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<SEC-DOCUMENT>0001144204-06-009779.txt : 20060314
<SEC-HEADER>0001144204-06-009779.hdr.sgml : 20060314
<ACCEPTANCE-DATETIME>20060314152325
ACCESSION NUMBER:		0001144204-06-009779
CONFORMED SUBMISSION TYPE:	8-K
PUBLIC DOCUMENT COUNT:		6
CONFORMED PERIOD OF REPORT:	20060308
ITEM INFORMATION:		Entry into a Material Definitive Agreement
ITEM INFORMATION:		Termination of a Material Definitive Agreement
ITEM INFORMATION:		Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant
ITEM INFORMATION:		Unregistered Sales of Equity Securities
ITEM INFORMATION:		Financial Statements and Exhibits
FILED AS OF DATE:		20060314
DATE AS OF CHANGE:		20060314

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			SINGING MACHINE CO INC
		CENTRAL INDEX KEY:			0000923601
		STANDARD INDUSTRIAL CLASSIFICATION:	PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS [3652]
		IRS NUMBER:				953795478
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			0331

	FILING VALUES:
		FORM TYPE:		8-K
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-24968
		FILM NUMBER:		06684868

	BUSINESS ADDRESS:	
		STREET 1:		6601 LYONS ROAD
		STREET 2:		BLDG A-7
		CITY:			COCONUT CREEK
		STATE:			FL
		ZIP:			33073
		BUSINESS PHONE:		9545961000

	MAIL ADDRESS:	
		STREET 1:		6601 LYONS ROAD BLDG
		CITY:			COCONUT CREEK
		STATE:			FL
		ZIP:			33073
</SEC-HEADER>
<DOCUMENT>
<TYPE>8-K
<SEQUENCE>1
<FILENAME>v037671_8k.txt
<TEXT>
================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 8-K

                                 CURRENT REPORT
     PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

         DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): MARCH 8, 2006

                        THE SINGING MACHINE COMPANY, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)


          Delaware                       0-24968               95-3795478
- --------------------------------------------------------------------------------
(State or other jurisdiction     (Commission File Number)      (IRS Employer
     of incorporation)                                       Identification No.)


            6601 Lyons Road, Bldg. A-7, Coconut Creek, Florida 33073
            --------------------------------------------------------
              (Address of principal executive offices and Zip Code)

        Registrant's telephone number, including area code (954) 596-1000

                                   Copies to:
                             Darrin M. Ocasio, Esq.
                       Sichenzia Ross Friedman Ference LLP
                           1065 Avenue of the Americas
                            New York, New York 10018
                              Phone: (212) 930-9700
                               Fax: (212) 930-9725

      Check the  appropriate  box below if the Form 8-K  filing is  intended  to
simultaneously  satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):

|_|   Written  communications  pursuant to Rule 425 under the Securities Act (17
      CFR 230.425)
|_|   Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
      240.14a-12)
|_|   Pre-commencement  communications  pursuant  to  Rule  14d-2(b)  under  the
      Exchange Act (17 CFR 240.14d-2(b))
|_|   Pre-commencement  communications  pursuant  to  Rule  13e-4(c)  under  the
      Exchange Act (17 CFR 240.13e-4(c))

================================================================================
<PAGE>

ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
ITEM 1.02 TERMINATION OF A MATERIAL DEFINITIVE AGREEMENT.
ITEM 2.03 CREATION OF A DIRECT FINANCIAL OBLIGATION.
ITEM 3.02 UNREGISTERED SALES OF EQUITY SECURITIES.

On March 8, 2006, we entered into a Bridge Loan Agreement (the "Loan Agreement")
with Ever Solid  Limited (the  "Lender")  pursuant to which the Lender agreed to
lend to us an  aggregate  amount  of  $2,000,000  and in  exchange,  we issued a
$2,000,000  principal  amount 8% Senior  Promissory  Note  (the  "Note")  to the
Lender.  The Note bears  interest at 8% per annum and matures within 48 hours of
the closing of that  certain  Stock  Purchase  Agreement  (the  "Stock  Purchase
Agreement")  dated  February  21,  2006  which we  entered  into  with  koncepts
International  Limited. If, however, the Stock Purchase Agreement fails to close
for  whatever  reason,  we will be required to repay all  principal  and accrued
interest on or before  September 8, 2006. In addition,  our  obligation to repay
the  principal  and  accrued  interest  under the Note is  secured by all of our
assets pursuant to a certain Collateral Security Agreement which we entered into
with the Lender on March 8, 2006.

We used the proceeds  from the loan to repay our  outstanding  principal  amount
$4,000,000 8% convertible  debentures (the "Debentures") issued pursuant to that
certain  Securities  Purchase  Agreement  dated  August 20, 2003 (the  "Purchase
Agreement")  which came due on February 20, 2006,  plus accrued  interest in the
aggregate amount of $270,000, which accrued interest was forgiven by the holders
of the  Debentures.  In addition,  we entered into a  Settlement  Agreement  and
Release (the "Settlement Agreement") with the holders of the Debentures on March
5, 2006  pursuant to which the  holders  and we agreed to release and  discharge
each other, and our respective officers, directors, principals, control persons,
past and present employees,  insurers,  successors,  agents and assigns from any
and all actions, damages, judgments,  claims, and demands existing or claimed to
exist  between the parties in  connection  with the  Debentures  or the Purchase
Agreement.

We claim an  exemption  from the  registration  requirements  of the Act for the
private placement of these securities pursuant to Section 4(2) of the Act and/or
Regulation D promulgated  thereunder since,  among other things, the transaction
did not involve a public  offering,  the  investors  were  accredited  investors
and/or qualified  institutional  buyers, the investors had access to information
about the company and their  investment,  the investors  took the securities for
investment  and not resale,  and we took  appropriate  measures to restrict  the
transfer of the securities.

On  March  14,  2006,  we  issued  a press  release  announcing  the  entry  and
termination into the aforementioned  material definitive  agreements.  A copy of
this  press  release  has been  filed  with this  Current  Report on Form 8-K as
Exhibit 99.1 and is incorporated herein by reference.

In accordance with General  Instruction B.2 of Form 8-K, the information in this
Current Report on Form 8-K,  including  Exhibit 99.1,  shall not be deemed to be
"filed" for purposes of Section 18 of the  Securities  Exchange Act of 1934,  as
amended (the  "Exchange  Act"),  or otherwise  subject to the  liability of that
section,  and shall  not be  incorporated  by  reference  into any  registration
statement or other document  filed under the Act or the Exchange Act,  except as
shall be expressly set forth by specific reference in such filing.

ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.

(A)   FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.

      Not applicable.

(B)   PRO FORMA FINANCIAL INFORMATION.

      Not applicable.

(C)   EXHIBITS.


<PAGE>

EXHIBIT
NUMBER                              DESCRIPTION
- --------------------------------------------------------------------------------

10.1  Bridge  Loan  Agreement  dated  March 8, 2006,  by and between The Singing
      Machine Company, Inc. and Ever Solid Limited.

10.2  Collateral  Security  Agreement  dated  March 8, 2006,  by and between The
      Singing Machine Company, Inc. and Ever Solid Limited.

10.3  Bridge Note of The Singing Machine Company, Inc. dated March 8, 2006

10.4  Settlement  Agreement  and Release  dated as of March 5, 2006 by and among
      The Singing  Machine  Company,  Inc.  and the holders of the  Company's 8%
      Convertible Debentures.

99.1  Press Release of The Singing Machine Company, Inc. dated March 14, 2006.


<PAGE>

                                   SIGNATURES

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

                                        THE SINGING MACHINE, COMPANY, INC.


Date: March 14, 2006                    /s/ Yi Ping Chan
                                        ----------------------------------------
                                        Yi Ping Chan
                                        Interim CEO and Chief Operating Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>2
<FILENAME>v037671_ex10-1.txt
<TEXT>


                              BRIDGE LOAN AGREEMENT

      THIS BRIDGE LOAN AGREEMENT, dated as of March 8, 2006, is entered into by
and between THE SINGING MACHINE COMPANY, INC., a Delaware corporation located at
6601 Lyons Road, Building A-7 Coconut Creek, FL 33073, USA (the "Company"), and
EVER SOLID LIMITED, a Hong Kong registered company, located at Shing Dao
Industrial Bldg., F/5, 232 Aberdeen Main Road, Hong Kong or its successors or
assigns (as used herein, each such signatory or their successors or assigns is
referred to as the "Lender" or a "Lender").

                              W I T N E S S E T H:

      WHEREAS,  the Company and the Lender are  executing  and  delivering  this
Agreement in accordance  with and in reliance upon the exemption from securities
registration for offers and sales to accredited investors afforded,  inter alia,
by Rule 506 under  Regulation D  ("Regulation  D") as  promulgated by the United
States  Securities and Exchange  Commission (the "SEC") under the Securities Act
of 1933, as amended (the "1933 Act"), and/or Section 4(2) of the 1933 Act; and

      WHEREAS, In connection with the Lender's intent to help Company facilitate
its faithful  performance  under that certain  Stock  Purchase  Agreement  dated
February 21, 2006  (hereafter  "SPA") by and between Company on the one hand and
koncepts  International  Limited ("koncepts") on the other, Lender has agreed to
lend funds to the Company,  subject to and upon the terms and conditions of this
Agreement the repayment of which will be represented by a Promissory Note of the
Company ("Senior Note"), on the terms and conditions referred to herein; and

      NOW THEREFORE,  in  consideration of the premises and the mutual covenants
contained  herein and other good and  valuable  consideration,  the  receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:

1. AGREEMENT TO LEND

      1.1.  Subject to the terms and  conditions of this Agreement and the other
      Transaction  Agreements,  Lender  hereby agrees to loan to the Company the
      principal  amount  of  $2,000,000.00  US  Dollars  (the  "Loan  Amount  or
      Aggregate  Loan  Amount")  to  be  used  exclusively  to  redeem  existing
      outstanding  Debentures held by Omicron Master Trust, SF Capital Partners,
      Ltd.,  Bristol  Investment Fund, Ltd.,  Ascend Offshore Fund, Ltd., Ascend
      Partners LP, and Ascend Partners  Sapient LP  (collectively  the "Sub-Debt
      Holders") in the original  aggregate  principal amount of $4,000,000.  The
      obligation to repay the loan shall be evidenced by the Company's  issuance
      of the Senior Note, which shall be shall be in the form of Annex 1 annexed
      hereto.

      1.2. The loan to be made by the Lender and the issuance of the Senior Note
      to the Lender and the other transactions contemplated hereby are sometimes
      referred to herein and in the other Transaction Agreements (as defined
      below) collectively as the "Transactions."

2. TERMS OF REPAYMENT

      2.1. The Note shall bear  interest  absent an event of default at the rate
      of eight percent (8%) per annum, commencing as of the date on which Lender
      advances  funds to Company  pursuant to the Senior Note,  which  interest,
      absent an event of default,  shall all be due upon

<PAGE>

      maturity of the Senior Note as provided for therein. If shareholder
      approval for completion of the SPA is granted, koncepts shall be entitled
      to deliver the original Senior Note marked 'Paid' and written satisfaction
      of this Bridge Loan Agreement to Company as payment for Two Million
      ($2,000,000 USD) dollars of koncepts total Three Million ($3,000,000 USD)
      dollars purchase consideration under the SPA thereby reducing the cash
      required at closing under the terms of the SPA to One Million dollars
      ($1,000,000 USD). Notwithstanding the foregoing, at such time Company will
      still owe Lender all amounts of accrued but unpaid interest and other
      fees, if any, owing under the terms of the Senior Note, and will
      concurrently pay such accrued but unpaid interest and fees, if any, to
      Lender in cash. If, however, shareholder approval is not granted, the
      Senior Note shall mature as per its terms on or before September 8, 2006.

