Document:

LOAN
      SETTLEMENT AND CONVERSION AGREEMENT

    

    among
      

    

    SUANG-YI
      PAI

    

    MIN-TAN
      YANG

    

    and

    

    KID
      CASTLE EDUCATIONAL CORPORATION

    

    

    

    December
      28, 2006

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    LOAN
      SETTLEMENT AND CONVERSION AGREEMENT

    

    This
      Loan
      Settlement and Conversion Agreement, effective as of December 28, 2006, (the
      “Agreement”)
      is
      entered into by Suang-Yi Pai (“Pai”),
      Min-Tan Yang (“Yang”),
      and
      Kid Castle Educational Corporation (the “Company”).
      

     

    Background

     

    This
      Agreement is entered into based on the following facts and circumstances, which
      the parties stipulate are an accurate recitation of the facts:

    

    
      	1.  	
              During
                the fourth quarter of 2005, the Company experienced financial difficulties
                and was incapable of generating cash flows sufficient to sustain
                its
                operations. With the threat of insolvency looming, the Company’s
                management team at the time - Chief Executive Officer Kuo-An Wang
                and
                Chief Financial Officer Yu-En Chiu - approached Pai and Yang for
                financial
                aid and management support. 

            

    

    

    
      	2.  	
              At
                the request of Wang and Chiu, Pai and Yang agreed to make or cause
                to be
                made, in aggregate, an investment in the amount of approximately
                US$1.8
                million to the Company, based on the understanding that (a) Pai would
                be
                appointed as the Chairman of the Board and Yang the Chief Executive
                Officer of the Company, and (b) the investment made by Pai and Yang
                would
                be used to subscribe newly issued shares of the Company based on
                the
                valuation of the Company at the time of the investments.
                

            

    

    

    
      	3.  	
              On
                November 2, 2005, Pai was elected to be the Chairman of the Board
                of
                Directors of the Company and Yang was elected to be a director and
                the
                Chief Executive Officer of the
                Company.

            

    

    

    
      	4.  	
              On
                or about October 31, 2005, at Pai’s behest, Olympic Well International
                Ltd. (“Olympic”) and Chen-Chen Shih invested US$0.75 million (together,
                the “Outside
                Investors”).
                A portion of the investment made by Olympic in the amount of US$342,364
                was assigned to Pai on or about December 30, 2005 in connection with
                settling the matter with former CFO Chiu discussed below.
                

            

    

    

    
      	5.  	
              On
                or about November 14, 2005, Yang invested US$1.05 million to the
                Company.

            

    

    

    
      	6.  	
              Although
                all parties were under the understanding that Pai, Yang and the Outside
                Investors would be issued Company stock when an appropriate valuation
                for
                the stock was mutually determined, the investments were not otherwise
                documented in written agreements. 

            

    

    

    
      	7.  	
              Soon
                after Pai and Yang assumed their new management roles, they were
                informed
                by Chiu, the former CFO, that he had engaged in a practice of commingling
                his personal funds with Company funds. The extent of the commingling
                and
                the impact on the valuation of the Company was unknown at the time,
                making
                it more difficult to value the Company. Further, it became apparent
                that
                the Company’s then available financial information was not sufficiently
                reliable basis to derive a valuation for the shares.
                

            

    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

       

    

    
      	8.  	
              It
                was then agreed by all parties that the investments made by Outside
                Investors, Pai and Yang would be treated as interest bearing short
                term
                loans (the “the
                Management Loans”)
                until the Board of Directors could be in a position to determine
                the value
                of the Company, at which time the Management Loans would be converted
                into
                shares of Company common stock based on a price approved by the Board
                of
                Directors and agreed to by the holders of the
                loans.

            

    

    

    
      	9.  	
              Upon
                further investigation it became apparent that Chiu owed the Company
                a
                substantial amount as of the end of 2005. Chiu was at that time in
                financial distress and would not be able to repay the amounts due
                the
                Company in the near future. To reduce the impact of Chiu’s debt on the
                Company, it was agreed that Pai and Yang would assume Chiu’s debt to the
                Company outstanding as of the end of 2005, when the amount of such
                debt
                could be ascertained, and in consideration an equivalent portion
                of the
                Management Loans would be forgiven.

            

    

    

    
      	10.  	
              It
                was subsequently determined that Chiu owed the Company NT$18,500,000
                as of
                the end of 2005 and based on the above-mentioned understanding, the
                outstanding amount of the Management Loans was reduced to US$1,248,514
                pursuant to a three-way loan settlement agreement entered into between
                Pai
                and Yang, Chiu and the Company. 

