Knights Bridge Capital
                            27 Reid Street, 1st Floor
                            Hamilton, HM NX, Bermuda

                       Tel: 441-295-1820/Fax: 441-295-5491

                                CathayOnline Inc.
                            Financing Terms Agreement

                                December 12, 2000

1.   Issuer:  CathayOnline Inc. (CAOL or Company) a Nevada  corporation with its
     principal office located at:

          575 Madison Avenue
          New York, NY 10022
          Tel: (212) 888-6822
          Fax: (212) 888-1212
          Email: glenno@cathayonline.com

2.   Purchaser:  Knights  Bridge  Capital  and  other  purchasers  (collectively
     Purchaser(s)). All Purchaser(s) shall be accredited investors as Defined by
     Rule 501 of Regulation D.

3.   Securities:  (a) Convertible Notes (Note(s)) convertible into shares of the
     common stock of (Common  Stock).  The Note(s) shall have a maturity date of
     twelve months; the unconverted principal balance and any accrued and unpaid
     interest  shall be due and payable in cash on such date.  The maturity date
     of the  Note(s)  shall be  automatically  extended  for up to 18  one-month
     periods,  unless the  Purchaser(s)  or any subsequent  holder,  (Holder(s))
     notifies  the  Company in writing  not less than ten (10) days prior to any
     expiration that the Note(s) will not be extended.

4.   Investment Amount

          $500,000

5. Conversion Terms

     The CAOL Note(s) are  convertible  into shares of Common Stock  (Conversion
     Shares) at any time after the  Closing  Date (as  defined In Section 14 (b)
     herein).  The effective date (Effective  Date) of each conversion  shall be
     the date set forth on the conversion notice (Conversion  Notice),  provided
     such  Conversion  Notice is received  by Stone  Tower Inc. as escrow  agent
     (Escrow Agent) and the Company, via U.S. mail, facsimile,

<PAGE>

5.   Conversion Terms cont'd

     overnight  courier,  or hand delivery no later than the fifth  business day
     after such date.  The price at which the CAOL  Note(s)  shall be  converted
     (Conversion  Price) shall be the lower of (i) the average closing bid price
     of Company's  Common Stock for the five days prior to the Effective Date of
     the  Conversion  Notice or (ii) the  closing  bid price as quoted on NASDAQ
     Level II on the Closing Date.

6.   Prepayment:

     The CAOL  Note(s)  may not be  prepaid,  in whole or in part,  without  the
     written consent of Holder(s).

7.   Interest:

     Ten percent (10%) annual rate,  payable monthly in arrears in cash (or CAOL
     common stock (Interest Shares) at the option of CAOL, only if such Interest
     Shares have been registered and are freely tradable by Holder(s)). Interest
     shall  accrue  from the  Closing  Date and  shall be  payable  on the first
     business day of each month commencing  January 2, 2001. If interest is paid
     in CAOL  common  stock  the  stock  shall be valued at the lower of (i) the
     Average Price for the five trading days immediately  preceding the date the
     interest  payment is due;  or (ii) the Average  Price for the five  trading
     days  immediately  preceding the date the Interest  Shares are delivered to
     Holder(s).

8.   Placement Fee

     Maximum twelve and one half percent (12.5%) of the investment amount.

9.   Securities Act Exemption

     The CAOL Note(s) are being issued without registration under the Securities
     Act of 1993  (Securities  Act) in  reliance  on the  exemption  provided by
     Section 4 (1) of the Securities Act.

10.  Securities Act Registration:

     (a) CAOL shall file an amendment to its registration  statement on Form SB2
     under the Securities  Act including the Conversion  Shares and the Interest
     Shares   (Registration   Statement   Amendment)   as  soon  as   reasonably
     practicable,  but not more than fifteen  (15) days,  after the Closing Date
     (Filing  Date  Deadline)  and  shall  use its best  efforts  to cause  such
     Registration  Statement  Amendment to be declared  effective not later than
     February 15, 2001 (Effective  Date Deadline).  (b) Until the earlier of (i)
     two  years  from  the  Closing  Date  or the  date  upon  which  all of the
     Registerable  shares have been sold, CAOL shall maintain the  effectiveness
     of the Registration Statement and/or shall maintain its status as a current
     filer  under the  Securities  Exchange  Act of 1934,  so that  Purchaser(s)
     and/or  Holder(s)  of  Registerable  Securities  may sell  such  securities
     without restriction (except for the prospectus delivery requirements of the
     Securities Act of 1993 and/or Form 144 filing, 10. Securities Act manner of

<PAGE>

     sale and volume limitation provision of Rule 144), Registration during such
     period. Cont'd