3. SECURITY

      3.1.  The  obligations  of Company to Lender  pursuant to this Bridge Loan
      Agreement  and the  Senior  Note  are  secured  by a  separate  Collateral
      Security Agreement executed of even date herewith.

4. CERTAIN  DEFINITIONS.  As used herein,  each of the  following  terms has the
meaning set forth below, unless the context otherwise requires:

         4.1.1.   "Closing   Date"   means  the  date  of  the  closing  of  the
         Transactions, as provided herein.

         4.1.2.   "Escrow Agent" means Anton Handal, Esq.

         4.1.3.   "Person" means any living person or any entity, such as, but
         not necessarily limited to, a corporation, partnership or trust.

         4.1.4.   "Securities" means the Senior Note.

         4.1.5.   "Transaction Agreements" means this Bridge Loan Agreement,
         the Senior Note, the Collateral Security Agreement, the Settlement
         Agreement and Release and includes all ancillary documents referred
         to in those agreements collectively.

5. FORM OF PAYMENT; DELIVERY OF CERTIFICATES.

      5.1.  The Lender  shall  advance to Company the Loan Amount by  delivering
      immediately  available  good funds in United States  Dollars to the Escrow
      Agent no later than the Closing Date.

      5.2.  No later  than the  Closing  Date,  the  Company  shall  cause to be
      delivered to the Escrow  Holder fully  executed  copies of the  Settlement
      Agreement  and  Release  in the  form  as set  forth  in  Annex  2 to this
      agreement.

      5.3.  No later  than the  Closing  Date,  the  Company  shall  cause to be
      delivered to the Escrow Holder a fully executed Senior Note and Collateral
      Security Agreement in the form as set forth in Annex 3 to this Agreement.

<PAGE>

6. METHOD OF PAYMENT.  At Closing  disbursement of the Loan Amount shall be made
by  wire  transfer  of  funds  directly  from  Escrow  Holder's  account  to the
below-referenced  banks or such  other  financial  institution  as set  forth in
written instructions  provided to Lender by the Company in the amounts set forth
on the table below:

        SUB-DEBT HOLDERS             BANK ACCOUNT/WIRING INFO.       AMOUNT
- -----------------------------------  -------------------------  ----------------
Omicron Master Trust                                            $   1,250,000.00
- -----------------------------------  -------------------------  ----------------
SF Capital Partners, Ltd.                                       $     250,000.00
- -----------------------------------  -------------------------  ----------------
Bristol Investment Fund, Ltd.                                   $     150,000.00
- -----------------------------------  -------------------------  ----------------
Ascend Offshore Fund, Ltd.                                      $     239,000.00
- -----------------------------------  -------------------------  ----------------
Ascend Partners LP                                              $      29,100.00
- -----------------------------------  -------------------------  ----------------
Ascend Partners Sapient LP                                      $      81,900.00
- -----------------------------------  -------------------------  ----------------
                                                         TOTAL  $   2,000,000.00
===================================  =========================  ================

7. LENDER REPRESENTATIONS,  WARRANTIES, ETC.; ACCESS TO INFORMATION; INDEPENDENT
INVESTIGATION

   The Lender represents and warrants to, and covenants and agrees with, the
      Company as follows:

      7.1. Without limiting Lender's right to sell the Securities pursuant to an
      effective  registration statement or otherwise in compliance with the 1933
      Act, if required,  the Lender is  purchasing  the  Securities  for its own
      account for investment only and not with a view towards the public sale or
      distribution thereof and not with a view to or for sale in connection with
      any distribution thereof.

      7.2. The Lender is (i) an "accredited investor" as that term is defined in
      Rule 501 of the General Rules and Regulations under the 1933 Act by reason
      of Rule  501(a)(3),  (ii)  experienced  in making  investments of the kind
      described in this  Agreement  and the related  documents,  (iii) able,  by
      reason of the business  and  financial  experience  of its officers (if an
      entity)  and  professional  advisors  (who  are  not  affiliated  with  or
      compensated  in any way by the Company or any of its Affiliates or selling
      agents),  to protect its own interests in connection with the transactions
      described in this Agreement,  and the related  documents,  and to evaluate
      the merits and risks of an investment in the Securities,  and (iv) able to
      afford the entire loss of its investment in the Securities.

      7.3. All subsequent offers and sales of the Securities by the Lender shall
      be made pursuant to registration of the relevant Securities under the 1933
      Act or pursuant to an exemption from registration, if required.

      7.4. The Lender understands that the Securities are being offered and sold
      to  it  in  reliance  on  specific   exemptions   from  the   registration
      requirements  of the  1933  Act and  state  securities  laws  and that the
      Company  is  relying  upon the truth and  accuracy  of,  and the  Lender's
      compliance   with,   the    representations,    warranties,    agreements,
      acknowledgments and understandings of the Lender set forth herein in order
      to determine the  availability  of such  exemptions and the eligibility of
      the Lender to acquire the Securities.

      7.5.  This  Agreement  and the other  Transaction  Agreements to which the
      Lender is a party, and the transactions  contemplated  thereby,  have been
      duly and  validly  authorized,  executed  and  delivered  on behalf of the
      Lender and are valid and binding  agreements of the Lender  enforceable in

<PAGE>

      accordance with their respective  terms,  subject as to  enforceability to
      general principles of equity and to bankruptcy, insolvency, moratorium and
      other  similar  laws  affecting  the  enforcement  of  creditors'   rights
      generally.

8.  COMPANY  REPRESENTATIONS,  ETC. The Company  represents  and warrants to the
Lender as of the date hereof and as of the Closing Date:

      8.1. RIGHTS OF OTHERS AFFECTING THE TRANSACTIONS.  There are no preemptive
      rights of any  shareholder of the Company to acquire the Senior Notes.  No
      party other than a Lender or an Other  Lender has a currently  exercisable
      right of first  refusal,  which would be  applicable  to any or all of the
      transactions contemplated by the Transaction Agreements.

      8.2. STATUS. The Company is a corporation duly organized, validly existing
      and in good  standing  under the laws of the State of Delaware and has the
      requisite  corporate  power  to own its  properties  and to  carry  on its
      business  as now being  conducted.  The  Company  is duly  qualified  as a
      foreign  corporation  to do  business  and is in  good  standing  in  each
      jurisdiction  where the nature of the business conducted or property owned
      by it makes such qualification  necessary,  other than those jurisdictions
      in which the failure to so qualify  would not have or result in a Material
      Adverse  Effect.  The Company has registered its stock and is obligated to
      file reports pursuant to Section 12 or Section 15(d) of the Securities and
      Exchange  Act of 1934,  as amended  (the 1934 Act").  The Common  Stock is
      quoted on the American Stock Exchange ("Principal Trading Market").

      8.3.  TRANSACTION  AGREEMENTS  AND STOCK.  This  Agreement and each of the
      other Transaction Agreements,  and the transactions  contemplated thereby,
      have been duly and validly  authorized by the Company,  this Agreement has
      been duly executed and delivered by the Company and this Agreement is, and
      the  Senior  Note,  and each of the  other  Transaction  Agreements,  when
      executed  and  delivered  by the  Company,  will  be,  valid  and  binding
      consensual  agreements of the Company enforceable in accordance with their
      respective terms,  subject as to  enforceability to general  principles of
      equity and to bankruptcy,  insolvency,  moratorium, and other similar laws
      affecting the enforcement of creditors' rights generally.

      8.4.  NON-CONTRAVENTION.  The execution and delivery of this Agreement and
      each of the other Transaction  Agreements by the Company,  the issuance of
      the  Securities,  and  the  consummation  by  the  Company  of  the  other
      transactions  contemplated  by this  Agreement,  the Senior Note,  and the
      other  Transaction  Agreements do not and will not conflict with or result
      in a breach  by the  Company  of any of the  terms or  provisions  of,  or
      constitute a default under (i) the certificate of incorporation or by-laws
      of the Company, each as currently in effect, (ii) any indenture, mortgage,
      deed of trust,  or other  material  agreement or  instrument  to which the
      Company is a party or by which it or any of its  properties  or assets are
      bound,  including  any  listing  agreement  for the  Common  Stock  on the
      American  or any other  recognized  stock  exchange  except as herein  set
      forth,  or (iii) to its knowledge,  any existing  applicable law, rule, or
      regulation  or any  applicable  decree,  judgment,  or order of any court,
      United States federal or state regulatory body,  administrative agency, or
      other governmental body having jurisdiction over the Company or any of its
      properties or assets, except such conflict,  breach or default which would
      not have or result in a Material Adverse Effect.

<PAGE>

      8.5.  APPROVALS.  No  authorization,  approval  or  consent  of any court,
      governmental body,  regulatory agency,  self-regulatory  organization,  or
      stock exchange or market or the shareholders of the Company is required to
      be obtained by the Company for the issuance and sale of the  Securities to
      the Lender as contemplated by this Agreement,  except such authorizations,
      approvals and consents that have been obtained.

      8.6. FULL DISCLOSURE. To the best of the Company's knowledge,  there is no
      fact known to the Company (other than general economic conditions known to
      the public  generally or as disclosed in the Company's SEC Documents) that
      has not been disclosed in writing to the Lender.

      8.7. CONFIRMATION. The Company confirms that all statements of the Company
      contained herein shall survive acceptance of this Agreement by the Lender.
      The Company agrees that, if any events occur or circumstances  exist prior
      to the Closing Date or the release of the Loan Amount to the Company which
      would make any of the Company's representations, warranties, agreements or
      other  information  set  forth  herein  materially  untrue  or  materially
      inaccurate  as of such date,  the  Company  shall  immediately  notify the
      Lender (directly or through its counsel,  if any) in writing prior to such
      date of such fact, specifying which  representation,  warranty or covenant
      is affected and the reasons therefor.

      8.8.  INTEGRATION.  The Company has  previously  entered into that certain
      Securities  Purchase Agreement with koncepts dated as of February 21, 2006
      pursuant to which the Company made certain  representations and warranties
      as are contained in that agreement.  Such  representations  and warranties
      are hereby incorporated into this Agreement by reference,  and the Company
      hereby reaffirms such  representations and warranties as being accurate as
      of the date of this Agreement as if they were contained in this Agreement.

9. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.

      9.1.  FILINGS.  The Company  undertakes  and agrees to make all  necessary
      filings in connection  with the sale of the Securities to the Lender under
      any United States laws and  regulations  applicable to the Company,  or by
      any domestic  securities exchange or trading market, and to provide a copy
      thereof to the Lender promptly after such filing.

      9.2. REPORTING STATUS. So long as the Lender  beneficially owns any of the
      Securities  and for at least  twenty (20)  Trading  Days  thereafter,  the
      Company shall file all reports  required to be filed with the SEC pursuant
      to Section 13 or 15(d) of the 1934 Act, shall take all  reasonable  action
      under its control to ensure that adequate current public  information with
      respect to the Company,  as required in accordance  with Rule 144(c)(2) of
      the 1933 Act, is publicly available, and shall not terminate its status as
      an issuer required to file reports under the 1934 Act even if the 1934 Act
      or the rules and regulations thereunder would permit such termination. The
      Company will take all reasonable  action under its control to maintain the
      continued  listing  and  quotation  and  trading of its  Common  Stock the
      Principal  Trading Market or a listing on the NASDAQ/Small Cap or National
      Markets and, to the extent  applicable  to it, will comply in all material
      respects with the Company's reporting,  filing and other obligations under
      the by-laws or rules of the Principal  Trading  Market and/or the National
      Association of Securities Dealers, Inc., as the case may be, applicable to

<PAGE>

      it at least  through  the date which is sixty (60) days after the later of
      the date on which (x) all of the Notes have been converted or been paid in
      full or (y) all of the Warrants have been exercised or have expired.

