, we wrote off the investment and recorded a loss of $133,267 in our fiscal year 2003 operating results. On August 25, 2003, we entered into a revised agreement with Global International to provide consulting services to Global International. Under the terms of the revised agreement, we are entitled to consulting fees equal to 15% of Global International’s annual net income. The service period covered by this revised agreement began on July 1, 2003. As of December 31, 2003, Global International was in a loss position for 2003, and therefore we have not accrued any consulting fee income from Global International under the revised agreement.

      Provision for Taxes. Provision for taxes for fiscal year 2003 was $209,434. This income tax provision mainly represents the use of net operating loss carry-forwards to offset the income generated from our operations in Taiwan and an increase in the valuation allowance that we charged against deferred tax assets generated from our Shanghai operations in order to reduce the deferred tax assets to the extent that the tax benefit is more likely than not to be realized. Income tax benefit for fiscal year 2002 was $18,333. This income tax benefit mainly represents the net operating loss carry forwards on the period’s tax losses.

LIQUIDITY AND CAPITAL RESOURCES

      As of December 31, 2004, our principal sources of liquidity included cash and bank balances of $213,564 which decreased from $1,273,723 at December 31, 2003. The decrease was mainly due to the expenditures to fund the daily operations and the new investments in our PRC operations (please refer to Note 8 to our Condensed Consolidated Financial Statements for more information).

      Net cash used in operating activities was $1,544,902 and $2,689,688 during fiscal years 2004 and 2003, respectively. Net cash used in operating activities during fiscal year 2004 was primarily attributed to net loss and an increase in cash used to purchase inventories.

      Net cash (used in) provided by investing activities were ($354,073) and $900,330 during fiscal years 2004 and 2003, respectively. The $1,254,403 difference was primarily attributable to cash provided by pledged notes receivable of $15,760 during fiscal year 2004, as compared to that of $1,302,135 during fiscal year 2003.

      Net cash provided by financing activities during fiscal year 2004 was $914,229 as compared to $2,920,607 during fiscal year 2003. The $2,006,378 difference was primarily attributable to net proceeds of $2,514,428 we

received from the issuance of 3,592,040 shares of our common stock during fiscal year 2003, and the repayment of loans from officers/shareholders of $585,006 during fiscal year 2004.

      As of December 31, 2003, our principal sources of liquidity included cash and bank balances of $1,273,723, which increased from $125,806 at December 31, 2002. The increase was mainly due to the net proceeds of $2,514,428 we received from our investors for the issuance of 3,592,040 shares of our common stock for cash in 2003, partially offset by the use of our working capital in the normal course of our business, our investments in two PRC entities and repayment of certain bank borrowings. In addition, we plan to meet future cash requirements by bank financing and by issuing new equity securities.

      Net cash (used in) provided by operating activities was ($2,689,688) and $33,886 during fiscal years 2003 and 2002, respectively. Net cash used in operating activities during fiscal year 2003 was primarily attributed to the decrease of notes and accounts payable of $648,923 and reductions of receipts in advance of $932,208, as compared to the increases in accounts and notes payable of $85,826 and in receipts in advance of $1,058,151 for fiscal year 2002.

      Net cash provided by (used in) investing activities amounted to $900,330 and ($477,650) during fiscal years 2003 and 2002, respectively. During fiscal years 2003 and 2002, cash received from (used in) pledged notes receivable amounted to $1,302,135 and ($208,063), respectively, and capital expenditures were $275,899 for fiscal year 2003, of which $58,072 was financed via a capital lease arrangement, compared to $215,682 for fiscal year 2002. In addition, the Company was repaid $123,366 owed to it by a shareholder/director in 2003. The amount was originally loaned to the shareholder to finance his individual investment in Global International. The loan was repaid in full to us prior to December 31, 2003 without any loss. We also prepaid and acquired investments totaling $208,984 in two PRC companies, which were in the early stage of their operations as of December 31, 2003, to satisfy the cash requirements for these companies.

      Net cash provided by financing activities during fiscal year 2003 was $2,970,607 as compared to $536,660 during fiscal year 2002. The $2,433,947 difference was primarily attributed to the net proceeds of $2,514,428 we received from the issuance of 3,592,040 shares of our common stock for cash in 2003.