11.  Limitations:

     No Purchaser  or  subsequent  Holder of CAOL Note(s)  shall be permitted to
     convert any CAOL note(s) to the extent that such conversion would cause any
     Holder to be the beneficial  owner of more than 5% of the then  outstanding
     CAOL Common Stock, at that given time. This limitation  shall not be deemed
     to prevent any Holder from  acquiring  more than an  aggregate of 5% of the
     Common Stock, so long as such Holder does not beneficially own more than 5%
     of CAOL  Common  Stock,  at any  given  time.  The  Holder(s)  shall not be
     entitled to vote any  Conversion  shares.  The  prohibition  against voting
     shall  terminate upon the bona fide transfer of any Conversion  Shares to a
     third party who is not an affiliate of any Holder(s).

12.  Transferability:

     The CAOL Note(s)  shall be freely  transferable  by the  Purchasers  or any
     Holder(s)  provided such transfer is in compliance with  applicable  United
     States and state securities laws.

13.  Escrow of Common Stock:

     (a) to facilitate the delivery of the Conversion Shares upon any conversion
     of the CAOL  Note(s) in whole or in part , CAOL will issue an  aggregate of
     10,000,000  shares  (twenty  certificates  of 500,000  shares each) of CAOL
     Common Stock (Escrow Shares) in the name of Knights Bridge Capital and will
     deliver the certificates for such shares without legend to the Escrow Agent
     within five (5) business days of the mutual execution of this Agreement.

     (b) CAOL will deliver on behalf of the Escrow  Agent at the address  listed
     below certificates without legend in the name of Knights Bridge Capital for
     such Escrow Shares:

     Per the instructions of the Escrow Agent

     (c)  Escrow  Agent  shall  advise the  holder of the  securities  that upon
     receipt of the Escrow Shares or any Additional Escrow Shares (as defined in
     Section 13 (d)  herein),  to deposit the Escrow  Shares and any  Additional
     Escrow  Shares into the  account of Knights  Bridge  Capital  with the sole
     signatory  on such  account  to be Stone  Tower Inc.
<PAGE>

13.  Escrow of Common Stock Cont'd

     At the request of the broker, CAOL will take all necessary actions to cause
     the Escrow  Shares to be  transferred  promptly into the street name of the
     broker securities depository.

     (d) If at any time, or from time to time,  the Escrow Agent is holding less
     than 200% of the number of Escrow Shares  required to convert the remaining
     CAOL Notes(s) (based on the then Conversion  Price) the Escrow Agent and/or
     Holder(s) may request in writing that the Company deposit enough additional
     shares of common Stock with the Escrow Agent (Additional  Escrow Shares) so
     that the  Escrow  Agent is  holding  200% of the  number of  Escrow  Shares
     required to convert such  remaining  CAOL  Note(s).  In no event shall such
     number of shares exceed  20,000,000.  The failure of the Company to deliver
     such  Additional  Escrow  Shares  within ten business days of such a demand
     shall be a material  default of this Agreement and in addition to any other
     remedies,  including  without  limitation  specific  performance  (to which
     Holder(s) are hereby entitled), shall entitle the Holder(s) to an immediate
     distribution  of Escrow shares in an amount equal to 500,000  Escrow Shares
     plus an  additional  50,000  Escrow  Shares  for each day  after  the tenth
     business  day  such  failure  to  deliver  the  additional   Escrow  Shares
     continues.  (Such  distribution  shall be made by the  Escrow  Agent to the
     Holder(s)  pro-rata to the  principal  amount of CAOL  Note(s) held by each
     Holder.) CAOL  acknowledges  that its obligation for any Additional  Escrow
     Shares is additional compensation to Purchaser(s) for the risk of potential
     failure or refusal of CAOL to deliver  Additional Escrow Shares, and is not
     a penalty.

     (e) Upon the  earlier of (i) thirty (30) days after the date upon which the
     last remaining CAOL Note(s) has been fully converted into Conversion Shares
     with  interest  paid in full;  or (ii) the full  payment  of the  remaining
     principal  and interest  balance of the CAOL Note(s) the Escrow Agent shall
     return any remaining Escrow Shares to CAOL.

     (f) If at any time the Escrow Agent is required to deliver to  Purchaser(s)
     or Holder(s) Escrow Shares that have not been registered or may not be sold
     under Rule 144, the Escrow Agent shall cause CAOL's transfer agent to place
     a standard  restrictive legend on the certificates for such shares prior to
     transfer and delivery to Holder(s).