      9.3. USE OF PROCEEDS.  The Company will use 100% of the proceeds  received
      hereunder to retire all of its issued and outstanding  debentures together
      with all accrued but unpaid interest and penalties.

      9.4. PUBLICITY, FILINGS, RELEASES, ETC. Each of the parties agrees that it
      will  not  disseminate   any  information   relating  to  the  Transaction
      Agreements or the transactions contemplated thereby, including issuing any
      press releases,  holding any press  conferences or other forums, or filing
      any reports  (collectively,  "Publicity"),  without giving the other party
      reasonable  advance  notice and an  opportunity to comment on the contents
      thereof. Neither party will include in any such Publicity any statement or
      statements or other material to which the other party reasonably  objects,
      unless in the  reasonable  opinion of counsel to the party  proposing such
      statement,   such  statement  is  legally  required  to  be  included.  In
      furtherance  of the  foregoing,  the  Company  will  provide to the Lender
      drafts of the  applicable  text of the first filing of a Current Report on
      Form 8-K or a Quarterly or Annual  Report on Form 10-Q or 10-K intended to
      be made with the SEC which  refers to the  Transaction  Agreements  or the
      transactions contemplated thereby as soon as practicable (but at least two
      (2) Trading Days before such filing will be made) will not include in such
      filing any statement or  statements  or other  material to which the other
      party reasonably  objects,  unless in the reasonable opinion of counsel to
      the party proposing such statement,  such statement is legally required to
      be included.  Notwithstanding  the  foregoing,  each of the parties hereby
      consents to the  inclusion of the text of the  Transaction  Agreements  in
      filings made with the SEC as well as any descriptive text  accompanying or
      part of such filing which is accurate  and  reasonably  determined  by the
      Company's counsel to be legally required. Notwithstanding, but subject to,
      the foregoing provisions of this Section 4(d), the Company will, after the
      Closing Date,  promptly issue a press release and file a Current Report on
      Form  8-K  or,  if  appropriate,  a  quarterly  or  annual  report  on the
      appropriate  form,  referring  to  the  transactions  contemplated  by the
      Transaction Agreements. Both the Company and Lender hereby consent to Cove
      Partners   LLC   preparing  a  Tombstone   relating  to  the   transaction
      contemplated by this Agreement for use on its corporate website and in its
      marketing materials.

      9.5. For so long as the Senior Note is outstanding,  and unless the Lender
      has prior consented in writing,  which consent can be withheld at the sole
      and absolute  discretion  of Lender,  Company shall not incur in excess of
      $1,500,000  US Dollars of debt with  Crestmark  Bank,  or any  replacement
      accounts receivable lender or factor.

10. CLOSING DATE.

      10.1. The Closing Date shall occur on the date which is the first Business
      Day after each of the conditions  contemplated  by Sections 7 and 8 hereof
      shall have  either  been  satisfied  or been  waived by the party in whose
      favor such conditions run.

      10.2. The closing of the  Transactions  shall occur on the Closing Date at
      the  offices of Handal &  Associates,  1200 Third Ave.,  Suite  1321,  San
      Diego,  CA 92101,  and shall take place no later than 5:00 P.M.,  New York

<PAGE>

      time on such day, or such other day and time,  as is mutually  agreed upon
      by the Company and the Lender.

11. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.

      11.1.  The Lender  understands  that the Company's  obligation to sell the
      Notes to the Lender  pursuant to this  Agreement  on the  Closing  Date is
      conditioned upon:

         11.1.1. The execution and delivery of this Agreement by the Lender;

         11.1.2.  Delivery  by the Lender of good funds as payment in full of an
         amount equal to the Loan Amount in accordance with this Agreement;

         11.1.3.  The accuracy on such Closing Date of the  representations  and
         warranties of the Lender  contained in this Agreement,  each as if made
         on such date, and the  performance by the Lender on or before such date
         of all covenants and agreements of the Lender  required to be performed
         on or before such date; and

         11.1.4.  There  shall  not be in  effect  any law,  rule or  regulation
         prohibiting or restricting the  transactions  contemplated  hereby,  or
         requiring any consent or approval which shall not have been obtained.

12. CONDITIONS TO THE LENDER'S OBLIGATION TO PURCHASE.

      12.1. The Company understands that the Lender's obligation to purchase the
      Notes on the Closing Date is conditioned upon:

         12.1.1.  Delivery to Escrow  Holder by the Company of a fully  executed
         copy of this Agreement and Note;

         12.1.2.  Delivery to Escrow  Holder by the Company of a fully  executed
         Sub-Debt Holder  Settlement and Release  Agreement in the form attached
         hereto as Annex 2;

         12.1.3.  Delivery to Escrow Holder of a fully executed  Broad-Form UCC1
         filing  statement and collateral  security  agreement  securitizing the
         Note;

         12.1.4.  The accuracy in all  material  respects on the Closing Date of
         the  representations  and  warranties of the Company  contained in this
         Agreement,  each as if made on such date,  and the  performance  by the
         Company on or before such date of all covenants  and  agreements of the
         Company required to be performed on or before such date; and

         12.1.5.   Approval  of  this  Agreement  and  all  related  Transaction
         Agreements by the Hong Kong Stock Exchange;

      12.2. There shall not be in effect any law, rule or regulation prohibiting
      or restricting  the  transactions  contemplated  hereby,  or requiring any
      consent or approval which shall not have been obtained; and

      12.3.  From and after the date hereof to and  including  the Closing Date,
      each of the following conditions will remain in effect: (i) the trading of
      the  Common  Stock  shall  not have  been  suspended  by the SEC or on the
      Principal  Trading  Market;  (ii) trading in  securities  generally on the
      Principal  Trading Market shall not have been suspended or limited;  (iii)

<PAGE>

      no minimum  prices shall been  established  for  securities  traded on the
      Principal Trading Market;  and (iv) there shall not have been any material
      adverse change in any financial market.

      12.4.  Company shall reimburse  Lender its direct  out-of-pocket  costs in
      connection  with the  transactions  contemplated  under this  Bridge  Loan
      Agreement to a maximum of $15,000 US Dollars.

13. INDEMNIFICATION AND REIMBURSEMENT.

      13.1. The Company agrees to indemnify and hold harmless the Lender and its
      officers, directors, employees, and agents, and each Lender Control Person
      from and against  any losses,  claims,  damages,  liabilities  or expenses
      incurred  (collectively,  "Damages"),  joint or several, and any action in
      respect thereof to which the Lender, its partners,  Affiliates,  officers,
      directors,  employees,  and duly  authorized  agents,  and any such Lender
      Control  Person  becomes  subject to,  resulting  from,  arising out of or
      relating to any  misrepresentation,  breach of warranty or non-fulfillment
      of or failure to perform any  covenant or agreement on the part of Company
      contained in this Agreement,  as such Damages are incurred,  except to the
      extent such Damages result  primarily from Lender's failure to perform any
      covenant or agreement  contained in this  Agreement or the Lender's or its
      officer's,  director's,  employee's,  agent's or Lender  Control  Person's
      gross negligence,  recklessness or bad faith in performing its obligations
      under this Agreement.

      13.2. The Company hereby agrees that, if the Lender,  other than by reason
      of its gross negligence,  illegal or willful  misconduct (in each case, as
      determined  by a  non-appealable  judgment  to such  effect),  (x) becomes
      involved  in any  capacity  in any  action,  proceeding  or  investigation
      brought by any  shareholder  of the Company,  in  connection  with or as a
      result  of the  consummation  of the  transactions  contemplated  by  this
      Agreement  or  the  other  Transaction  Agreements,  or if the  Lender  is
      impleaded in any such action,  proceeding or  investigation by any Person,
      or (y) becomes  involved in any  capacity  in any  action,  proceeding  or
      investigation  brought by the SEC,  any  self-regulatory  organization  or
      other body having  jurisdiction,  against or  involving  the Company or in
      connection  with or as a result of the  consummation  of the  transactions
      contemplated by this Agreement or the other Transaction Agreements, or (z)
      is  impleaded  in any such  action,  proceeding  or  investigation  by any
      Person,  then in any such case,  the Company shall  indemnify,  defend and
      hold  harmless  the Lender  from and against and in respect of all losses,
      claims,  liabilities,  damages or expenses resulting from, imposed upon or
      incurred by the Lender, directly or indirectly,  and reimburse such Lender
      for its  reasonable  legal and other  expenses  (including the cost of any
      investigation and preparation) incurred in connection  therewith,  as such
      expenses are incurred.  The indemnification and reimbursement  obligations
      of the Company under this paragraph  shall be in addition to any liability
      which the Company may otherwise have, shall extend upon the same terms and
      conditions to any  Affiliates of the Lender who are actually named in such
      action,  proceeding or  investigation,  and partners,  directors,  agents,
      employees and Lender Control  Persons (if any), as the case may be, of the
      Lender and any such Affiliate,  and shall be binding upon and inure to the
      benefit of any successors,  assigns, heirs and personal representatives of
      the Company,  the Lender,  any such  Affiliate  and any such  Person.  The
      Company  also  agrees  that  neither  the Lender  nor any such  Affiliate,

<PAGE>

      partner, director, agent, employee or Lender Control Person shall have any
      liability to the Company or any Person asserting claims on behalf of or in
      right of the Company in connection with or as a result of the consummation
      of this Agreement or the other  Transaction  Agreements,  except as may be
      expressly and specifically provided in or contemplated by this Agreement.

14. JURY TRIAL  WAIVER.  The Company and the Lender hereby waive a trial by jury
in any  action,  proceeding  or  counterclaim  brought by either of the  Parties
hereto  against the other in respect of any matter  arising out or in connection
with the Transaction Agreements.

15.  GOVERNING  LAW:  MISCELLANEOUS.  This  Agreement  shall be  governed by and
interpreted  in accordance  with the laws of the State of New York for contracts
to be wholly performed in such state and without giving effect to the principles
thereof  regarding  the  conflict of laws.  Each of the parties  consents to the
exclusive  jurisdiction of the federal courts whose districts encompass any part
of the County of New York or the state  courts of the State of New York  sitting
in the County of New York in  connection  with any  dispute  arising  under this
Agreement or any of the other  Transaction  Agreements and hereby waives, to the
maximum extent permitted by law, any objection, including any objection based on
forum  non  conveniens,   to  the  bringing  of  any  such  proceeding  in  such
jurisdictions or to any claim that such venue of the suit,  action or proceeding
is improper. To the extent determined by such court, the Company shall reimburse
the  Lender for any  reasonable  legal fees and  disbursements  incurred  by the
Lender in  enforcement  of or  protection  of any of its rights under any of the
Transaction Agreements.  Nothing in this Section shall affect or limit any right
to serve process in any other manner permitted by law.

      15.1. The Company and the Lender  acknowledge  and agree that  irreparable
      damage  would  occur  in the  event  that  any of the  provisions  of this
      Agreement  or the  other  Transaction  Agreements  were not  performed  in
      accordance  with their specific terms or were  otherwise  breached.  It is
      accordingly  agreed that the parties shall be entitled to an injunction or
      injunctions  to  prevent  or  cure  breaches  of the  provisions  of  this
      Agreement and the other Transaction Agreements and to enforce specifically
      the terms and provisions hereof and thereof, this being in addition to any
      other remedy to which any of them may be entitled by law or equity.

      15.2.  Failure  of any party to  exercise  any right or remedy  under this
      Agreement or otherwise,  or delay by a party in  exercising  such right or
      remedy, shall not operate as a waiver thereof.

      15.3. This Agreement shall inure to the benefit of and be binding upon the
      successors and assigns of each of the parties hereto.