      As of December 31, 2003, we had a total line of credit of $2,198,769 from certain banks and the unused credit facility of $39,812.

      As of December 31, 2004, 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.

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

      One of our financing sources is from bank borrowings. As of December 31, 2004 and December 31, 2003, the balances of bank borrowings, including current and non-current portions, were $4,284,807 and $2,484,471, respectively.

      On May 28, 2004, the Group signed a joint venture agreement with Zhangjhou Yu Hua Educational Investment Co., Ltd. in Henan Province, PRC to establish a company, Henan Kid Castle Education Development Co., Ltd. with registered capital of RMB$300,000. Pursuant to this joint venture agreement, the Group and Zhangjhou Yu Hua Educational Investment Co., Ltd. own 65% and 35% interests in Henan Kid Castle Education Development Co., Ltd., respectively. No capital contribution has yet been made for the joint venture as of December 31, 2004.

      On June 29, 2004, the Group signed a joint venture agreement with Li Kai and Zhang Wuen Shou in the PRC to establish a company, Shanxi Kid Castle Education Development Co., Ltd. with registered capital of RMB$500,000. Pursuant to this joint venture agreement, the Group, Li Kai and Zhang Wuen Shou own, respectively, 51%, 30% and 19% interests in Shanxi Kid Castle Education Development Co., Ltd. No capital contribution has yet been made for the joint venture as of December 31, 2004.

      We have a non-contributory and funded defined benefit retirement plan (the “Plan”) covering all regular employees of KCIT, our subsidiary in Taiwan, as described in Note 16 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 $28,845, respectively. We also make defined contributions to a retirement benefits plan for our employees in the PRC in accordance with local regulations. The contributions made by us for fiscal years 2004, 2003 and 2002 amounted to $83,176, $72,775 and $41,466, respectively.

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

      The accompanying financial statements have been prepared assuming the Group will continue as a going concern. As the Group is aggressively expanding its business in the PRC and the Group’s PRC operation is still in an emerging stage and has not turned profitable, the Group has suffered recurring losses from operations and has a net capital deficiency. The above conditions raise substantial doubt about the Group’s ability to continue as a going concern, if the investment in the PRC does not gradually see returns. As discussed in Note 13 to our Condensed Consolidated Financial Statements, the majority of the Group’s existing loans were guaranteed by two directors of the Group who have expressed their continuous support to the Group until other sources of funds have been obtained. Moreover, as discussed in Note 23 to our Condensed Consolidated Financial Statements, subsequent to December 31, 2004, the Group successfully obtained new bank facilities in the first quarter of 2005 (please refer to Note 13 and Note 23 to our Condensed Consolidated Financial Statements for more information). Management believes that, with continuous growth in the sales in the PRC, the existing directors’ support and the new bank facilities, the Group will have sufficient funds for operations. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

NEW ACCOUNTING PRONOUNCEMENTS

      In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46”). FIN 46 clarifies when a company should consolidate in its financial statements the assets, liabilities and activities of a variable interest entity. FIN 46 provides general guidance as to the definition of a variable interest entity and requires a variable interest entity to be consolidated if a company absorbs the majority of the variable interest entity’s expected losses, or is entitled to receive a majority of the variable interest entity’s residual returns, or both. In December 2003, the FASB issued a revised interpretation of FIN 46 (“FIN 46-R”), which supersedes FIN 46 and clarifies and expands current accounting guidance for variable interest entities. FIN 46 and FIN 46-R are effective immediately for all variable interest entities created after January 31, 2003, and for variable interest entities created prior to February 1, 2003, no later than the end of the first reporting period after March 15, 2004. We have performed a review of any entities created prior to and subsequent to January 31, 2003, and determined the adoption of FIN 46 and FIN 46-R did not have a material impact on the Company’s financial reporting and disclosures.

      On April 30, 2003, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS No. 149”). SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the Derivatives Implementation Group (“DIG”) process that effectively required amendments to SFAS No. 133, and decisions made in connection with other FASB projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative and characteristics of a derivative that contains financing components. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after September 30, 2003 and for hedging relationships designated after September 30, 2003. We believe that the adoption of SFAS No. 149 will have no material impact on our consolidated financial statements.

