Document:

EXHIBIT 10.6

                               AMENDMENT NO. 2 TO
                           LOAN AND SECURITY AGREEMENT

      THIS AMENDMENT NO. 2 TO LOAN AND SECURITY AGREEMENT (this "AMENDMENT"), is
entered into on this 7th day of January, 2000, by and between SUNROCK CAPITAL
CORP., a Delaware corporation ("LENDER"), and DSI TOYS, INC., a Texas
corporation ("BORROWER").

                                    RECITALS

     A. Borrower and Lender have entered into that certain Loan and Security
Agreement, dated as of February 2, 1999, as amended by that certain Amendment
No. 1 to Loan and Security Agreement, dated effective as of June 30, 1999, by
and between Lender and Borrower (as the same may be amended, modified or
supplemented from time to time, the "LOAN AGREEMENT").

      B. Pursuant to a letter agreement, dated as of December 30, 1999, by and
between Borrower and Lender (the "LETTER AGREEMENT"), Lender waived certain
specified provisions of the Loan Agreement in order to facilitate certain
transactions (the "MERGER") contemplated by a Merger Agreement between Borrower,
Meritus Industries, Inc., a New Jersey corporation, Meritus Industries, Ltd., a
Hong Kong corporation, Walter S. Reiling and Susan Reiling.

      C. The Letter Agreement requires certain amendments to the Loan Agreement.

      NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties, intending to be legally bound, agree as
follows:

                                   ARTICLE I
                                   DEFINITIONS

      1.01  Capitalized terms used in this Amendment, to the extent not
otherwise defined herein, shall have the same meaning as in the Loan Agreement,
as amended hereby.

                                   ARTICLE II
                                   AMENDMENTS

      2.01  DEFINITION OF NET INCOME. SECTION 1 of the Loan Agreement is hereby
amended by adding the following SUBSECTIONS 1.31:

            1.31 "Net Income" shall mean as to any Person, as of any date of
      determination, the net income (or loss) of such Person and its
      Subsidiaries (if any), calculated on a consolidated basis and in
      accordance with GAAP, for the period commencing on the first day of the
      fiscal year in which the date of determination occurs and ending on such
      date of determination.

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      2.02  DEFINITION OF SECOND  AMENDMENT.  SECTION 1 of the Loan  Agreement
is hereby amended by adding the following SUBSECTION 1.32:

            1.32 "Second Amendment" shall mean that certain Amendment No. 2 to
      Loan and Security Agreement, dated as of January 7, 2000, by and between
      Lender and Borrower.

      2.03  AMENDMENT TO PERMIT SUBORDINATED INDEBTEDNESS. SECTION 9.9 of the
Loan Agreement is hereby amended and restated to read in its entirety as
follows:

            0.9 INDEBTEDNESS.

                  (a) Borrower shall not incur, create, assume, become or be
      liable in any manner with respect to, or permit to exist, any obligations
      or indebtedness, EXCEPT: (a) the Obligations; (b) trade obligations and
      normal accruals in the ordinary course of business not yet due and
      payable, or with respect to which the Borrower is contesting in good faith
      the amount or validity thereof by appropriate proceedings diligently
      pursued and available to Borrower, and with respect to which adequate
      reserves have been set aside on its books; (c) purchase money indebtedness
      (including capital leases) to the extent not incurred or secured by liens
      (including capital leases) in violation of any other provision of this
      Agreement; (d) indebtedness expressly permitted by SECTIONS 9.9(B) AND (C)
      below and subject to the conditions set forth in such sections; and (e)
      the indebtedness set forth on Schedule 9.9 hereto; PROVIDED, THAT, (i)
      Borrower may only make regularly scheduled payments of principal and
      interest in respect of such indebtedness in accordance with the terms of
      the agreement or instrument evidencing or giving rise to such indebtedness
      as in effect on the date hereof, (ii) Borrower shall not, directly or
      indirectly, (A) amend, modify, alter or change the terms of such
      indebtedness or any agreement, document or instrument related thereto as
      in effect on the date hereof, or (B) redeem, retire, defease, purchase or
      otherwise acquire such indebtedness, or set aside or otherwise deposit or
      invest any sums for such purpose, and (iii) Borrower shall furnish to
      Lender all notices or demands in connection with such indebtedness either
      received by Borrower or on its behalf, promptly after the receipt thereof,
      or sent by Borrower or on its behalf, concurrently with the sending
      thereof, as the case may be.