14.  Escrow of CAOL Note(s):

     (a) To facilitate  the delivery of the Note(s) the Company shall deliver to
     the Escrow Agent at the address set forth in Section  13(b) within five (5)
     business days of the mutual execution of

<PAGE>

14.  Escrow of CAOL Note(s) Cont'd

     this Agreement twenty (20) CAOL Notes, which have been duly executed by the
     Company  but which are blank as to name and  address  of the  Purchaser(s),
     principal amount and date of issuance (Issue Date).

     (b) The Escrow Agent shall upon receipt of good funds for the purchase of a
     CAOL  Note(s) fill in the name and address of the  Purchaser(s),  principal
     amount and Issue Date. The Escrow Agent shall deliver the completed Note(s)
     to the  Purchaser(s)  and the escrowed  funds  together  with a copy of the
     completed  Note(s) to the Company.  Upon issuance of the entire $500,000 of
     Notes the Escrow Agent shall return any remaining  unissued  blank Notes to
     Company.

15.  Purchase of CAOL Note(s):

     (a)  Purchaser(s)  shall  deposit  with the Escrow Agent said funds for any
     draw down  against the Notes for the  purchase of the CAOL  Note(s)  within
     five (5) business days of the receipt by the Escrow Agent of the unlegended
     certificate(s)  for the Escrow Shares registered in the name of Stone Tower
     Inc.,  the  executed  blank  Notes  and  a  legal  opinion   acceptable  to
     Purchaser(s) in Form and substance from counsel to CAOL.

     (b) The Escrow Agent shall wire the purchase  price for the CAOL Note(s) to
     CAOL in weekly  installments  of up to $50,000 in  accordance  with written
     instructions  and shall deliver the CAOL Notes(s) to Knights Bridge Capital
     within five business days of confirmation  that the Escrow Shares have been
     transferred  into the  "street  name" of the  broker's  (as  determined  in
     Section  13( c ) herein)  securities  depository.  The date upon  which the
     purchase price for the CAOL Note(s) is wired to CAOL is the "Closing Date."

16.  Representations, Warranties and Covenants of CAOL:

     CAOL makes the following representations, warranties and covenants:

     (a)  Organization,  Good  Standing and Power.  The Company is a corporation
     duly incorporated,  validly existing and in good standing under the laws of
     the State of Nevada and has the requisite corporate power to own, lease and
     operate its  properties and assets and to conduct its business as it is now
     being conducted.

     (b)  Authorization:  Enforcement.  The Company has the requisite  corporate
     power and  authority to enter into and perform this  Agreement and to issue
     and sell the CAOL Note(s), and the

<PAGE>


16.  Representations, Warranties and Covenants of CAOL cont'd:

     Conversion  Shares,  in accordance  with the terms hereof.  The  execution,
     delivery  and  performance  of  this  Agreement  by  the  Company  and  the
     consummation by it of the transactions contemplated hereby and thereby have
     been duly and validly authorized by all necessary  corporate action, and no
     further consent or  authorization  of the Company or its Board of Directors
     or  stockholders  is required.  This  Agreement  has been duly executed and
     delivered  by the  Company.  The  Agreement  constitutes  valid and binding
     obligation  of the Company  enforceable  against the Company in  accordance
     with its terms,  except as such enforceability may be limited by applicable
     bankruptcy,   insolvency,    reorganization,    moratorium,    liquidation,
     conservatorship,  receivership  or similar  laws  relating to, or affecting
     generally the  enforcement of creditor's  rights and remedies,  or by other
     equitable principles of general application.

     ( c)  Capitalization:  CAOL represents and warrants that it has 100,000,000
     shares of Common Stock authorized;  and no more than 31,185,258 shares have
     been  issued and are  outstanding;  and that it has no shares of  preferred
     stock  authorized  and that no shares of  preferred  stock are  issued  and
     outstanding;  no more than  45,641,221  shares of Common Stock are reserved
     for  issuance  pursuant  to stock  options and  warrants;  and no shares of
     common stock are reserved for  conversion  of preferred  stock,  or for any
     other purpose.  CAOL further advises that it pursuant to another  financing
     agreement  it has  issued  6,500,000  shares  currently  held in  escrow as
     security  for  $250,000 of  convertible  notes and  additional  warrants to
     purchase up to 1,500,000 common shares.

     (d) Issuance of Conversion  Shares.  The  Conversion  Shares have been duly
     authorized  by  all  necessary  corporate  action  and  when  delivered  to
     Holder(s) in accordance  with the terms thereof will be validly  issued and
     outstanding, full paid and non-assessable.

17.  Representations and Warranties of Knights Bridge Capital

     Knights  Bridge  Capital  hereby makes the  following  representations  and
     warranties to the Company:

     (a) Accredited Purchaser.  Knights Bridge Capital is an accredited investor
     as defined in Regulation D promulgated under the Securities Act.