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

      In December 2003, the Staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” which supersedes SAB 101, “Revenue Recognition in Financial Statements.” SAB 104’s primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements and revises the SEC’s “Revenue Recognition in Financial Statements Frequently Asked Questions and Answers” that have been codified in Topic 13. SAB 104 was effective immediately and did not have a material impact on our financial reporting and disclosures.

      In December 2003, the FASB revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. It requires additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required information should be provided separately for pension plans and for other postretirement benefit plans. This Statement, which also requires new disclosures for interim periods beginning after December 15, 2003, is effective for fiscal years ended after December 15, 2003. We have adopted this Statement since the year ended December 31, 2003, and the adoption of this Statement has no impact on our consolidated financial statements.

      In September 2004, the EITF delayed the effective date for the recognition and measurement guidance previously discussed under EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-01”) as included in paragraphs 10-20 of the proposed statement until further guidance is issued for its application. The proposed statement will clarify the meaning of other-than-temporary impairment and its application to investments in debt and equity securities, in particular investments within the scope of FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and investment accounted for under the cost method. The Group is currently evaluating the effect of this proposed statement on its financial position and results of operations.

      None.

Risks Relating to Our Business

      Our ability to attain a positive cash flow and become profitable depends on our ability to generate and maintain greater revenue while incurring reasonable expenses. This, in turn, depends, among other things, on the development of our business of child educational teaching materials and related services focusing on English language in Taiwan and the PRC. We may be unable to achieve and maintain profitability if we fail to do any of the following:

      We have incurred operating losses since inception. As a result, as of December 31, 2004, we had an accumulated deficit of $7,312,074. We incurred net losses of $1,906,996, $1,940,591, and $1,254,592 for the years ended December 31, 2002, 2003 and 2004, respectively, and had cash flow from operations of $33,886, ($2,689,688) and $(1,544,902) for the years ended December 31, 2002, 2003 and 2004, respectively. If we are unable to achieve and maintain a positive cash flow and profitability, we may be unable to continue our operations. Even if we do achieve a positive cash flow and profitability, we cannot be certain that we will be able to sustain or increase them on a quarterly or annual basis in the future.

      Our inability to achieve or maintain profitability or positive cash flow could result in disappointing financial results, impede implementation of our growth strategy or cause the market price of our common stock to decrease. Specifically, if we cannot effectively maintain, improve and develop our products and services, we may not be able to recover our fixed costs or otherwise turn profitable. We may not be able to develop and introduce new products, services and enhancements that respond to technological changes, evolving education industry standards or customer needs and trends on a timely basis. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new products, services or service enhancements. These new products, services and service enhancements may not achieve market acceptance or our competitors may develop alternative technologies and methods that gain broader market acceptance than our products and services. Accordingly, we cannot assure you that we will be able to generate the cash flow and profits necessary to sustain our business expectations, which makes our ability to successfully implement our business plan uncertain.

      Although the market for English language instruction and education is growing rapidly, we cannot be certain that this growth will continue at its present rate, or at all. We believe our success ultimately will depend upon, among other things, our ability to:

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

      There can be no assurance that our franchisees will operate schools successfully. While no individual franchisee represents more than 1% of our franchise revenues, a significant failure of our franchisees to operate successfully could adversely affect our operating results. The resolution of certain franchisee financial difficulties may cause us to incur additional costs, due to uncollectible accounts receivable related to franchise and license fees, the purchase of teaching and learning materials and/or potential claims by franchisees and could have a material adverse effect on our results of operations.

      Our markets are new, rapidly evolving and highly competitive, and we expect this competition to persist and intensify in the future. This increase in competition could lead to price reductions, decreased sales-volume, under-utilization of employees, reduced operating margins and loss of market share. There can be no assurance that we will be able to successfully compete for customers in our targeted markets.