                  (b) Borrower may incur and suffer to exist unsecured
      indebtedness of Borrower to Walter S. Reiling and Susan Reiling, evidenced
      by that certain Subordinated Secured Promissory Note, dated January 7,
      2000, issued by Borrower payable to the order of such individuals, which
      indebtedness is subject and subordinate in right of payment to the right
      of Lender to receive the prior final payment and satisfaction in full of
      all of the Obligations; PROVIDED, THAT: (i) the principal amount of such
      indebtedness shall not exceed $1,690,000.00, less the aggregate amount of
      all repayments, repurchases or redemptions, whether optional or mandatory
      in respect thereof, plus interest thereon at the rate provided for in such
      agreement or instrument as in effect on the date hereof, (ii) Borrower
      shall not, directly or indirectly, make any payments in respect of such

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      indebtedness, including, but not limited to, any prepayments or other
      non-mandatory payments, except to the extent expressly permitted under
      that certain Subordination Agreement, dated January 7, 2000, between
      Walter S. Reiling and Susan Reiling as acknowledged and received by
      Borrower and Borrower shall not, directly or indirectly, (A) amend,
      modify, alter or change any terms of such indebtedness or any agreement,
      document or instrument related thereto, or (B) redeem, retire, defease,
      purchase or otherwise acquire such indebtedness, or set aside or otherwise
      deposit or invest any sums for such purpose except as otherwise permitted
      under any subordination agreement with Lender with respect to such
      indebtedness, and (iii) Borrower shall furnish to Lender all notices,
      demands or other materials concerning such indebtedness either received by
      Borrower or on its behalf, promptly after receipt thereof, or sent by
      Borrower or on its behalf, concurrently with the sending thereof, as the
      case may be.

                  (c) Borrower may incur and suffer to exist unsecured
      indebtedness of Borrower to MVII, LLC, a California limited liability
      company, evidenced by that certain Promissory Note, dated January 7, 2000,
      issued by Borrower payable to the order of MVII, LLC (the "MVII NOTE"),
      which indebtedness is subject and subordinate in right of payment to the
      right of Lender to receive the prior final payment and satisfaction in
      full of all of the Obligations; PROVIDED, THAT: (i) the principal amount
      of such indebtedness shall not exceed $5,000,000.00, less the aggregate
      amount of all repayments, repurchases or redemptions, whether optional or
      mandatory in respect thereof, plus interest thereon at the rate provided
      for in such agreement or instrument as in effect on the date hereof , (ii)
      Borrower shall not, directly or indirectly, make any payments in respect
      of such indebtedness, including, but not limited to, any prepayments or
      other non-mandatory payments, except to the extent expressly permitted
      under that certain Subordination Agreement, dated January 4, 2000, by and
      among E. Thomas Martin and MVII, LLC and Lender, as acknowledged and
      received by Borrower, and Borrower shall not, directly or indirectly, (A)
      amend, modify, alter or change any terms of such indebtedness or any
      agreement, document or instrument related thereto, or (B) redeem, retire,
      defease, purchase or otherwise acquire such indebtedness, or set aside or
      otherwise deposit or invest any sums for such purpose except as otherwise
      permitted under any subordination agreement with Lender with respect to
      such indebtedness, and (iii) Borrower shall furnish to Lender all notices,
      demands or other materials concerning such indebtedness either received by
      Borrower or on its behalf, promptly after receipt thereof, or sent by
      Borrower or on its behalf, concurrently with the sending thereof, as the
      case may be. Notwithstanding SECTION 9.9(C)(I) above, Borrower shall be
      permitted to increase the outstanding principal amount of the MVII Note
      from time to time by an amount not to exceed $500,000 in the aggregate for
      all such increases; PROVIDED, THAT, the stated interest rate of such
      indebtedness shall not be increased, the frequency of payments shall not
      be increased and the principal amount of the MVII Note, as increased from
      time to time, shall be payable no more frequently than monthly or in
      amounts greater than $100,000. Borrower shall promptly provide written
      notice to Lender of an increase in the stated principal amount of the MVII
      Note pursuant to the authority granted in this SECTION 9.9(C).