     (b)  Organization,  Good Standing and Power.  Knights  Bridge  Capital is a
     corporation organized, validly existing and in

<PAGE>

17.  Representations and Warranties of Knights Bridge Capital cont'd:


     good  standing  under the laws of the Cayman  Islands and has the requisite
     power to own,  lease and operate its  properties  and assets and to conduct
     its business as it is now being conducted.

     ( c) Authorization;  Enforcement.  Knights Bridge Capital has the requisite
     power to enter into and perform  this  Agreement  and to purchase  the CAOL
     Note(s) in accordance  with the terms hereof.  The execution,  delivery and
     performance   of  this   Agreement  by  Knights   Bridge  Capital  and  the
     consummation by it of the transactions contemplated hereby and thereby have
     been duly and validly  authorized by all necessary  action,  and no further
     consent or  authorization  of Knights  Bridge  Capital,  is required.  This
     Agreement has been duly executed and delivered by Knights  Bridge  Capital.
     This  Agreement  constitutes,  or shall  constitute  when duly executed and
     delivered by all parties thereto, a valid and binding obligation of Knights
     Bridge  Capital  enforceable  against  Knights Bridge Capital in accordance
     with its terms,  except as such enforceability may be limited by applicable
     bankruptcy,   insolvency,    reorganization,    moratorium,    liquidation,
     conservatorship,  receivership  or similar  laws  relating to, or affecting
     generally the  enforcement  of  creditor's  rights and remedies or by other
     equitable principles of general application.


18.  Default

     Normal  and  customary   events  of  default:   non-payment   of  interest,
     bankruptcy, breach of representations, warranties and covenants, etc.

19.  Binding Agreement

     The parties  shall be legally  bound by the above  terms and shall  execute
     such further  documents as may be required to implement  The  provisions of
     this Agreement,  including without limitation, An Escrow Agreement, and the
     CAOL Note(s).

Agreed to and Accepted by:

CathayOnline Inc.


By:
                 Brian Ransom                           Date


By:
       Knights Bridge Capital                           Date

Escrow Agent:


      Stone Tower Inc.
Date




<PAGE>

                                                                       EXHIBIT A



                            JOINT ESCROW INSTRUCTIONS

Dated as of the date of the
Financing Terms Agreement
To which These Joint Escrow
Instructions Are Attached

Stone Tower Inc.
27 - Reid Street, 1st Floor
P.O. Box HM 3051
Hamilton, HM NX, Bermuda

Dear Sirs:

         As escrow agent for CathayOnline Inc. (CAOL) and Knights Bridge Capital
as named in the Financing Terms Agreement between CAOL, Knights Bridge Capital
and Escrow Agent to which a copy of these Joint Escrow Instructions is attached
as EXHIBIT A (Agreement), you (Escrow Agent) are hereby authorized and directed
to hold and disburse the Escrow Shares, Additional Escrow Shares and funds
deposited with Escrow Agent by Purchaser(s) delivered to the Escrow Agent
pursuant to the terms of the Agreement (Escrow Property):

         1. The Escrow Agent's duties hereunder may be altered, amended,
modified or revoked only by a writing signed by CAOL, Knights Bridge Capital and
the Escrow Agent.

         2. The Escrow Agent shall be obligated only for the performance of such
duties as are specifically set forth herein and may rely and shall be protected
in relying or refraining from acting on any instrument reasonably believed by
the Escrow Agent to be genuine and to have been signed or presented by the
property party or parties. The Escrow Agent shall not be personally liable for
any act the Escrow Agent may do or omit to do hereunder as Escrow Agent while
acting in good faith, except for fraud, willful misconduct, or gross negligence,
and any act done or omitted by the Escrow Agent pursuant to the advice of the
Escrow Agent's attorneys-at-law shall be evidence of such good faith.

         3. The fees, if any, and disbursements of the Escrow Agent chargeable
in respect of services provided in the capacity as Escrow Agent pursuant to this
Escrow Agreement will be the responsibility of the Seller.


         4. The Escrow Agent is hereby expressly authorized to disregard any and
all warnings given by any of the parties hereto or by any other person or
corporation, excepting only orders or process of courts of law and is hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case the Escrow Agent obeys or complies with any such order, judgment
or decree, the Escrow Agent shall not be liable to any of the parties hereto or
to any other person, firm or corporation by reason of such decree being
subsequently reversed, modified, annulled, set aside, vacated or found to have
been entered without jurisdiction.