      Our failure to maintain and enhance our competitive position could seriously harm our business and operating results. We encounter current or potential competition from a number of sources, including:

      Our primary competitors, including Giraffe Language School in Taiwan, Ladder Digital Education Corp. in Taiwan and the PRC, and Joy Enterprises Organization in Taiwan and the PRC, have significant financial, technical and marketing resources, and/or name recognition. Some of these competitors have a longer operating history and greater overall resources than we do. These companies also have established customer support and professional services organizations. As a result, our competitors may be able to adapt more quickly to changes in customer needs, offer products and services at lower prices than we do, and devote greater resources than we do to the development and sale of teaching/learning products and services, which could result in reducing our market share.

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

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

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

      In addition, laws in the PRC have traditionally been less protective of intellectual property rights and enforcement relating to the protection of intellectual property in the PRC has been sporadic at best. Deterioration in compliance with existing legal protections or reductions in the legal protection for intellectual property rights in the PRC could adversely affect our revenue as we continue to expand into the PRC market.

      Although we have taken steps to avoid infringement claims from others, these measures may not be adequate to prevent others from claiming that we violated their copyrights, other trademarks or other proprietary rights. Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract our management from our business. A party making a

claim could secure a judgment that requires us to pay substantial damages or we may lose the rights to use our products or to modify them.

      We rely substantially on bank loans to satisfy our funding requirements. As of December 31, 2002, 2003 and 2004, our bank loans and loans from financial institutions were $4,284,807, $2,484,471 and $1,982,019 respectively. Although, in our experience, our bank loans and loans from financial institutions have been, in the past, a stable source of funding, no assurances can be given that this will continue to be the case. If we are unable to secure sufficient borrowings, our liquidity position would be adversely affected, and we may be required to seek more expensive sources of funding to finance our operations.

      Implementing our strategies may require substantial capital expenditures. To the extent these expenditures exceed our cash resources, we will be required to seek additional debt or equity financing. Our ability to obtain sufficient financing and the cost of such financing will depend on numerous factors, some of which are beyond our control, including:

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

      Our transactions with suppliers and customers are effected in New Taiwan dollars, the functional currency of our Taiwanese subsidiary, Kid Castle Internet Technologies Limited (KCIT), and, as a result of our expansion in the PRC, increasingly in RMB, the functional currency of our PRC subsidiary, Kid Castle Educational Software Development Company Limited (KCES). Our financial statements are reported in U.S. dollars. As a result, fluctuations in the relative exchange rate among the U.S. dollar, the New Taiwan dollar and the RMB will affect our reported shareholders’ equity from one period to the next. Such impacts could be meaningful and are independent of the underlying performance of our business. The market price of our securities could be significantly affected by unfavorable changes in exchange rates. We do not actively manage our exposure to such unfavorable changes in exchange rates.

      Our operating subsidiaries are a Taiwanese company and a PRC company and our officers and directors are residents of various jurisdictions outside the United States. All or a substantial portion of the assets of our business and of such persons are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon such persons or to enforce court judgments in the United States obtained against such persons in the United States courts and predicated upon the civil liability provisions of the Securities Act.

                  Our internal controls and management systems are not currently consistent with international practices in certain respects and we are in the process of improving these controls to enable us to certify the effectiveness of our internal controls under the Sarbanes-Oxley Act of 2002. Our failure to timely and

successfully upgrade these controls and systems could subject us to regulatory actions and harm the price of our stock.

      Our internal control and management systems were designed to meet the standards generally adopted by private Taiwan companies and the internal control and management systems of our PRC subsidiaries were designed to the standards generally adopted by companies in China. These standards are different from the standards and best practices adopted by companies in the United States. We have identified areas in which our current control and management systems do not meet international standards and practices. In addition, during their audit, our external auditors brought to our attention a number of areas in which our current internal controls and management systems do not reduce undetected material errors or fraud to a relatively low level of risk, which could adversely affect our ability to accurately and timely record, process, summarize and report financial data. Pursuant to the Sarbanes-Oxley Act of 2002 and the various rules and regulations adopted pursuant thereto or in conjunction therewith, we are required, for fiscal year 2004, to perform an evaluation of our internal controls over financial reporting and file an assessment of its effectiveness with the U.S. Securities and Exchange Commission. For Fiscal 2005, our external auditors are required to attest to such evaluation. Unless we successfully upgrade our controls and systems, we will not be able to satisfactorily comply with our obligation under the Sarbanes-Oxley Act of 2002 and our external auditors will be unable to provide a satisfactory certification. We have prepared an internal plan of action for compliance, which includes a schedule of activities to address our need to meet these standards and best practices. If we fail to successfully complete the improvements we have scheduled on a timely basis, or if the activities fail to raise our internal controls and management systems to the levels required by international standards or legal requirements, or if we fail to implement new or improved controls, then we may fail to meet our reporting obligations and our auditors may be unable to certify the management’s assertion of the effectiveness of our internal controls as required under the Sarbanes-Oxley Act of 2002. This could subject us to regulatory scrutiny and result in a loss of public confidence in our management, which could, among other things, adversely affect our stock price.