      15.4.  All pronouns and any  variations  thereof  refer to the  masculine,
      feminine or neuter, singular or plural, as the context may require.

      15.5. A facsimile transmission of this signed Agreement shall be legal and
      binding on all parties hereto.

      15.6.  This Agreement may be signed in one or more  counterparts,  each of
      which shall be deemed an original.

<PAGE>

      15.7. The headings of this Agreement are for  convenience of reference and
      shall not form part of, or affect the interpretation of, this Agreement.

      15.8. If any provision of this Agreement shall be invalid or unenforceable
      in any jurisdiction,  such invalidity or unenforceability shall not affect
      the validity or  enforceability  of the remainder of this Agreement or the
      validity or enforceability of this Agreement in any other jurisdiction.

      15.9.  This  Agreement  may be amended  only by an  instrument  in writing
      signed by both Parties.

16.  NOTICES.  Any notice  required  or  permitted  hereunder  shall be given in
writing  (unless  otherwise  specified  herein) and shall be deemed  effectively
given on the earliest of:

      16.1.  the date  delivered,  if delivered by personal  delivery as against
      written receipt therefor or by confirmed facsimile transmission,

      16.2. the fifth Business Day after deposit, postage prepaid, in the United
      States Postal Service by registered or certified mail, or

      16.3.  the third  Business Day after mailing by domestic or  international
      express courier, with delivery costs and fees prepaid,

      16.4. in each case, addressed to each of the other parties thereunto:

17. SURVIVAL OF REPRESENTATIONS  AND WARRANTIES.  The Company's and the Lender's
representations  and warranties  herein shall survive the execution and delivery
of this  Agreement and the delivery of the  Certificates  and the payment of the
Loan  Amount,  and shall  inure to the benefit of the Lender and the Company and
their respective successors and assigns.

18.  ISSUANCE OF EQUITY OR DEBT  SECURITIES.  For so long as the  Securities  or
Senior  Note is  outstanding,  and absent  prior  receipt  by the  Company of an
express  written waiver from the Lender of this  condition,  which waiver can be
withheld  for any or no reason by  Lender in its sole and  absolute  discretion,
Company will not enter into any agreement pursuant to which it will issue, or be
obligated  to  issue,  any form of equity or  quasi-equity  securities,  or debt
instrument  which  may be  converted  into any form of  equity  or  quasi-equity
securities,  or has attached to it any form of warrants or options which entitle
the holder thereof to purchase and/or receive in any manner equity securities of
the Company.

19.  BROAD FORM UCC FILING.  The Company  shall grant  Lender a  consensual  and
perfected "broad form" UCC-1 filing secured by all of the assets of the Company,
such that Lender  shall be deemed a  consensual  secured  lender in the event of
either a voluntary or  non-voluntary  filing by or against  Company under United
States Code Title 11 or any  similar  state or federal  statute.  In this regard
Company shall promptly  execute such documents as Lender may reasonably  request
from time to time so as to perfect its position as a secured lender to Company.

<PAGE>

      IN WITNESS WHEREOF,  with respect to the Loan Amount specified below, this
Agreement  has been duly  executed  by the Lender and the Company as of the date
set first above written.

LENDER:                                   COMPANY: THE SINGING MACHINE  COMPANY,
EVER SOLID, LTD.                                   INC.
(a Hong Kong registered company)


By: /s/       Sak Hong Lau                By: /s/       Yi Ping Chan
    ---------------------------------         ----------------------------------
    (Signature of Authorized Person)          (Signature of Authorized Person)

                                          Yi Ping Chan,
Sak Hong Lau, Chairman                    Interim Chief Executive Officer
- -------------------------------------     --------------------------------------
Printed Name and Title                    Printed Name and Title

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>3
<FILENAME>v037671_ex10-2.txt
<TEXT>
                          COLLATERAL SECURITY AGREEMENT

      THIS COLLATERAL SECURITY AGREEMENT,  dated as of March 8, 2006, is entered
into by and between THE SINGING MACHINE  COMPANY,  INC., a Delaware  corporation
located at 6601 Lyons Road,  Building  A-7  Coconut  Creek,  FL 33073,  USA (the
"Borrower"),  and EVER SOLID LIMITED, a Hong Kong registered company, located at
Shing Dao  Industrial  Bldg.,  F/5,  232  Aberdeen  Main Road,  Hong Kong or its
successors or assigns (as used herein,  each such signatory or their  successors
or assigns is referred to as the "Lender" or a "Lender").

                              W I T N E S S E T H:

      WHEREAS,  the Borrower and the Lender are  executing and  delivering  this
Agreement in accordance  with and in reliance upon the exemption from securities
registration for offers and sales to accredited investors afforded,  inter alia,
by Rule 506 under  Regulation D  ("Regulation  D") as  promulgated by the United
States  Securities and Exchange  Commission (the "SEC") under the Securities Act
of 1933, as amended (the "1933 Act"), and/or Section 4(2) of the 1933 Act; and

      WHEREAS,   In  connection  with  the  Lender's  intent  to  help  Borrower
facilitate its faithful  performance under that certain Stock Purchase Agreement
dated February 21, 2006 (hereafter "SPA") by and between Company on the one hand
and koncepts International, Limited ("koncepts") on the other, Lender has agreed
to lend funds to the Borrower,  subject to and upon the terms and  conditions of
this Agreement the repayment of which will be represented by a Senior Promissory
Note of the Borrower  ("Senior Note"),  on the terms and conditions  referred to
herein; and

      NOW THEREFORE,  in  consideration of the premises and the mutual covenants
contained  herein and other good and  valuable  consideration,  the  receipt and
sufficiency of which are hereby  acknowledged,  the parties agree as follows:

1. AGREEMENT TO LEND:

      Subject to the terms and  conditions of this  Agreement,  the Senior Note,
and the Bridge Loan  Agreement of even date  herewith,  Lender  hereby agrees to
loan to the Borrower the principal amount of $2,000,000.00 US Dollars (the "Loan
Amount or Aggregate  Loan  Amount") to be used  exclusively  to redeem  existing
outstanding Debentures held by Omicron Master Trust, SF Capital Partners,  Ltd.,
Bristol  Investment Fund, Ltd.,  Ascend Offshore Fund, Ltd., Ascend Partners LP,
and Ascend  Partners  Sapient LP  (collectively  the "Sub-Debt  Holders") in the
original aggregate  principal amount of $4,000,000.  The obligation to repay the
loan shall be evidenced by the Borrower's execution of the Senior Note.

2. TERMS OF REPAYMENT:

      The Senior Note shall bear interest absent an event of default at the rate
of eight  percent  (8%) per  annum,  commencing  as of the date on which  Lender
advances funds to Company pursuant to the Senior Note, which interest, absent an
event of default,  shall all be due upon maturity of the Senior Note as provided
for  therein.  If  shareholder  approval for  completion  of the SPA is granted,
koncepts shall be entitled to deliver the original Senior Note marked "Paid" and
written satisfaction of this Bridge Loan Agreement to Company as payment for Two
Million  ($2,000,000  USD) dollars of koncepts' total Three Million  ($3,000,000
USD)  dollars  purchase  consideration  under the SPA thereby  reducing the cash
required  at  closing  under  the  terms  of  the  SPA to  One  Million  dollars
($1,000,000 USD). Notwithstanding the foregoing, at such time Company will still
owe Lender all amounts of accrued but unpaid  interest  and other fees,  if any,
owing under the terms of the Senior Note, and will concurrently pay such accrued
but  unpaid  interest  and  fees,  if any,  to  Lender  in  cash.  If,  however,
shareholder  approval is not  granted,  the Senior Note shall  mature as per its
terms on or before September 8, 2006.

3. SECURITY:

      The Bridge Loan and Senior Note  described  above is secured as more fully
set forth herein.

4. SECURITY INTEREST:

      4.1 GRANT OF SECURITY  INTEREST:  Borrower  grants to Lender a  continuing
consensual  and  perfected  security  interest in, and lien on, all of Borrowers
assets both foreign and domestic of whatever form or character (collectively the
"Collateral")  to secure the payment of the  indebtedness and the performance of
all of Borrower's obligations under this Agreement and the Collateral Documents.

      Borrower  acknowledges  that nothing  contained  in this  Agreement or any
other  agreement will be (i) construed as an agreement by Lender to resort to or
look to a particular type of the Collateral as security for the repayment of the
indebtedness or (ii) deemed to limit or reduce any security  interest in or lien
upon any portion of the Collateral for the indebtedness.

      4.2 PERFECTION OF SECURITY INTEREST:

      (a) FILING OF FINANCING  STATEMENT:  The Borrower  irrevocably  authorizes
Lender  at any  time  and  from  time  to time to  file  any  initial  financing
statements  and  amendments  thereto  describing  the  Collateral and perfecting
Lender's  security  interest  therein,  and agrees to execute  upon  demand such
documents as are required by Lender to perfect Lender's security interest in the
Collateral.  The  Borrower  will pay all taxes and other costs of the filing and
any other costs associated  therewith.  The Borrower also ratifies the filing of
any financing statement already filed by Lender prior to the date hereof.

      (b)  POSSESSION:  The Borrower  will have  possession  of the  Collateral,
except where Lender  chooses to perfect its security  interest by  possession in
addition to the filing of a financing  statement.  If the  Collateral  is in the
possession of a third party, the Borrower will join with Lender in notifying the
third party of Lender's security interest and obtaining an acknowledgement  from
the third party that it is holding the Collateral for the benefit of Lender.

      (c) CONTROL:  The Borrower will cooperate with Lender in obtaining control
with respect to the Collateral consisting of, but not limited to all foreign and
domestic: (i) Deposit Accounts; (ii) Investment Property; (iii) Letter-of-Credit
rights;  and (iv) Electronic  chattel paper;  (d) Marking of Chattel Paper:  The
Borrower  will not  create any  Chattel  Paper  without  placing a legend on the
Chattel  paper  acceptable  to Lender  indicating  that  Lender  has a  security
interest in the Chattel Paper.


<PAGE>

      4.3 NO DISPOSITION OF COLLATERAL:  Lender does not authorize, and Borrower
agrees not to (a) sell or lease any of the  Collateral,  except for Inventory in
the ordinary course of business; (b) license any of the Collateral; or (c) grant
any other security interest in any of the Collateral.

      4.4 PURCHASE  MONEY  SECURITY  INTERESTS:  To the extent that the Borrower
uses the Loan to purchase the Collateral,  Borrower's repayment of the Loan will
apply on a  "first-in-first  out" basis so that the  portion of the Loan used to
purchase a particular item of the Collateral  will be paid in the  chronological
order the Borrower purchased the Collateral.

      4.5 BORROWER REMAINS LIABLE:  Notwithstanding anything contained herein to
the contrary, (a) Borrower will remain liable for all damages,  obligations, and
liabilities  under the contracts and  agreements  included in the  Collateral to
perform  all of its  duties  and  obligations  to the  same  extent  as if  this
Agreement had not been executed, (b) the exercise by Lender of any of its rights
under this Agreement or the  Collateral  Documents will not release the Borrower
from any of its  duties  or  obligations  under  the  contracts  and  agreements
included in the  Collateral  and (c) Lender will have no obligation or liability
under the contracts and agreements  included in the Collateral,  nor will Lender
be obligated to perform any of the obligations or duties of Borrower  thereunder
or to take any action to collect or enforce any claim for payment. Borrower will
pay all taxes,  levies,  assessments  and charges of any kind upon or related to
the Collateral, Borrower's business, income, revenues and assets.