         5. The Escrow Agent shall not be liable in any respect on account of
the identity, authorities or rights of the parties executing or delivering or
purporting to execute or deliver the Agreement or any documents or papers
deposited or called for hereunder.

         6. The Escrow Agent shall be entitled to employ such legal counsel and
other experts as the Escrow Agent may deem necessary properly to advise the
Escrow Agent in connection with the Escrow Agent's duties hereunder, may rely
upon the advice of such counsel, and may pay such counsel reasonable
compensation therefore. The Escrow Agent has acted as legal counsel for Seller
in connection with the Agreement and may continue to act as legal counsel for
Seller, from time to time, notwithstanding its duties as Escrow Agent hereunder.
The Purchaser hereby waives any and all claims and allegations of conflict in
relation to the Escrow Agent's continued representation of the Seller as her
attorney.

         7. The Escrow Agent's responsibilities as Escrow Agent hereunder shall
terminate if the Escrow Agent shall resign by written notice to the Seller and
the Purchaser. In the event of such resignation, the Purchaser and the Seller
shall appoint a successor Escrow Agent.

         8. If the Escrow Agent reasonably requires other or further instruments
in connection with these Joint Escrow Instructions or obligations in respect
hereto, the necessary parties hereto shall join in furnishing such instruments.

         9. It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the Escrow
Property held by the Escrow Agent hereunder, the Escrow Agent is authorized and
directed in the Escrow Agent's sole discretion (1) to retain in the Escrow
Agent's possession without liability to anyone all or any part of the said
Escrow Property until such disputes shall have been settled either by mutual
written agreement of the parties concerned or by a final order, decree or
judgment of a court of competent jurisdiction after the time for appeal has
expired and no appeal has been perfected, but the Escrow Agent shall be under no
duty whatsoever to institute or defend any such proceedings or (2) to delver the
Escrow Property held by the Escrow Agent hereunder to a state or federal court
having competent subject matter jurisdiction in accordance with the applicable
procedure therefore.

         10. The Seller and the Purchaser agree jointly and severally to
indemnify and hold harmless the Escrow Agent from any and all claims,
liabilities, costs or expenses in any way arising from or relating to the duties
or performance of the Escrow Agent hereunder other than any such claim,
liability, cost or expense to the extent the same shall have been determined by
final, unappealable judgment of a court of competent jurisdiction to have
resulted from fraud, gross negligence or willful misconduct of the Escrow Agent.

         11. In the event of any action or proceeding brought by any party
against another this Agreement and/or the Financing Terms Agreement, the
prevailing party or parties shall be entitled to recover all expenses incurred
through the date of final collection, including without limitation, all
attorneys' fees.

         12. Any notice required or permitted hereunder shall be given in
writing (unless otherwise specified herein) and shall be deemed effectively
given upon personal delivery, overnight courier, facsimile or three business
days after deposit in the United States Postal Service, by registered or
certified mail with postage and fees prepaid, addressed to each of the other
parties thereunto entitled at the addresses listed below their signature, or at
such other addresses as a party may designate by ten days advance written notice
to each of the other parties hereto.

         13. This instrument shall be binding upon and inure to the benefit of
the parties hereto, and their respective successors and permitted assigns and
shall be governed by the laws of the State of Georgia without giving effect to
principles governing the conflicts of laws. A facsimile transmission of these
instructions signed by the Escrow Agent shall be legal and binding on all
parties hereto.

         14. Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings provided in the Agreement.



CathayOnline Inc.



By:
                                         Name, Title & Date
CathayOnline Inc.
575 Madison Avenue

New York, NY 10022 Tax I.D.

(212) 888-6822   Phone
(212) 888-1212   Fax

Knights Bridge Capital


By:
                         Name, Title & Date

Knights Bridge Capital
27 Reid Street, 1st Floor
P.O. Box HM 3051
Hamilton, HM NX, Bermuda

Tel: 441-295-1820
Fax: 441-295-5491

Escrow Agent




Stone Tower Inc.
27 Reid Street, 1st Floor
P.O. Box HM 3051
Hamilton, HM NX, Bermuda