      Our success is dependent upon the personal efforts and abilities of our executive officers, Kuo-An Wang, our Chief Executive Officer, and Yu-En Chui, our Chief Financial Officer. If these key officers cease employment with us before we find qualified replacements, it would have a significant negative impact on our operations. We do not have employment agreements with any of our executive officers.

      Moreover, our growth and success depend on our ability to attract, hire and retain additional highly qualified management, educators, technical, marketing and sales personnel. These individuals are in high demand and we may not be able to attract the staff we need. The hiring process is intensely competitive, time consuming and may divert the attention of our management from our operations. Competitors and others have in the past, and may in the future, attempt to recruit our employees. If we lose the services of any of our senior management or key education personnel, or if we fail to continue to attract qualified personnel, our business could suffer.

      The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share. Our common stock may fall within the definition of penny stock and be subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000, or annual incomes exceeding $200,000 or $300,000, together with their spouses).

      For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny

stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell our common stock and may affect the ability of investors to sell our common stock in the secondary market.

      In March 2003, Guangdong Province of the PRC, Hong Kong, Singapore, Taiwan and several other Asian countries encountered an outbreak of SARS, a highly contagious form of atypical pneumonia. In the future, if any of our employees or students is suspected to have contracted SARS, under certain circumstances such employees, students and affected areas of our premises may have to be quarantined. As a result, we may have to temporarily suspend all or part of our operations. Furthermore, a future outbreak of SARS may negatively impact our ability to attract foreign teachers, who may be less inclined to come to Taiwan, and to attract and retain students, whose parents may choose to have them taught at home by individual tutors or forego supplemental English learning altogether. Although the World Health Organization removed all of the above regions from its list of areas affected by SARS by the summer of 2003, and there have been only a relatively small number of confirmed cases of SARS since that time, we cannot rule out the possibility of a future outbreak or predict the effect any such future outbreak could have on our company.

Risks Relating to The People’s Republic of China

      Our operations and assets in the PRC are subject to significant political, regulatory and economic uncertainties. Changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, restrictions on the manner of operating educational institutions or disseminating educational materials, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition. Under its current leadership, the PRC government has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the PRC government will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.

      In addition, in July 2003, our subsidiary, KCES, entered into agreements with a local Chinese party, 21^st Century Publishing House, in Jiangxi Province to establish two joint ventures, Jiangxi 21^st Century Kid Castle Culture Media Co., Ltd. (KC Culture Media) and 21^st Century Kid Castle Language and Education Center (KC Education Center). KC Culture Media and KC Education Center are established to engage primarily in the publication and distribution of English language education materials, enter into franchise and consulting relationships with kindergarten and language schools, and provide services to cooperative schools in China. We intend to use them as one of our primary vehicles for our expansion into the PRC market. Although we received, on January 19, 2004 and October 31, 2003, licenses from the applicable government authorities to conduct the business of KC Culture Media and KC Education Center in the PRC, the regulations with respect to operation of businesses by foreign-owned entities are still in flux. There is no assurance that the licenses will not be challenged by the PRC authorities.

      Unlike the United States, the PRC has a civil law system based on written statutes in which judicial decisions have little precedential value. The PRC government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is

limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. These matters may be subject to the exercise of considerable discretion by agencies of the PRC government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination.

      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.

      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 2004, we have projected that, if interest rates were to increase by 1%, the result would be an annual increase in our interest expense of $32,688. This analysis does not take into consideration the effect of changes in the level of overall economic activity on interest rate fluctuations.