      5. REPRESENTATIONS AND WARRANTIES:

      The Borrower represents and warrants to Lender that:

      5.1  ORGANIZATION AND AUTHORITY:  The Borrower is a Delaware  corporation,
duly  organized and in good standing under the laws of the State of Delaware and
has the power and  authority to own its assets and transact  its  business.  The
precise  legal  name of the  Borrower  is set  forth on the  first  page of this
Agreement.  The Person  executing  this  Agreement  has full power and  complete
authority to execute this  Agreement and all  Collateral  Documents on behalf of
Borrower.

      5.2  TRANSACTIONS  LEGAL  AND  AUTHORIZED:  The  execution,  delivery  and
performance  of this  Agreement  and the  Collateral  Documents  have  been duly
authorized by all necessary action of Borrower, and the execution,  delivery and
performance  of this  Agreement and the  Collateral  Documents  does not violate
Borrower's  formation  documents,  or  the  terms  of any  contract,  indenture,
agreement or undertaking to which Borrower is a party or by which it is bound.

      5.3  ENFORCEABILITY OF OBLIGATIONS:  This Agreement,  the Senior Note, and
the Collateral  Documents are valid,  binding upon, in full force and effect and
fully  enforceable  against  Borrower,  Validity  Guarantor  or any other  party
thereto in accordance with their respective terms.


<PAGE>

      5.4  LITIGATION:  No  litigation or other  proceeding  before any court or
administrative agency is pending or threatened.  Furthermore, Borrower is not in
default with respect to any order, writ,  injunction,  or demand of any court or
governmental department or agency.

      5.5 FINANCIAL STATEMENTS/REPORTS/CERTIFICATES:

      (a) EXISTING  FINANCIAL  INFORMATION/NO  ADVERSE  CHANGES:  The  financial
statements  furnished  to Lender are true and correct and have been  prepared in
accordance  with GAAP  applied on a  consistent  basis  throughout  the  periods
involved.  The balance sheet fairly presents the condition of Borrower as of the
date thereof,  and the profit and loss statement  fairly presents the results of
operations.  There have been no material  adverse  changes in the  condition  of
Borrower,  financial  or  otherwise  subsequent  to the date of the most  recent
financial statement furnished to Lender.

      (b) FUTURE FINANCIAL INFORMATION:  All financial information,  statements,
reports and  certificates  required  by this  Agreement  are true and  accurate.
Lender are based upon  reasonable  assumptions  or facts then known to Borrower,
and fairly present,  to the best knowledge of Borrower,  the projected condition
of Borrower as therein set forth, and fairly presents,  to the best knowledge of
Borrower, the projected results of operations.

      5.6  OWNERSHIP  OF  COLLATERAL;  NO LIENS:  Except  as set forth  below in
Exhibit "A" and any collateral  security agreement executed by Borrower in favor
of Crestmark Bank,  Borrower is the owner of and has good and indefeasible title
to all of the Collateral.  The Collateral is not subject to any liens,  purchase
options,  mortgages,  pledges,  encumbrances,  claims (legal or  equitable),  or
charges  of any kind  except  Permitted  Encumbrances.  As of the  date  hereof,
Borrower has not sold any Collateral  except in the ordinary course of business.
Lender's  security  interest  in the  Collateral  is a first  priority  security
interest,  and Borrower will defend and indemnify  Lender against the claims and
demands of all other persons claiming an interest in the Collateral.

      5.7 PERSONAL PROPERTY: The Collateral will remain personal property at all
times. The Borrower will not affix any of the Collateral to any real property in
any manner which would change its nature from that of personal  property to real
property or a fixture.

      5.8 TAX RETURNS AND TAXES:  Borrower has filed all federal,  state,  local
and foreign tax returns  which are  required to be filed and has paid all taxes,
withholdings,  assessments and other  government  charges which have become due.
Borrower  does not  know of any  proposed  material  additional  tax  assessment
against it, or any of its properties, or any basis therefore.

      5.9 FULL  DISCLOSURE:  Neither this  Agreement  nor any written  statement
furnished  by or on behalf of  Borrower to Lender in  connection  with the Loan,
taken as a whole,  contains any untrue  statement of a material fact or omits to
state a material  fact  necessary to make the  statements  contained  therein or
herein not  misleading.  There is no fact  relating to Borrower or its  business
which  Borrower has not  disclosed to Lender in writing,  which  materially  and
adversely  affects,  or as far as Borrower can now foresee,  will materially and
adversely affect Borrower's business (financial or otherwise).


<PAGE>

      5.10 CASUALTY LOSS OR JUDGMENT:  The Collateral has not suffered any loss,
substantial damage, or destruction and no attachment, lien, levy, garnishment or
commencement of any related proceeding has occurred against the Collateral.

      5.11 NO MATERIAL  ADVERSE CHANGE:  No material adverse change has occurred
in  the  existing  or  prospective  financial  condition,  business,  assets  or
liabilities of the Borrower.

      6. AFFIRMATIVE COVENANTS:

      Borrower  covenants and agrees that until all  indebtedness  due Lender is
paid in full, Borrower will:

      6.1 PAYMENTS ON INDEBTEDNESS:  Pay all  indebtedness  when due, whether by
acceleration  or  otherwise.  Furthermore,  Borrower  will not have any Advances
outstanding  under the Loan contrary to any  provisions of the Loan Agreement or
the  Collateral  Documents,  including  any  Advances  in excess of the  Advance
Formula which are not immediately repaid to Lender.

      6.2 PERFORMANCE OF OBLIGATIONS:  Perform or cause to be performed,  all of
the terms, conditions, obligations and covenants of Borrower or any other Person
as required by this Agreement,  the Collateral Documents or any other agreement,
executed between Lender and Borrower and/or another Person, whether now existing
or hereafter created.

      Borrower  will also take all action (or not take any action)  necessary to
keep the representations and warranties true and accurate.

      6.3 INFORMATION:  Furnish  promptly and in a form  satisfactory to Lender,
such  information  as  Lender  may  request,  from  to  time,  and to  permit  a
representative  of Lender  access to any of its premises,  computer  systems and
financial records to inspect and examine Borrower's books and records.

      6.4 NOTIFICATION OF DISPUTES: Notify Lender promptly of any litigation, or
administrative  or tax  proceeding,  or other action  threatened  or  instituted
against  Borrower or any property of Borrower or any other material matter which
could adversely impair Borrower's  financial condition or its ability to conduct
its business. For the purposes of this Agreement, any single such claim in which
the sum in dispute is in excess of Twenty Thousand  ($20.000.00) Dollars, or all
such  claims  in  which  the  aggregate  sums in  dispute  are  Twenty  Thousand
($20,000.00) Dollars or more, will be deemed to be material and adverse.

      6.5  PAYMENT  OF TAXES:  Pay when due all  taxes,  assessments,  and other
governmental  charges to which  Borrower or it's  property is or will be subject
before such charges become  delinquent,  except that no such charge need be paid
so long  as its  validity  or  amount  is  being  contested  in  good  faith  by
appropriate proceedings and Borrower has established a cash reserve with respect
thereto;  provided,  however, that any such tax, assessment,  or charge shall be
paid  forthwith  (under  protest) upon the filing of any lien securing the same,
commencement of levy, other form of execution, or any other collection action.


<PAGE>

      6.6  INSURANCE:   Maintain  insurance  in  such  form  and  amount  as  is
satisfactory  to  Lender,  with loss  payable  clauses  in favor of  Lender  and
providing that any losses under the policies are payable to Lender.  If Borrower
fails to obtain or maintain any required policies,  then Lender, without waiving
any Default by Borrower  relating  thereto,  may (but without any obligation) at
any time  thereafter  make such  payment or obtain such  coverage  and take such
other  actions as Lender deems  advisable.  Borrower  will not take out separate
insurance  concurrent in form or contributing  in the event of a loss.  Borrower
will also maintain  insurance pursuant to all applicable  Worker's  Compensation
laws, and liability insurance for damage to persons. All such insurance shall be
in such form,  with such companies and in such amounts as shall be acceptable to
Lender and each policy shall provide that the insurance  company will provide at
least  thirty (30) days notice to Lender prior to any  cancellation  or material
alteration or amendment of any policy.  In the event any proceeds are payable to
Borrower,  or  otherwise  become  available,  as a result of a  casualty  to any
Collateral,  all such proceeds are be the property of Lender, immediately turned
over to Lender and applied to the Indebtedness due Lender.

      6.7 COMPLIANCE  WITH LAWS:  Continue at all times to comply with all laws,
ordinances,  regulations or requirements of any governmental  authority relating
to Borrower's business, property or affairs, including,  without limitation, all
environmental  laws and the Fair Labor Standards Act of 1938, 29 U.S.C.  200, et
seq., as amended from time to time.

      6.8  PRESERVATION  OF COLLATERAL:  Maintain the Collateral in good repair,
working  order and  condition.  With respect to Accounts,  Borrower  will pursue
collections  diligently and present  evidence  thereof to Lender,  if requested.
Borrower will, upon request, immediately deliver to Lender evidence of ownership
and/or certificates of title relative to the Collateral.

      7. NEGATIVE COVENANTS:

      Borrower  covenants and agrees that until all  indebtedness  due Lender is
paid in full, it will not:

      7.1 NO CHANGES: The Borrower will not change its state of incorporation or
organization. The Borrower will also not change its name, adopt an assumed name,
or move its chief  executive  office  without  giving Lender at least sixty (60)
days prior written notice.

      7.2 DIVIDENDS: Declare or pay any dividend, or make any other distribution
of, or with regard to, its capital stock or other equity  security,  or purchase
or retire any of its capital stock or other equity security.  Provided, however,
with  respect to any year in which  Borrower  is taxed by the  Internal  Revenue
Service as an " S corporation,  Borrower may make a  distribution  of profits to
its  shareholders  in an amount  not to exceed the sum  necessary  to enable its
shareholders to pay their personal state and federal taxes directly attributable
to the profits earned by Borrower for the year.

      7.3 LOANS LIABILITIES:  Make a loan, or incur or assume any obligations or
liabilities  as guarantor,  surety,  indemnitor or otherwise with respect to any
indebtedness or other obligation of any Person, except in the ordinary course of
business.

      7.4  TRANSACTIONS  WITH   AFFILIATES/NO   SUBSIDIARIES:   Enter  into  any
transaction with any stockholders of Borrower or such stockholders'  affiliates,
except on terms not less  favorable than would be usual and customary in similar
transactions between persons or entities dealing at arm's length.  Borrower does
not have and will not organize or acquire any subsidiaries.


<PAGE>

      7.5  REDEMPTION/ISSUANCE:  Release,  redeem, retire, purchase or otherwise
acquire,  directly  or  indirectly,  any of its  capital  stock or other  equity
security without the prior written consent of Lender.

      7.6  DEFAULT  IN  PAYMENT OF OTHER  DEBT:  Default  in the  payment of any
indebtedness owed to any Person for borrowed money.

      7.7  JUDGMENT:  Suffer or permit any  judgment,  decree or order not fully
covered by insurance to be entered by a court of competent  jurisdiction against
Borrower  or  Validity  Guarantor  or permit or suffer  any writ or  warrant  of
attachment  or any  similar  process to be filed  against  Borrower  or Validity
Guarantor or against any property or asset of Borrower or Validity Guarantor.

      Borrower  covenants and agrees that until all  indebtedness  due Lender is
paid in full, it will keep proper books of accounts in a manner  satisfactory to
Lender.  Lender  will  have  the  right,  at  any  time,  to  verify  any of the
Collateral,  documentation  or books,  whether such  documentation  is furnished
weekly,  monthly or annually in whatever manner and in whatever frequency Lender
deems necessary.