Tel: 441-295-1820
Fax: 441-295-5491


<PAGE>
                               CATHAYONLINE, INC.
                                CONVERTIBLE NOTE

$15,000                                                        February 15, 2001


     FOR  VALUE  RECEIVED,  the  undersigned,   CathayOnline,   Inc.,  a  Nevada
corporation  (Company),  hereby  promises to pay to the order of Knights  Bridge
Capital, or its lawful assigns (Purchaser), in lawful money of the United States
of America,  and in immediately  available  funds, the principal sum of $15,000.
The principal  hereof and any unpaid accrued  interest  thereon shall be due and
payable on or before 5:00 p.m.,  Eastern  Standard  Time,  on November  30, 2001
(unless  the  payment  date is  accelerated  as  provided  in  Section 4 hereof,
extended as provided in Section 2 hereof,  or unless this Note is  converted  as
set forth in Section 1 hereof).  Payment of all amounts due  hereunder  shall be
made at the  address of the  Purchaser  provided  for in  Section 5 hereof.  The
Company  further  promises to pay  interest at the rate of ten percent per annum
payable monthly on the outstanding principal balance hereof, such interest to be
payable  in  arrears  commencing  on April 2,  2001  and on the  maturity  date.
Interest  shall be  payable in cash (or Common  Stock  (Interest  Shares) at the
option of the Company,  only if such Interest  Shares have been  registered  for
resale and are freely  tradable.  If interest  is paid in CAOL common  stock the
stock shall be valued at the lower of (i) the Average Price for the five trading
days  immediately  preceding  the date the interest  payment is due; or (ii) the
Average  Price for the five  trading  days  immediately  preceding  the date the
Interest Shares are delivered to Holder(s).

     This Note is one of a series of Notes  issued by the Company  pursuant to a
Financing Terms  Agreement  between the Company and Knights Bridge Capital dated
as of December 12, 2000 (Financing Terms  Agreement).  Capitalized  terms herein
shall have the same meaning as in the Financing Terms Agreement.  THE PROVISIONS
OF THE FINANCING TERMS AGREEMENT ARE INCORPORATED HEREIN BY REFERENCE.

     In connection  with any conversion of the Note into any Conversion  Shares,
the Company has placed into escrow with St.  George's Trust Company Limited (the
Escrow Agent) an aggregate of 10,000,000  shares of Common Stock (Escrow Shares)
pursuant to the terms of Joint  Escrow  Instructions  dated as of  December  12,
2000. THE PROVISIONS OF THE JOINT ESCROW INSTRUCTIONS ARE INCORPORATED HEREIN BY
REFERENCE.

     1. CONVERSION. The Purchaser or any subsequent holder or holders (Holder(s)
of this Note is  entitled,  at its option,  at any time and in whole or in part,
until maturity hereof (as extended by Holder(s)) to convert the principal amount
of this Note or any portion of the principal amount hereof into Shares of Common
Stock at lower of (a) the average of the closing bid price  (Closing  Bid Price)
of the Company's  Common Stock for the five-day trading period ending on the day
prior to the Effective  Date  (Average  Price) times (x); or (b) the Closing Bid
Price on the Closing Date.


<PAGE>

     In the event a  Registration  Statement  Amendment  covering the Conversion
Shares  is not  filed by the  Filing  Date  Deadline  and/or  shall  not  become
effective by the Effective Date Deadline (a) for the first month or part thereof
after the Filing Date Deadline that the Registration Statement Amendment has not
been filed;  and/or (b) for the first month or part thereof  after the Effective
Date  Deadline  that  the  Registration   Statement  Amendment  has  not  become
effective;  for each additional month or part thereof commencing one month after
the Effective Date Deadline, for up to two years from the Closing Date, that the
Registration  Statement  Amendment  has not been made  effective  with a current
prospectus  available,  or the  Registration  Statement  Amendment  ceases to be
effective with a current prospectus  available;  or the Conversion Shares cannot
be sold pursuant to SEC Rule 144 (d) (subject only to Form 144 filing, manner of
sale and volume limitation provisions of Rule 144).

     For  purposes of this Note,  the Closing Bid Price shall be the closing bid
price of the Common Stock as reported by the National  Association of Securities
Dealers Automated  Quotation System Level II (Nasdaq),  or the closing bid price
in the over-the-counter market; or, in the event the Common Stock is listed on a
stock exchange, the closing bid price value per share shall be the closing price
on the exchange,  as reported in the Wall Street  Journal.  The shares of Common
Stock issued upon  conversion  of the Note are herein  referred to as Conversion
Shares.  Such  conversion  shall be effectuated by  surrendering  the Note to be
converted  to the Escrow  Agent,  with the form of  Conversion  Notice  attached
hereto as Exhibit 1,  executed by the  Holder(s)  of this Note  evidencing  such
Holder(s)'  intention  to convert  this Note or a specified  portion  hereof (as
above  provided).  The  Effective  Date  shall  be the  date  set  forth  on the
Conversion  Notice,  provided such  Conversion  Notice is received by the Escrow
Agent and the  Company,  via U.S.  mail,  overnight  courier,  hand  delivery or
facsimile, no later than the fifth business day after such date.