            

    

    

    
      	11.  	
              The
                Company was not in a financial position to repay the Management Loans
                when
                they became due, despite the holders’ request for payment. The maturity
                dates of the Management Loans were extended by agreement in February,
                May
                and August 2006. Pai, Yang and the Company have been unable to reach
                a
                conclusion on a fair valuation for the
                shares.

            

    

    

    
      	12.  	
              The
                remaining debt owed by the Company to Olympic and Chen-Chen Shih
                under the
                Management Loans as of July 31, 2006 were assigned to Pai pursuant
                to
                Assignment Agreements dated as of August 1,
                2006.

            

    

    

    
      	13.  	
              On
                October 27, 2006, Pai and Yang submitted a proposal (the “Proposal”)
                to the Board of Directors of the Company requesting the Company to
                convert
                the Management Loans into newly issued shares of the Company at an
                issue
                price of US$0.15 per share.

            

    

    

    
      	14.  	
              The
                Proposal has been reviewed and approved by a majority of the Company’s
                Board of Directors, all of whom have no personal interest in the
                transaction.

            

    

    

    
      
        
          Loan
            Settlement and Conversion Agreement 

        

      

      
        Page
          2

        
          

        

      

      
        
        

      

    

     

    Agreement

     

    Based
      on
      the foregoing facts and circumstances, the parties agree as
      follows:

     

    1.  OUTSTANDING
      AMOUNTS

     

    The
      parties agree that as of the date of this Agreement, the amounts outstanding
      under the Management Loans are as follows:

     

    
      	 	 	
              Outstanding
                Principal

              (US$)

            	 	
              Accumulated
                Interest (7% per annum)

              (US$)

            	 
	
              Pai

            	 	 	
              407,725

            	 	 	
              11,730

            	 
	 	 	 	 	 	 	 	 
	
              Yang

            	 	 	
              840,789

            	 	 	
              4,838

            	 
	 	 	 	 	 	 	 	 
	
              Total

            	 	 	
              1,248,514

            	 	 	
              16,568

            	 

    

     

     

    2.  CONVERSION
      OF LOANS

     

    The
      parties agree that a fair conversion price for the Management Loans is $0.15
      per
      share (the “Conversion
      Price”).
      The
      parties agree that effective as of the date of this Agreement, a portion of
      the
      outstanding principal amounts on the Management Loans will be converted into
      shares of the Company’s common stock at the Conversion price, and a portion will
      be reissued in the form of promissory note with a one year term and interest
      of
      7% per annum in the form attached as Exhibit A. The amounts outstanding to
      be
      converted into common stock, and to be reissued in the form of a promissory
      note, are as follows:

    

     

    
      	 	 	
              Principal
                Outstanding as of December 28, 2006

              (US$)

            	 	
               

              Residual
                Promissory Note

              (US$)

            	 	
              Principal
                converted to Common Stock

              (US$)

            	 	
               

              Shares
                of Common Stock

            	 
	
              Pai

            	 	 	
              407,725

            	 	 	
              107,680

            	 	 	
              300,045

            	 	 	
              2,000,297

            	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
              Yang

            	 	 	
              840,789

            	 	 	
              240,789

            	 	 	
              600,000

            	 	 	
              4,000,000

            	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
              Total

            	 	 	
              1,248,514

            	 	 	
              348,469

            	 	 	
              900,045

            	 	 	
              6,000,297

            	 

    

     

    
      
        
          Loan
            Settlement and Conversion Agreement 

        

      

      
        Page
          3

        
          

        

      

      
        
        

      

       

    

    3.  DELIVERIES

     

    Concurrently
      with executing this Agreement the Company will delivery certificates
      representing fully paid and non-assessable shares of the Company’s common stock
      in the amounts reflected in Section 2, together with residual promissory notes
      in the amounts reflected in Section 2. The Management Loans will simultaneously
      be deemed cancelled. 

    

    4.  ADJUSTMENT
      OF CONVERSION PRICE

     

    The
      parties acknowledge that the Company has agreed to the Conversion Price based
      in
      part on a valuation of the Company’s stock performed by Polaris Securities Co.,
      Ltd. (“Polaris”)
      in
      which Polaris based its findings on estimated unaudited EBIT and EBITDA for
      the
      four fiscal quarters ended September 30, 2006. The parties agree that if audited
      results for either EBIT and EBITDA for the year ended December 31, 2006 exceed
      the unaudited figures used by Polaris by more than 10%, the Conversion Price
      will be adjusted upwards by the percentage change between the unaudited figures
      used by Polaris and audited results for 2006. To perform the adjustment, the
      change in EBIT and EBITDA will be averaged by adding EBIT and EBITDA together
      and dividing by two. If an adjustment is necessary, no stock will be cancelled.
      Rather, the residual promissory notes will be cancelled and reissued to reflect
      the decreased amount that would have resulted if the amount of principal
      converted to common stock under Section 2 had been converted to common stock
      at
      the revised conversion price. 