      8.1 QUARTERLY FINANCIAL  STATEMENTS AND REPORTS:  Borrower will deliver to
Lender quarterly management prepared financial  statements,  balance sheets, and
profit and loss  statements  for the  quarter  then ended,  certified  to by the
president or chief  financial  officer of Borrower.  Such reports will set forth
the financial  affairs and true condition of Borrower for (each quarter and will
be  delivered  to Lender no later  than  thirty  (45) days after the end of each
quarter. In addition, Borrower will furnish to Lender the following certified to
by the president or chief financial  officer of Borrower within the time periods
set forth:

      (a) ACCOUNTS  RECEIVABLE  REPORTS:  Monthly detailed  Accounts  Receivable
Aging Reports no later than fifteen (15) days after the end of each month;

      (b) Accounts  Payable  Reports:  Monthly  detailed  Accounts Payable Aging
Reports no later than fifteen (15) days after the end of each month;

      All  financial  and  operating  statements  are and  will be  prepared  in
accordance with GAAP applied on a consistent basis.

      8.2 FIELD  EXAMINATIONS:  Borrower  will permit  Lender to perform  annual
field  examinations  of Borrower's  assets and  liabilities,  to be performed by
Lender's inspector,  whether a Lender officer or an independent party, with fees
and expenses  thereof to be paid by Borrower.  The  information  compiled by the
field  examination is for Lender's internal use, and Lender has no obligation to
share the field examination, in whole or in part, with Borrower.

      8.3  ANNUAL  FINANCIAL  STATEMENTS/PROJECTIONS:  Each year  Borrower  will
deliver to Lender annual reviewed  financial  statements,  balance  sheets,  and
profits and loss statements prepared by a certified public accountant acceptable
to Lender. Such reports will set forth in detail Borrower's true condition as of
the end of  Borrower's  fiscal year no later than ninety (90) days after the end
of Borrower's fiscal years.  Borrower will also deliver to Lender  semi-annually
management prepared financial projections  forecasting on a month by month basis
that month's  balance sheet,  income  statement and a detailed  schedule of cash
disbursements  and borrowing  availability.  Said projections shall be submitted
within thirty (30) days after the Company's fiscal year end for each year and at
each six month point after year end that the Loan is outstanding.


<PAGE>

      9. REMEDIES UPON DEFAULT:

      Upon the occurrence of any Default, Lender can charge the default interest
rate on the Senior Note, and Lender has the following rights and remedies. These
rights and remedies are cumulative and not exclusive.

      9.1 GENERAL:  Upon any Default,  Lender may pursue any remedy available at
law (including  those available under the UCC), in equity or by agreement of the
parties.

      9.2 ACCELERATION:  Upon any Default,  Lender can accelerate all or part of
the  Indebtedness  without  notice or  demand,  and  declare  such  amount to be
immediately   due  and  payable,   without   presentation,   notice  or  demand,
notwithstanding  the maturity or due date, if any, therein to the contrary,  all
of which are expressly waived by Borrower and Validity Guarantor.

      9.3 CONFORMER REMEDIES:  Upon any Default,  Lender has the right to pursue
any of the following remedies  separately,  successively or simultaneously:  (i)
file suit and obtain  judgment and, in conjunction  with any action,  Lender may
seek any ancillary  remedies  provided by law,  including levy of attachment and
garnishment; (ii) take possession of any Collateral and any books and records of
the Borrower  without  demand and without legal process.  Upon Lender's  demand,
Borrower will assemble and make the Collateral  and books and records  available
to Lender as it directs.  Borrower grants to Lender the right, for this purpose,
to enter into or on any premises where the Collateral may be located;  and (iii)
without taking possession, sell, lease or otherwise dispose of the Collateral at
public or private sale in accordance with the UCC.

      9.4 RIGHT OF OFFSET:  Lender may offset  against any funds (i) of Borrower
or Validity  Guarantor on deposit with or in the possession of Lender,  and (ii)
of Borrower or Validity Guarantor on deposit in any deposit account.

      9.5 ACCOUNTS AND/OR ACCOUNTS RECEIVABLE:

      (a) Lender may notify any and all Account  Debtors to make  payment on any
Account directly to Lender.

      (b) Lender may in its own name or in the name of Borrower:

      (i) demand,  collect,  receive payment of, receipt for and give discharges
and  releases,  upon payment of all or any of the Accounts and any monies due or
to become  due in  respect  thereof  and to notify  all  Account  Debtors of the
Default and to direct all Account Debtors to pay Lender directly;

      (ii) settle,  compromise,  compound,  or adjust all or any of the Accounts
which are in dispute;

      (iii)  commence,  prosecute,  settle  and  compromise  any and all  suits,
actions,  or  proceedings  in  law  or in  equity  in  any  court  of  competent
jurisdiction to collect or otherwise realize on all or any of the Accounts or to
enforce any rights in respect thereof; and


<PAGE>

      (iv) file any claim or take any other  action or  proceeding  which Lender
may deem  necessary or  appropriate to protect and preserve and realize upon the
security interest of Lender in the Accounts and the proceeds thereof; and

      (v) generally to sell, assign,  transfer,  pledge, make any agreement with
respect to or otherwise reasonably deal with all or any of the Accounts as fully
and  completely  as  though  Lender  were the  absolute  owner  thereof  for all
purposes.   Borrower   hereby  waives  any  statutory  rule  or   constitutional
restriction,  prohibition,  or procedure in connection  with the rights  granted
Lender in this subsection and gives Lender the right to peaceful repossession of
the Collateral without hearing or court order.

      9.6 SALES AS CREDIT:  If after a Default,  Lender sells any  Collateral on
credit,  the Borrower will be credited  only with payments  actually made by the
purchaser,  received by Lender and applied to the Indebtedness. If the purchaser
fails to pay for the  Collateral,  Lender  may  resell  the  Collateral  and the
Borrower will be credited with the proceeds of the sale.

      9.7 WAIVERS:  To the extent  permitted by applicable law,  Borrower hereby
absolutely and irrevocably  waives and  relinquishes the benefits and advantages
of any  valuation,  stay,  appraisement,  extension  or  redemption  laws now or
hereafter  existing which,  but for this  provision,  might be applicable to any
sale made under the judgment,  order or decree of any court,  or otherwise.  The
Borrower  also waives any rights to compel  Lender to pursue  collection  of any
Collateral or to collect any income on the Collateral.

      10. STANDARDS FOR EXERCISING REMEDIES:

      To the extent that  applicable  law  imposes  duties on Lender to exercise
remedies in a commercially  reasonable  manner,  the Borrower  acknowledges  and
agrees that it is not commercially unreasonable for Lender:

      (a) EXPENSES:  To fail to incur expenses  deemed  significant by Lender to
prepare,  clean up or repair the  Collateral or complete raw material or work in
process into finished goods or other finished products prior to disposition;

      (b)  CONSENTS:  To fail to obtain  third party  consents for access to the
Collateral  to be disposed of, or to obtain or, if not required by other law, to
fail to obtain  governmental  or third  party  consents  for the  collection  or
disposition of the Collateral;

      (c)  PURSUIT  OF THIRD  PARTIES;  LIENS:  To fail to  exercise  collection
remedies against account debtors or other persons obligated on the Collateral or
to remove liens or encumbrances  or adverse claims against the  Collateral,  and
Borrower  waives  any right it may have to  require  Lender to pursue  any third
parties;

      (d)  COLLECTION  SPECIALISTS:  To  exercise  collection  remedies  against
Account Debtors and other person obligated on the Collateral directly or through
the of collection agencies and other collection specialists;

      (e)  ADVERTISING:  To advertise  dispositions  of the  Collateral  through
publications or media of general circulations,  whether or not the Collateral is
of a specialized nature;


<PAGE>

      (f)  SOLICITING:  To  contact  other  persons,  whether or not in the same
business as the Borrower,  for  expressions  of interest in acquiring all or any
portion of the Collateral;

      (g) AUCTIONEERS: To hire one or more professional auctioneers to assist in
the  disposition  of the  Collateral,  whether  or not  the  Collateral  is of a
specialize nature;

      (h) WHOLESALE SALES  PERMITTED:  To dispose of assets in wholesale  rather
than retail markets;

      (i)  DISCLAIMER  OF  WARRANTIES:  To  disclaim  any  warranties  as to the
Collateral, including as to title;

      (j)  INSURANCE:  To purchase  insurance or credit  enhancements  to insure
Lender against risks of loss,  collection or disposition of the Collateral or to
provide to Lender a guaranteed  return from the collection or disposition of the
Collateral; or

      (k) OTHER  PROFESSIONALS:  To the extent deemed  appropriate by Lender, to
obtain the services of other brokers, investment bankers, consultants, attorneys
and other professionals to assist Lender in the collection or disposition of any
of the  Collateral,  the costs of which, if any, shall be added to the principal
amount of the Senior Note.

      The  Borrower  acknowledges  that the  purpose  of this  Section  10 is to
provide non-exhaustive  indications of what actions or omissions by Lender would
not be commercially  unreasonable in Lender's  exercise of remedies  against the
Collateral  and that other  actions or  omissions  by Lender  will not be deemed
commercially  unreasonable  solely on  account  of not being  indicated  in this
Section 10. Without  limitation  upon the foregoing,  nothing  contained in this
section  will be  construed to grant any rights to the Borrower or to impose any
duties on Lender that would not have been  granted or imposed by this  Agreement
or by applicable law in the absence of this section.

      Nothing  contained in this  Agreement  will be construed to make Lender an
agent or trustee of Borrower or Validity  Guarantor for any purpose  whatsoever.
Lender will not be responsible or liable for any shortage, discrepancy,  damage,
loss or  destruction  of any  part of the  Collateral  wherever  the same may be
located  and  regardless  of the  cause  thereof  (except  to the  extent  it is
determined by final judicial decision that Lender's act or omission  constituted
gross   negligence  or  willful   misconduct).   Lender  will  not,   under  any
circumstances  or in any event  whatsoever,  have any liability for any error or
omission or delay of any kind occurring in the settlement, collection or payment
of any of the Accounts, liquidation of the Collateral or any instrument received
in payment thereof or for any damage resulting  therefrom  (except to the extent
it is determined by a final judicial  decision that Lender's error,  omission or
delay constituted gross negligence or willful  misconduct).  Lender does not, by
anything herein or in any assignment or otherwise,  assume any of the Borrower's
or Validity Guarantor's  obligations under any contract or agreement assigned to
Lender,  and Lender shall not be responsible  in any way for the  performance by
the  Borrower  or  Validity  Guarantor  of any kind of the terms and  conditions
thereof.


<PAGE>

      11. APPLICATION OF PROCEEDS:

      After the occurrence of a Default and  acceleration of the indebtedness by
Lender, or after demand for repayment of all  indebtedness,  the proceeds of any
sale or other  disposition  of the Collateral  will be applied by Lender,  first
upon all expenses authorized by this Agreement,  the Collateral  Documents or by
law, including reasonable attorney's fees incurred by Lender; the balance of the
proceeds of such sale or other disposition will be applied to the payment of the
indebtedness,  first  to  interest,  then to  principal,  then to  other  unpaid
Indebtedness,  and the surplus, if any, shall be paid over to the Borrower or to
such other Person or Persons as may be entitled  thereto under  applicable  law.
The Borrower and Validity Guarantor will remain liable for any deficiency, which
the Borrower or Validity Guarantor will pay to Lender immediately upon demand.

      12. EXPENSES:

      Borrower will pay to Lender,  on demand,  any and all expenses,  including
reasonable  attorneys' fees and collection expenses,  incurred or paid by Lender
in  protecting  or enforcing  its rights under this  Agreement,  the  Collateral
Documents or pursuant to any other document or agreement relating to the Loan.

      13. NOTICE:

      Any notice to Borrower or Lender will be deemed effective if it is written
and sent by facsimile with  confirmation of receipt,  by certified mail,  return
receipt requested, postage prepaid, or other expedited mail service, or by other
personal  delivery  service  addressed  to Borrower or Lender at the address set
forth in this  Agreement or at such other address as is designated by one to the
other in writing.