     Upon recording the amount  converted and amount of  indebtedness  remaining
under the Note,  set forth in the Conversion  Notice on the grid  comprising the
last page of the Note (Principal  Reduction Grid), the Escrow Agent shall send a
copy of the  revised  Principal  Reduction  Grid to the Company and shall send a
copy of the revised  Principal  Reduction  Grid to the  Holder(s).  Escrow Agent
shall also deliver the Conversion Shares to Holder(s)

     The Company has  authorized  and has reserved and  covenants to continue to
reserve,  free of  preemptive  rights and other  similar  contractual  rights of
stockholders,  a sufficient  number of its  authorized  but  unissued  shares of
Common  Stock to  satisfy  the  rights of  conversion  of the  holder or holders
(Holder(s)) of this Note.

     2.  EXTENSION OF MATURITY  DATE.  The maturity date shall be  automatically
extended  for up to  eighteen  (18)  one-month  periods,  unless  the  Holder(s)
notifies  the Company in writing  not less than 10 days prior to any  expiration
that the Notes will not be extended.

     3. PREPAYMENT. This Note shall not be prepaid, in whole or in part, without
the prior written consent of the Holder(s).


<PAGE>

     4.  DEFAULT.  The  occurrence  of any  one of the  following  events  shall
constitute an Event of Default:

     (a) The  non-payment,  when due, of any  principal or interest  pursuant to
this Note;

     (b) The material breach of any representation or warranty in this Note, the
Financing Terms Agreement or in the Joint Escrow Instructions.  In the event the
Holder(s)  becomes aware of a breach of this Section 4(b),  the Holder(s)  shall
notify the  Company in writing of such  breach and the  Company  shall have five
business days after notice to cure such breach;

     (c) The breach of any covenant or  undertaking  in this Note, the Financing
Terms Agreement or in the Joint Escrow Instructions,  not otherwise provided for
in this Section 5;

     (d) A  default  shall  occur  in  the  payment  when  due  (subject  to any
applicable  grace  period),   whether  by  acceleration  or  otherwise,  of  any
indebtedness  of the Company or an event of default or similar event shall occur
with  respect  to such  indebtedness,  if the  effect of such  default  or event
(subject to any required  notice and any  applicable  grace  period) would be to
accelerate  the  maturity  of any such  indebtedness  or to permit the holder or
holders  of such  indebtedness  to cause  such  indebtedness  to become  due and
payable prior to its express maturity;

     (e) The failure of the Company to file any report or  amendment to a report
under the  Securities  Exchange Act of 1934 more than ten days after such report
or amendment was required to be filed.

     (f) The  commencement by the Company of any voluntary  proceeding under any
bankruptcy,  reorganization,  arrangement,  insolvency,  readjustment  of  debt,
receivership,  dissolution,  or liquidation law or statute of any  jurisdiction,
whether  now or  hereafter  in effect;  or the  adjudication  of the  Company as
insolvent or bankrupt by a decree of a court of competent  jurisdiction;  or the
petition or application by the Company for,  acquiescence  in, or consent by the
Company to, the  appointment  of any  receiver or trustee for the Company or for
all or a substantial  part of the property of the Company;  or the assignment by
the Company  for the  benefit of  creditors;  or the  written  admission  of the
Company of its inability to pay its debts as they mature; or

     (g) The commencement  against the Company of any proceeding relating to the
Company  under  any   bankruptcy,   reorganization,   arrangement,   insolvency,
adjustment of debt,  receivership,  dissolution or liquidation law or statute of
any jurisdiction,  whether now or hereafter in effect,  provided,  however, that
the  commencement of such a proceeding  shall not constitute an Event of Default
unless  the  Company  consents  to the same or admits in  writing  the  material
allegations of same, or said proceeding shall remain undismissed for 20 days; or
the issuance of any order,  judgment or decree for the appointment of a receiver
or trustee for the Company or for all or a  substantial  part of the property of
the Company, which order, judgment or decree remains undismissed for 20 days; or
a warrant of attachment,  execution,  or similar process shall be issued against
any substantial part of the property of the Company.

<PAGE>

     Upon the occurrence of any Default or Event of Default,  the Holder(s) may,
by  written  notice to the  Company,  declare  all or any  portion of the unpaid
principal amount due to Holder(s),  together with all accrued interest  thereon,
immediately due and payable,  in which event it shall  immediately be and become
due and payable, provided that upon the occurrence of an Event of Default as set
forth in paragraph (f) or paragraph (g) hereof, all or any portion of the unpaid
principal amount due to Holder(s),  together with all accrued interest  thereon,
shall immediately become due and payable without any such notice.