    

    5.  GENERAL

     

    5.1  Binding
      Effect.
      This
      Agreement will be binding on the parties and their respective heirs, personal
      representatives, successors, legal representatives and permitted assigns, and
      will inure to their benefit. This Agreement may not be assigned by any party
      without the written consent of all other parties.

     

    5.2  Amendment.
      This
      Agreement may be amended only by a written agreement signed by each
      party.

    

    5.3  Waiver.
      No
      waiver will be binding on a party unless it is in writing and signed by the
      party making the waiver. A party’s waiver of a breach of a provision of this
      Agreement will not be a waiver of any other provision or a waiver of a
      subsequent breach of the same provision.

     

    5.4  Severability.
      If a
      provision of this Agreement is determined to be unenforceable in any respect,
      the enforceability of the provision in any other respect and of the remaining
      provisions of this Agreement will not be impaired. 

     

    5.5  Further
      Assurances.
      The
      parties will sign other documents and take other actions reasonably necessary
      to
      further effect and evidence this Agreement.

    
       

      
        
          
            Loan
              Settlement and Conversion Agreement 

          

        

        
          Page
            4

          
            

          

        

        
          
          

        

         

      

    

    5.6  No
      Third-Party Beneficiaries.
      The
      parties hereto have entered into this Agreement only to establish specified
      rights among themselves. The parties do not intend to confer any right or remedy
      on any third party.

     

    5.7  Termination.
      In the
      event of termination of this Agreement, no party will have any liability or
      any
      further obligation to any other party, except as provided in this
      Section 5.7
      and
      except that nothing in this Agreement releases, or may be construed as
      releasing, any party to this Agreement from any liability or damage to any
      other
      party arising prior to the termination hereof or arising out of any party’s
      willful and material default or breach under this Agreement (subject to any
      limitation on remedies set forth herein). 

     

    5.8  Governing
      Law.
      This
      Agreement is governed by the laws of the State of Florida, without giving effect
      to any conflict of law principle that would cause the laws of another
      jurisdiction to apply. 

     

    5.9  Entire
      Agreement.
      This
      Agreement contains the entire understanding of the parties regarding the subject
      matter of this Agreement and supersedes all prior and contemporaneous
      negotiations and agreements, whether written or oral, between the parties with
      respect to the subject matter of this Agreement.

     

    5.10  Signatures.
      This
      Agreement may be signed in counterparts. A fax or pdf format email transmission
      of a signature page will be considered an original signature page. At the
      request of a party, a party will confirm an electronically transmitted signature
      page by delivering an original signature page to the requesting
      party.

     

    

    

     (signature
      page follows)

     

    
      
        
          Loan
            Settlement and Conversion Agreement 

        

      

      
        Page
          5

        
          

        

      

      
        
        

      

    

    [Signature
      Page to Loan Settlement and Conversion Agreement]

    

    Dated
      effective as of the day first written above.

     

    
      	 	 	 
	 	KID
              CASTLE
              EDUCATIONAL CORPORATION 
	 
 	 
 	 
 
	 	 	/s/
              Min-Tan Yang
	 	 	
              

            
	 	By: 	Min-Tan Yang
	 	Its:	Chief Executive Officer

    

     

    
      	 	 	 
	 	       
              	/s/ Suang-Yi
              Pai
	 	
              
Suang-Yi
              Pai, individually

    

     

    
      	 	 	 
	 	        
              	/s/ Min-Tan
              Yang
	 	
              
Min-Tan
              Yang,
              individually

    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    Exhibit
      A

    

    Form
      Promissory Note

    

    (see
      attached)This
      Promissory Note has not been registered under the Securities Act of 1933 or
      any
      state securities laws. This Promissory Note may not be sold, assigned, or
      otherwise negotiated to any person unless pursuant to an effective registration
      statement filed under the Securities Act of 1933 and applicable state securities
      laws.

    

    

    PROMISSORY
      NOTE

    

    

    
      	
              $240,789

            	
              Issue
                Date: December 28, 2006

            

    

    

    This
      Promissory Note (“Note”) is made by Kid Castle Educational Corporation
      (“Borrower”) in favor of Min-Tan Yang (“Lender”).