      14. TERMINATION/RENEWAL:

      All   of   Borrower's   obligations,    duties,    promises,    covenants,
representations  and warranties  under this  Agreement and Collateral  Documents
will  continue  and remain in full force and effect  until the  indebtedness  is
irrevocably  paid in full in cash or in kind,  including all exit fees under the
Senior Note.

      15. MISCELLANEOUS:

      15.1  BINDING  EFFECT:  This  Agreement  is binding upon and inures to the
benefit  of  Borrower,  Validity  Guarantor  and  Lender,  and their  respective
successors and assigns and will bind all persons who become bound as a debtor to
this Agreement.  The foregoing,  will not, however,  authorize any assignment by
Borrower of its rights or duties  hereunder,  which  assignment,  in whole or in
part, by Borrower is not permissible. Lender may assign its rights and interests
under this Agreement and the Collateral Documents. If an assignment by Lender is
made,  Borrower  and  Validity  Guarantor  will make all  payments to and render
performance  under this  Agreement  and the  Collateral  Documents  to  Lender's
assignee.

      Borrower  and  Validity  Guarantor  waive and will not assert  against any
assignee any claims, defenses or set-offs,  which Borrower or Validity Guarantor
could assert against Lender except defenses which cannot be waived.

      15.2 DELAY/WAIVER:  No delay or failure of Lender in exercising any right,
remedy,  power or privilege hereunder will affect such right,  remedy,  power or
privilege, nor will any single or partial exercise thereof preclude the exercise
of any other right, remedy, power or privilege. No delay or failure of Lender at
any time to  demand  strict  adherence  to the terms of this  Agreement  will be
deemed to constitute a course of conduct inconsistent with Lender's right at any
time to demand strict adherence to the terms of this Agreement or the Collateral
Documents.


<PAGE>

      15.3 INCORPORATION BY REFERENCE: The Collateral Documents are incorporated
herein by reference.  In the event any provision of the Collateral  Documents is
inconsistent with the provisions of this Agreement,  then this Agreement will be
deemed  paramount  unless the rights and  remedies of Lender  would be adversely
affected or diminished thereby.

      15.4 APPLICABLE  LAW: This Agreement and the Collateral  Documents will be
interpreted,  and the rights of the parties hereunder will be determined,  under
the laws of the State of California (without regard to conflict of laws).

      15.5 FURTHER  ASSURANCES:  Borrower and Validity  Guarantor,  from time to
time, upon Lender's request,  will each make,  execute,  acknowledge and deliver
all such further and  additional  instruments  and  agreements and take all such
further  action as may be required,  to carry out the intent and purpose of this
Agreement or any part thereof.

      15.6  HOLD   HARMLESS/INDEMNITY:   Borrower  assumes   responsibility  and
liability for, and holds harmless and indemnifies  Lender from and against,  any
and all liabilities,  demands,  obligations,  injuries,  costs, damages (direct,
indirect or consequential),  awards, loss of interest, principal, or any portion
of the  Indebtedness,  charges,  expenses,  payments  of monies  and  reasonable
attorney fees,  incurred or suffered,  directly or indirectly,  by Lender and/or
asserted against Lender by any Person whatsoever, including Borrower or Validity
Guarantor,  which  arise  in  whole  or in part  out of this  Agreement,  or the
Collateral  Documents,  or the relationship  herein set forth or the exercise of
any  right or  remedy  including  the  realization,  disposition  or sale of the
Collateral,  or any portion thereof,  or the exercise of any right in connection
therewith even if the above are caused by the sole action, inaction, omission or
negligence of Lender,  but Borrower or Validity  Guarantor will not be liable if
the damages result solely from the fraud or gross negligence of Lender.

      15.7  LIMITATION OF LIABILITY:  Neither Lender nor any of its  affiliates,
directors, officers, agents, attorneys or employees shall be liable to Borrower,
Validity  Guarantor or any of Borrower's  affiliates  for any action  taken,  or
omitted to be taken, by it or them or any of them under this Agreement or any of
the Collateral Documents or in connection herewith or therewith,  except that no
person shall be relieved of any liability  imposed by law for gross  negligence,
recklessness or fraud.  Except for claims of gross  negligence,  recklessness or
fraud,  no  claim  may be  made by  Borrower,  Validity  Guarantor  or by any of
Borrower's affiliates,  directors, officers, agents, attorneys or employees, for
any  special,  consequential,  indirect  or  punitive  damages in respect of any
breach or wrongful  conduct  (whether  the claim is based on contract or tort or
duty  imposed by law)  arising out of or related to this  Agreement or any other
Collateral Documents, or the transactions contemplated hereby or thereby, or any
act, omission or event occurring in connection herewith or therewith.

      15.8  SURVIVAL  AND   CONTINUATION:   All   representations,   warranties,
covenants, indemnifications, consents and agreements contained in this Agreement
and/or any of the  Collateral  Documents  will  survive  the  execution  of this
Agreement,  the Collateral  Documents and any  investigations by Lender and will
be, and continue at all times while any Indebtedness is outstanding,  to be true
and accurate.


<PAGE>

      15.9  RULES  OF  CONSTRUCTION:  (a) No  reference  to  "proceeds"  in this
Agreement authorizes any sale, transfer,  or other disposition of the Collateral
by the Borrower;  (b)"includes and "including" are not limiting; (c) "Or" is not
exclusive; and (d) "all includes "any" and "any includes "all."

      15.10 COMPLETE AGREEMENT:  This Agreement incorporates and/or contains the
entire agreement of the parties hereto with respect to its subject matter.  None
of the parties to this  Agreement  will be bound by anything  not  expressed  in
writing.  This  Agreement  and the  Collateral  Documents may only be amended or
modified by a written agreement executed by Lender and Borrower.

      15.11 SEVERABILITY: If any provision of this Agreement is in conflict with
any statute or rule of law or is otherwise  unenforceable  for any reason,  then
that  provision  will be deemed  null and void to the extent of the  conflict or
unenforceability and will be deemed severable.  The offending provision will not
invalidate any other provision of this Agreement.


- --------------------------------------------------------------------------------
LENDER:                                     COMPANY:
- -------                                     --------
EVER SOLID, LTD.                            THE SINGING MACHINE COMPANY, INC.
(a Hong Kong registered company)


By: /s/ Sak Hong Lau                        By: /s/ Yi Ping Chan
    ----------------------------------          --------------------------------
   (Signature of Authorized Person)             (Signature of Authorized Person)


    Sak Hong Lau, Chairman                      Yi Ping Chan, Interim CEO
    ------------------------------------        --------------------------------
    Printed Name and Title                      Printed Name and Title
- --------------------------------------------------------------------------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.3
<SEQUENCE>4
<FILENAME>v037671_ex10-3.txt
<TEXT>
                        THE SINGING MACHINE COMPANY, INC.
                            -------------------------
                             SENIOR PROMISSORY NOTE

$2,000,000                                                         MARCH 8, 2006

      The Singing  Machine  Company,  Inc.,  a Delaware  corporation  ("Maker"),
hereby promises to pay to Ever Solid,  Limited.,  a Hong Kong registered company
("Holder"), at the Shing Dao Industrial Bldg., 5/F, 232 Aberdeen Main Road, Hong
Kong, or at such other address as may be specified by Holder,  the principal sum
of Two Million Dollars and no cents ($2,000,000 USD) if paid within  forty-eight
(48)  hours of the  closing  of that  certain  Stock  Purchase  Agreement  dated
February  21,  2006  by  and  between  Singing   Machine,   Inc.,  and  koncepts
International  Limited  a Hong  Kong  registered  company  ("koncepts")  ("Stock
Purchase  Agreement").  If, however, the Stock Purchase Agreement fails to close
for whatever  reason,  Maker shall make payment to Holder of all  principal  and
interest  then  owing on or before  September  8, 2006,  in lawful  money of the
United States of America.

      Absent an event of default, the principal  indebtedness  evidenced by this
Senior  Note shall earn  interest at the rate of eight  percent  (8%) per annum.
Principal and interest  shall be paid in one  installment on the earlier of: (a)
September 8, 2006,  or (b) within  forty-eight  (48) hours of the closing of the
Stock Purchase Agreement.  This Note may be prepaid in full, but not in part, at
any time without penalty.

      The  principal  amount of this  Senior  Note is "Senior  Indebtedness"  as
defined in the Bridge  Loan  Agreement  dated the date  hereof  among  Maker and
Holder.  This Senior Note is also secured by a consensual  and perfected  "broad
form"  UCC-1  filing  secured by all of the assets of Maker,  both  foreign  and
domestic,  such that Lender shall be deemed a consensual  secured  lender in the
event of either a voluntary or  non-voluntary  filing by or against  Maker under
United  States Code Title 11 or any similar  state or federal  statute.  In this
regard  Maker shall  promptly  execute such  documents as Lender may  reasonably
request from time to time so as to perfect its  position as a secured  lender to
Maker.

      Maker hereby waives presentment,  protest, demand or notice of any kind in
connection with any failure to pay when due the  indebtedness  evidenced by this
Note.  If Maker  fails to pay the  indebtedness  when due,  Maker  agrees to pay
Holder's  reasonable  legal fees and expenses  incurred in  connection  with the
enforcement of this Note.

      Regardless of the place of its execution,  this Note shall be construed in
accordance with the laws of the State of California.

                                        THE SINGING MACHINE COMPANY, INC.,
                                        A DELAWARE CORPORATION

                                        By: /s/ Yi Ping Chan
                                            ------------------------------------
                                            Yi Ping Chan, Interim - CEO
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.4
<SEQUENCE>5
<FILENAME>v037671_ex10-4.txt
<TEXT>
                        SETTLEMENT AGREEMENT AND RELEASE
                        --------------------------------

      This  Settlement  Agreement and Release (the  "Agreement")  is dated as of
March 5,  2006 and is made by and  between  Omicron  Master  Trust,  SF  Capital
Partners,  Ltd.,  Bristol  Investment  Fund,  Ltd.,  Ascend Offshore Fund, Ltd.,
Ascend  Partners  LP,  and  Ascend  Partners   Sapient  LP   (collectively   the
"Investors")  and The Singing  Machine  Company,  Inc.,  a Delaware  corporation
("Singing Machine").

      WHEREAS,  Singing  Machine,  issued  to  the  Investors  an  aggregate  of
$4,000,000.00  principal  amount  8%  convertible  debentures  pursuant  to  the
Securities   Purchase   Agreement  dated  August  20,  2003   (collectively  the
"Debentures");

      WHEREAS,  Singing Machine  desires to redeem all  outstanding  Debentures,
including interest and penalties ("Remaining Debentures") in accordance with the
terms and conditions hereof; and

      NOW,  THEREFORE,  in consideration of the mutual  conditions and covenants
contained in this Agreement, and for other good and valuable consideration,  the
sufficiency  and  receipt  of  which  is  hereby  acknowledged,   it  is  hereby
stipulated,  consented  to and  agreed by and among the  Investors  and  Singing
Machine as follows:

      1. On or  before  March 10,  2006,  Singing  Machine  shall (i) pay to the
Investors an aggregate of $2,000,000.00  (the "Funds") as set forth on Exhibit A
hereto,  by wire  transfer  to the bank and  account  as set forth on  Exhibit A
hereto,  and (ii) reduce the exercise  price to $0.85 per share for the warrants
on the attached Exhibit B in full satisfaction of the Remaining Debentures. Upon
receipt of the Funds, the Investors shall return,  via overnight  delivery,  the
Remaining Debentures to Singing Machine.