      We have operations in both Taiwan and the PRC. The functional currency of Higoal Development Ltd. and its subsidiary, Kid Castle Internet Technologies Ltd. is NT Dollars and the financial records are maintained and the financial statements are prepared for these entities in NT Dollars. The functional currency of Kid Castle Educational Software Development Company Ltd. and its consolidated investee, Jiangsi 21th Century Kid Castle Culture Media Co. Ltd. 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.

      The consolidated financial statements of Kid Castle Educational Corporation and its subsidiaries including the notes thereto, together with the report thereon of PricewaterhouseCoopers are presented beginning at page F-1.

      Not applicable.

      We are in the process of identifying, developing and implementing measures to improve the effectiveness of our disclosure controls and procedures, and, in particular, internal controls, including plans to enhance our resources, systems and training with respect to our financial reporting and disclosure responsibilities, and to review our actions with the audit committee and independent auditors. Since April 2004, we have been in the process of implementing a system with respect to internal control over financial reporting. In May 2004, we

began installing a new ERP system through an application service provider, and we expect the installation to be completed in the fourth quarter of 2005. Our CEO and our CFO believe that such measures will help improve our disclosure controls and procedures. Based on this information, as of December 31, 2004, our CEO and our CFO believe that, subject to the limitations noted above, our disclosure controls and procedures are effective in ensuring that material information required to be included in Kid Castle’s SEC reports is made known to them on a timely basis.

      In July 2004, our accounting manager, who was in charge of handling our internal control over financial reporting, resigned. We hired a new accounting manager in August 2004, who is responsible for general accounting matters and coordinating our internal control over financial reporting. Although this personnel change caused a temporary interruption of our internal control over financial reporting, we believe that our timely replacement of accounting personnel, the ongoing implementation of our new system with respect to internal control over financial reporting and the installation of our ERP system have minimized any adverse effect that may have been caused by such resignation.

      None.

PART III

      Information regarding our directors and executive officers is incorporated herein by reference to the information included in our definitive proxy statement for use in connection with our 2005 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after the end of our 2004 fiscal year, or such information will be included by amendment.

      Information regarding executive compensation is incorporated herein by reference to the information included in our definitive proxy statement for use in connection with our 2005 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after the end of our 2004 fiscal year, or such information will be included by amendment.

      Information regarding security ownership of certain beneficial owners and management is incorporated herein by reference to the information included in our definitive proxy statement for use in connection with our 2005 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after the end of our 2004 fiscal year, or such information will be included by amendment.

      Information regarding certain relationships and related transactions is incorporated herein by reference to the information included in our definitive proxy statement for use in connection with our 2005 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after the end of our 2004 fiscal year, or such information will be included by amendment.

      Information regarding principal accounting fees and services is incorporated herein by reference to the information included in our definitive proxy statement for use in connection with our 2005 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after the end of our 2004 fiscal year, or such information will be included by amendment.

PART IV

      (a) List of documents filed.

Accounts receivable

Inventory

      Provision for loss on inventory obsolescence and slow-moving items

Deferred income tax assets

      Valuation allowance for deferred income tax assets — current

      Valuation allowance for deferred income tax assets — non current

      (b) Exhibits

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

SIGNATURES

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

Date: April 15, 2005

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

Exhibit Index

Kid Castle Educational Corporation

Index To Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

To the Board of Directors and shareholders of

Kid Castle Educational Corporation

      In our opinion, the accompanying consolidated balance sheets as of December 31, 2004 and 2003, and the related consolidated statements of operations, of shareholders’ equity and of cash flows for the years ended December 31, 2004 and 2003 present fairly, in all material aspects, the financial position of Kid Castle Educational Corporation and its subsidiaries (the “Company”) at December 31, 2004 and 2003, and the results of their operations and their cash flows for the years ended December 31, 2004 and 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for the years ended December 31, 2004 and 2003 appearing under Item 15 (a) (3) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The financial statements and financial statement schedule of the Company as of and for the year ended December 31, 2002 were audited by other independent accountants whose report dated April 15, 2003 expressed an unqualified opinion on those statements.

      The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 17 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 17. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

PricewaterhouseCoopers

Taipei, Taiwan

March 31, 2005

Kid Castle Educational Corporation

Consolidated Balance Sheets