    

    1.  Payment.
      Borrower promises to pay only to Lender in immediately available funds the
      principal amount of $240,789, together with interest on the unpaid principal
      amount from the date of this Note until the date of payment. The due date is
      December 27, 2007, at which time the unpaid principal amount, together with
      accrued interest, is due in its entirety. 

     

    2.  Interest
      Rate.
      Borrower will pay interest on the unpaid principal amount at an annual rate
      of
      7%. Interest will be computed on the basis of the number of days elapsed in
      the
      year.

     

    3.  Place
      of Payments.
      All
      payments under this Note will be made to Lender at the address that Lender
      may
      designate by notice to Borrower.

     

    4.  Application
      of Payments.
      All
      payments under this Note will apply first to any costs and expenses due to
      Lender, then to accrued interest to date of payment, and then to the unpaid
      principal amount.

     

    5.  Prepayments.
      Borrower may prepay a part or all of the unpaid principal amount at any time.
      Excess payments or prepayments will not be credited as future scheduled payments
      required by this Note.

     

    6.  Events
      of Default.
      Each of
      the following is an event of default under this Note:

     

    6.1  Borrower
      fails to make any payment required by this Note within 30 days after the payment
      is due; 

     

    6.2  Borrower
      voluntarily dissolves or ceases to exist, or any final and nonappealable order
      or judgment is entered against Borrower ordering its dissolution; 

     

    6.3  Borrower
      fails to pay, becomes insolvent or unable to pay, or admits in writing an
      inability to pay Borrower’s debts as they become due, or makes a general
      assignment for the benefit of creditors; and

     

    6.4  a
      proceeding with respect to Borrower is commenced under any applicable law for
      the benefit of creditors, including but not limited to any bankruptcy or
      insolvency law, or an order for the appointment of a receiver, liquidator,
      trustee, custodian, or other officer having similar powers over Borrower is
      entered.

     

    
      
        
        

      

      
        Page
          1

        
          

        

      

      
        
        

      

    

     

    7.  Remedies.
      On and
      after an event of default under this Note, Lender may exercise the following
      remedies, which are cumulative and which may be exercised singularly or
      concurrently:

     

    7.1  upon
      notice to Borrower, the right to accelerate the due dates under this Note so
      that the unpaid principal amount, together with accrued interest, is immediately
      due in its entirety;

     

    7.2  any
      remedy available to Lender under any agreement guaranteeing or securing the
      performance of any of the obligations of Borrower under this Note or any of
      the
      obligations of any guarantor of this Note; and

     

    7.3  any
      other
      remedy available to Lender at law or in equity.

     

    8.  Time
      of Essence.
      Time is
      of the essence with respect to all dates and time periods in this
      Note.

     

    9.  Amendment.
      This
      Note may be amended only by a written document signed by the party against
      whom
      enforcement is sought.

     

    10.  Waiver.

     

    10.1  Borrower
      waives demand, presentment for payment, notice of dishonor or nonpayment,
      protest, notice of protest, and lack of diligence in collection, and agrees
      that
      Lender may extend or postpone the due date of any payment required by this
      Note
      without affecting Borrower’s liability.

     

    10.2  No
      waiver
      will be binding on Lender unless it is in writing and signed by Lender. Lender’s
      waiver of a breach of a provision of this Note will not be a waiver of any
      other
      provision or a waiver of a subsequent breach of the same provision.

     

    11.  Severability.
      If a
      provision of this Note is determined to be unenforceable in any respect, the
      enforceability of the provision in any other respect and of the remaining
      provisions of this Note will not be impaired.

     

    12.  Governing
      Law.
      This
      Note is governed by the laws of the State of Florida, without giving effect
      to
      any conflict-of-law principle that would cause the laws of any other
      jurisdiction to apply.

     

    13.  Costs
      and Expenses.
      If an
      event of default under this Note occurs and Lender does not institute any
      arbitration or litigation, Borrower will pay to Lender, upon Lender’s demand,
      all reasonable costs and expenses, including but not limited to attorney’s fees
      and collection fees, incurred by Lender in attempting to collect the
      indebtedness evidenced by this Note.

     

    
      	 	 	 
	 	Borrower:
	 	 
	 	KID CASTLE EDUCATIONAL CORPORATION

	 
 	 
 	 
 
	 	 	/s/ Suang-Yi Pai
	 	 	
              

            
	 	By:  	Suang-Yi
              Pai 
	 	Its:	Chairman of the Board

    

     

    
      
        
        

      

      
        Page
          2

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