      2. In consideration of the foregoing, upon receipt by the Investors of the
Funds, the Investors  release and discharge  Singing Machine,  Singing Machine's
officers,  directors,  principals,  control persons, past and present employees,
insurers,  successors,  agents and assigns  ("Singing Machine Parties") from all
actions,  cause  of  action,  suits,  debts,  dues,  sums  of  money,  accounts,
reckonings,  bonds, bills,  specialties,  covenants,  contracts,  controversies,
agreements,   promises,  variances,  trespasses,  damages,  judgments,  extents,
executions,  claims, and demands whatsoever,  in law, admiralty or equity, which
against  Singing  Machine  Parties ever had, now have or hereafter can, shall or
may,  have for,  upon,  or by reason of any matter,  cause or thing  whatsoever,
whether or not known or unknown,  from the  beginning of the world to the day of
the date of this Release  arising under the Debentures  and Securities  Purchase
Agreement dated August 20, 2003.


<PAGE>

      3. In consideration of the foregoing, upon receipt by the Investors of the
Funds,  the  Company  releases  and  discharges  the  Investors,  its  officers,
directors,  principals,  control persons, past and present employees,  insurers,
successors,  agents and assigns ("Investor Parties") from all actions,  cause of
action, suits, debts, dues, sums of money, accounts,  reckonings,  bonds, bills,
specialties,   covenants,  contracts,   controversies,   agreements,   promises,
variances,  trespasses,  damages, judgments,  extents,  executions,  claims, and
demands whatsoever,  in law, admiralty or equity, which against Investor Parties
ever had, now have or hereafter  can, shall or may, have for, upon, or by reason
of any matter, cause or thing whatsoever,  whether or not known or unknown, from
the beginning of the world to the day of the date of this Release  arising under
the Debentures and Securities Purchase Agreement dated August 20, 2003.

      4. Singing  Machine and the Investors each  understand and agree that this
Agreement  (including all of its terms) is forever deemed  confidential  between
them. Except as required under the statutes, rules or regulations of any federal
or state government,  government agency or court of competent jurisdiction, each
of Singing Machine and the Investors,  and their respective  counsel,  shall not
disclose or divulge any of the matters underlying this Agreement,  or any of the
terms or substance of this Agreement to others.

      All inquiries,  if any,  regarding the other party's  performance shall be
responded to promptly.  Each party shall  furnish the other party with a written
copy of each and every written response; or, if such response was oral the date,
time and person to whom a response was given.


<PAGE>

      5. All parties  acknowledge  and  represent  that:  (a) they have read the
Agreement;  (b) they clearly understand the Agreement and each of its terms; (c)
they fully and unconditionally consent to the terms of this Agreement;  (d) they
have had the benefit and advice of counsel of their own selection; (e) they have
executed  this  Agreement,  freely,  with  knowledge,  and without  influence or
duress; (f) they have not relied upon any other representations,  either written
or  oral,  express  or  implied,  made  to  them  by any  person;  and  (g)  the
consideration received by them has been actual and adequate.

      6.  This  Agreement   contains  the  entire  agreement  and  understanding
concerning  the subject  matter hereof  between the parties and  supersedes  and
replaces all prior negotiations,  proposed agreement and agreements,  written or
oral.  Each of the parties hereto  acknowledges  that neither any of the parties
hereto,  nor  agents or  counsel  of any other  party  whomsoever,  has made any
promise,   representation  or  warranty  whatsoever,  express  or  implied,  not
contained  herein  concerning the subject  hereto,  to induce it to execute this
Agreement and acknowledges ands warrants that it is not executing this Agreement
in reliance on any promise, representation or warranty not contained herein.

      7. This  Agreement  may not be modified or amended in any manner except by
an  instrument  in  writing  specifically  stating  that  it  is  a  supplement,
modification  or  amendment to the  Agreement  and signed by each of the parties
hereto.


<PAGE>

      8. Should any provision of this  Agreement be declared or be determined by
any court or tribunal to be illegal or invalid,  the  validity of the  remaining
parts,  terms or  provisions  shall not be affected  thereby and said illegal or
invalid  part,  term or provision  shall be severed and deemed not to be part of
this Agreement.

      9. This  Agreement  shall be governed by and construed in accordance  with
the laws of the State of New York,  without regard to principles of conflicts of
laws.  Any action  brought by either  party  against  the other  concerning  the
transactions  contemplated  by this Agreement shall be brought only in the state
courts of New York or in the  federal  courts  located in the state of New York.
Both parties and the individuals  executing this Agreement and other  agreements
on behalf of the Company agree to submit to the  jurisdiction of such courts and
waive trial by jury. The prevailing  party shall be entitled to recover from the
other party its reasonable attorney's fees and costs.

      10. This Agreement may be executed in  counterparts,  each of which,  when
all  parties  have  executed at least one such  counterpart,  shall be deemed an
original,  with the same force and effect as if all signatures  were appended to
one  instrument,  but all of which  together  shall  constitute one and the same
Agreement.


<PAGE>

      IN WITNESS  WHEREOF,  the parties have duly executed this  Agreement as of
the date first indicated above.

OMICRON MASTER TRUST              SF CAPITAL PARTNERS, LTD.
By: /s/ Bruce Bernstein           By: /s/ Daniel J. McNally
    ------------------------          ------------------------
Name:  Bruce Bernstein            Name: Daniel J. McNally
Title: Managing Partner           Its: General Counsel of its Investment Manager


BRISTOL INVESTMENT FUND, LTD.     ASCEND OFFSHORE FUND, LTD.
By: /s/ Paul Kessler              By: /s/ Malcolm Fairbairn
    ------------------------          ------------------------
Name:  Paul Kessler               Name:  Malcolm Fairbairn
Title: Director                   Title: Director

ASCEND PARTNERS LP                ASCEND PARTNERS SAPIENT LP
By: /s/ Malcolm Fairbairn         By: /s/ Malcolm Fairbairn
    ------------------------          ------------------------
Name:  Malcolm Fairbairn          Name:  Malcolm Fairbairn
Title: General Partner            Title: Director


THE SINGING MACHINE COMPANY, INC.


By: /s/ Yi Ping Chan
    ------------------------
Name:  Yi Ping Chan
Title: Interim CEO


<PAGE>

                                    EXHIBIT A

                                 ALLOCATIONS AND
                            WIRE TRANSFER INSRUCTIONS

- --------------------------------------------------------------------------------
INVESTOR                                     BANK ACCOUNT          AMOUNT
- --------------------------------------------------------------------------------
Omicron Master Trust                                               $1,250,000.00
- --------------------------------------------------------------------------------
SF Capital Partners Ltd.                                             $250,000.00
- --------------------------------------------------------------------------------
Bristol Investment Fund Ltd.                                         $150,000.00
- --------------------------------------------------------------------------------
Ascend Offshore Fund Ltd.                                            $239,000.00
- --------------------------------------------------------------------------------
Ascend Partners, LP                                                   $29,100.00
- --------------------------------------------------------------------------------
Ascend Partners Sapient LP                                            $81,900.00
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
                                             TOTAL                 $2,000,000.00
- --------------------------------------------------------------------------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>6
<FILENAME>v037671_ex99-1.txt
<TEXT>
[GRAPHIC OMITTED]        INVESTOR CONTACT:                COMPANY CONTACT:
THE SINGING MACHINE      Neil Berkman                     Y.P. Chan
                         Berkman Associates               Interim CEO
                         (310) 826 - 5051                 (954) 596 - 1000
                         info@BerkmanAssociates.com       www.SingingMachine.com
                         --------------------------       ----------------------


                                                           FOR IMMEDIATE RELEASE


                      THE SINGING MACHINE COMPANY ANNOUNCES
               RESTRUCTURING OF $4 MILLION SUBORDINATED DEBENTURE

          Entire Debenture Plus Interest Retired For $2 Million in Cash
          -------------------------------------------------------------


      COCONUT CREEK,  FL, March 14, 2006 -- THE SINGING  MACHINE  COMPANY (AMEX:
SMD)  announced  today that it has  retired  the entire $4 million  subordinated
debenture  which  came due on  February  20,  2006,  plus  accrued  interest  of
$270,000,  for a total cash payment of $2 million. The Company expects to report
a one-time gain of approximately  $2.27 million related to the retirement of the
debenture in its financial statements for the three months ended March 31, 2006.
Warrants expiring on September 7, 2006 to purchase  approximately 487,000 shares
of The  Singing  Machine  common  stock for $0.85 per share that were  issued in
connection with the subordinated debenture remain outstanding.

      Funds to complete this  transaction  were provided by a $2 million  bridge
loan from Ever Solid Ltd., a Hong Kong  subsidiary  of  Starlight  International
Holdings Ltd. (Hong Kong Stock Exchange: 485).

      On February  27,  2006,  The Singing  Machine  announced  an  agreement in
principle under which, subject to the successful restructuring of the $4 million
subordinated debenture and other conditions, koncepts International Ltd., a Hong
Kong  subsidiary  of  Starlight   International  Holdings  Ltd.,  would  acquire
approximately  12.9 million newly issued,  unregistered  shares of the Company's
common  stock  (representing  approximately  56% of the  total  number of shares
issued and outstanding  following the closing of the proposed transaction) for a
total of $3 million,  or $0.233 per share, and would receive warrants to acquire
up to an additional 5.0 million shares over a four-year period at prices ranging
from $0.233 to $0.350 per share.

      Y.P.  Chan,  Interim CEO of The Singing  Machine,  said, "We are extremely
pleased to resolve the subordinated debt issue, which has been a major challenge
and distraction for the Company.  I want to thank all of the sub-debt  investors
for their  level-headed  common sense business approach to reaching a resolution
of this matter as well as for their ongoing support.  This restructuring removes
the major  contingency  for the koncepts  International  Ltd.  investment in The
Singing  Machine.  We look forward to completing  that  transaction  in the near
future and to working with Starlight, our key supplier, to expand our business."

      ABOUT THE SINGING MACHINE

      Incorporated in 1982, The Singing Machine Company develops and distributes
a full line of  consumer-oriented  karaoke  machines  and music as well as other
products under The Singing MachineTM, MotownTM, MTVTM, NickelodeonTM, Hi-5TM and
other brand names.  The first to provide karaoke systems for home  entertainment
in the United States,  The Singing  Machine sells its products in North America,
Europe and Asia.


                        THE SINGING MACHINE COMPANY, INC.
 6601 Lyons Road o Building A-7 o Coconut Creek, Florida 33073 o (954) 596-1000
                              o Fax (954) 596-2000

<PAGE>

FORWARD-LOOKING STATEMENTS

      This press release contains forward-looking  statements within the meaning
of the Private  Securities  Litigation Reform Act of 1995. Such  forward-looking
statements are based on current  expectations,  estimates and projections  about
the Company's  business  based,  in part, on assumptions  made by management and
include,  but are not limited to statements  about our financial  statements for
the fiscal year ended March 31, 2006.  These  statements  are not  guarantees of
future  performance  and involve risks and  uncertainties  that are difficult to
predict.  Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such  forward-looking  statements  due to numerous
factors, including the risks that our vendors in China may not ship our products
on the scheduled basis and that we will have sufficient cash flow to finance our
working  capital  needs in the second and third  quarter of this fiscal year. In
addition,  you should  review  our risk  factors  in our SEC  filings  which are
incorporated herein by reference. Such forward-looking  statements speak only as
of the date on  which  they are made  and the  company  does not  undertake  any
obligation  to  update  any  forward-looking  statement  to  reflect  events  or
circumstances after the date of this release.


                                     * * * *

                        THE SINGING MACHINE COMPANY, INC.
 6601 Lyons Road o Building A-7 o Coconut Creek, Florida 33073 o (954) 596-1000
                              o Fax (954) 596-2000
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