     5. NOTICES.  Notices to be given hereunder shall be in writing and shall be
deemed to have been sufficiently given if sent by first class or certified mail,
overnight  courier,  delivered  personally  or sent by  facsimile  transmission.
Notice  shall be deemed to have been  received  on the date and time of personal
delivery,   delivery  by  overnight   courier,   certified   mail  or  facsimile
transmission.

         Notices shall be given to the following addresses:

         If to the Company:

         CathayOnline, Inc.
         437 Madison Avenue
         33rd Floor
         New York, NY  10022
         Tel: (212) 888-6822
         Fax: (212) 888-1212

         Attn:  Brian Ransom, President

         If to the Purchaser:

         Knights Bridge Capital
         27 Reid Street, 1st Floor
         Hamilton, Bermuda
         Fax: 441-295-5491
         Tel:  441-295-1820

         If to the Escrow Agent:

         St. George's Trust Company Limited
         27 Reid Street, 1st Floor
         Hamilton, Bermuda
         Fax: 441-295-5491
         Tel:  441-295-1820


<PAGE>


     6. LIMITATION. Notwithstanding any other provision of this Note (including,
without  limitation,  all  Exhibits  hereto)  to  the  contrary,  no  individual
Holder(s)  of this Note or any  portion of this Note shall be required to accept
(through the  issuance to such person of Interest  Shares or  otherwise),  or be
permitted to exercise any of the conversion rights to receive  securities of the
Company, if such action would result in the Holder(s) becoming at any particular
time  the  beneficial  owner  of an  aggregate  of  more  than  5% of  the  then
outstanding Common Stock of the Company, as calculated pursuant to Section 13 of
the  Securities  Exchange Act of 1934 (the  Exchange Act) and  Regulation  13D-G
promulgated  thereunder.  The foregoing  shall not prohibit the  Holder(s)  from
receiving  any  remaining  amounts  owed  under this Note to such  Purchaser  or
Holder(s) from the Company, or to receive in the aggregate  securities exceeding
such  amount,  so long as  Holder(s)  does not have  beneficial  ownership of an
aggregate of more than 5% of the outstanding Common Stock at any given time.

     7. CONSENT TO JURISDICTION AND SERVICE OF PROCESS.  The Company consents to
the  jurisdiction  of any court of the State of Nevada and of any federal  court
located in Nevada. The Company waives personal service of any summons, complaint
or other  process in connection  with any such action or  proceeding  and agrees
that service  thereof may be made, as the  Purchaser or Holder(s) may elect,  by
certified mail directed to the Company at the location provided for in Section 6
hereof, or, in the alternative, in any other form or manner permitted by law.

     8.  GOVERNING  LAW. THIS NOTE HAS BEEN PURCHASED IN THE STATE OF NEVADA AND
SHALL BE GOVERNED BY AND CONSTRUED AND  INTERPRETED IN ACCORDANCE  WITH THE LAWS
OF THE STATE OF NEVADA APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY
THEREIN, WITHOUT GIVING EFFECT TO THE RULES OR PRINCIPLES OF CONFLICTS OF LAW.

     9. ATTORNEYS FEES. In the event the Holder(s)  hereof shall refer this Note
to an  attorney  for  collection,  the  Company  agrees to pay all the costs and
expenses incurred in attempting or effecting collection hereunder or enforcement
of the terms of this Note, including reasonable  attorney's fees, whether or not
suit is instituted.

     10.  CONFORMITY  WITH LAW.  It is the  intention  of the Company and of the
Holder(s) to conform strictly to applicable usury and similar laws. Accordingly,
notwithstanding  anything to the  contrary  in this Note,  it is agreed that the
aggregate of all charges which  constitute  interest under  applicable usury and
similar laws that are  contracted  for,  chargeable  or  receivable  under or in
respect of this Note, shall under no circumstances  exceed the maximum amount of
interest  permitted  by  such  laws,  and  any  excess,  whether  occasioned  by
acceleration  or  maturity  of  this  Note  or  otherwise,   shall  be  canceled
automatically,  and if theretofore paid, shall be either refunded to the Company
or credited on the principal amount of this Note.




<PAGE>

     IN WITNESS  WHEREOF,  the Company has signed and sealed this Note as of the
date set forth above.


CathayOnline, Inc.

By:
     ---------------------------------------
                       (Signature)


                  (name)


                         (title)

<PAGE>

<TABLE>
<CAPTION>


                            PRINCIPAL REDUCTION GRID


          Date                  Principal             Principal Converted      Adjusted Principal       Conversion Shares
                                                                                                            Delivered
<S>                       <C>                     <C>                          <C>                  <C>
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</TABLE>