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      2.04  AMENDMENT TO NET WORTH. SUBSECTION 9.14 of the Loan Agreement is
hereby amended and restated to read in its entirety as follows:

            9.14 NET WORTH. The Borrower will not permit its Net Worth to be
      less than the following respective amounts at the following respective
      dates:

                       DATE                 MINIMUM NET WORTH
                     --------               -----------------

                     12/31/99                  $ 6,500,000
                     03/31/00                  $ 6,000,000
                     06/30/00                  $ 6,500,000
                     09/30/00                  $10,000,000
                     12/31/00                  $10,500,000

                     03/31/01                  $ 8,500,000
                     06/30/01                  $ 9,000,000
                     09/30/01                  $12,500,000
                     12/31/01                  $13,000,000

                     03/31/02                  $11,000,000
                     06/30/02                  $11,500,000
                     09/30/02                  $15,000,000
                     12/31/02                  $15,500,000

      2.05  FISCAL YEAR OF BORROWER. SECTION 9 of the Loan Agreement is hereby
amended by adding the following SUBSECTION 9.18:

            9.18 BORROWER'S FISCAL YEAR. Borrower's fiscal year shall be a
      period of 365 or 366 consecutive days, as appropriate, beginning on the
      first day after the last day of the immediately preceding fiscal year and
      ending on the next-following December 31, beginning with the 365
      consecutive days ending on December 31, 1999.

      2.06  MINIMUM NET INCOME. SECTION 9 of the Loan Agreement is hereby mended
by adding the following SUBSECTION 9.19:

            9.19 NET INCOME. The Borrower will not permit its Net Income to be
      less than the following respective cumulative amounts for the periods
      ended as of the following respective dates, each of which dates shall be a
      date of determination for purposes of the definition of Net Income set
      forth at SUBSECTION 1.31 hereof:

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                       DATE                     NET INCOME
                     --------                  ------------

                     03/31/00                  $(2,000,000)
                     06/30/00                  $(1,500,000)
                     09/30/00                  $ 2,000,000
                     12/31/00                  $ 2,500,000

                     03/31/01                  $(2,000,000)
                     06/30/01                  $(1,500,000)
                     09/30/01                  $ 2,000,000
                     12/31/01                  $ 2,500,000

                     03/31/02                  $(2,000,000)
                     06/30/02                  $(1,500,000)
                     09/30/02                  $ 2,000,000
                     12/31/02                  $ 2,500,000

      2.07  AMENDMENT OF SECTION 10.1. SECTIONS 10.1(M) and 10.1(N) of the Loan
Agreement are hereby amended and restated in their entirety as set forth below,
and a new SECTION 10.1(O) is hereby added to SECTION 10.1 as follows:

                  (m) there shall be an event of default under any of the other
      Financing Agreements;

                  (n) DSI (HK) Limited shall fail to maintain its existing
      credit facility with State Street Bank and Trust Company or one or more
      credit facilities acceptable to Lender, in either case upon such terms and
      conditions as Lender may find adequate to provide financing for the
      continued operations of DSI (HK) Limited in the manner then conducted; or

                  (o) Borrower shall make any payment to the holders of the
      subordinated indebtedness permitted pursuant to SECTIONS 9.9(B) or 9.9(C)
      of this Agreement at a time when such payments are not permitted under the
      subordination agreements entered into between Lender and the holders of
      such subordinated indebtedness and acknowledged by Borrower.

      2.08  AMENDMENT TO THE TERM OF THE LOAN AGREEMENT. SUBSECTION 12.1(A) of
the Loan Agreement is hereby amended and restated to read in its entirety as
follows:

            (a) This Agreement and the other Financing Agreements shall become
      effective as of the date set forth on the first page hereof and shall
      continue in full force and effect for a term ending on February 2, 2003
      (the "Termination Date"). On the Termination Date Borrower hereby promises
      to pay to Lender, in full, all outstanding and unpaid Obligations and
      shall furnish cash collateral to Lender in such amounts as Lender
      determines are reasonably necessary to secure Lender from loss, cost,
      damage or expense, including attorneys' fees and legal expenses, in
      connection with any contingent Obligations, including checks or other
      payments provisionally credited to the Obligations

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      and/or as to which Lender has not yet received final and indefeasible
      payment. Such payments in respect of the Obligations and cash collateral
      shall be remitted by wire transfer in Federal funds to such bank account
      of Lender, as Lender may, in its discretion, designate in writing to
      Borrower for such purpose. Interest shall be due until and including the
      next business day, if the amounts so paid by Borrower to the bank account
      designated by Lender are received in such bank account later than 12:00
      noon, Philadelphia, Pennsylvania, time.

      2.09  AMENDMENT TO EARLY TERMINATION FEE. SUBSECTION 12.1(C) of the Loan
Agreement is hereby amended and restated to read in its entirety as follows:

            (c) If for any reason this Agreement is terminated prior to the end
      of the then current term or renewal term of this Agreement, in view of the
      impracticality and extreme difficulty of ascertaining actual damages and
      by mutual agreement of the parties as to a reasonable calculation of
      Lender's lost profits as a result thereof, Borrower agrees to pay to
      Lender, upon the effective date of such termination, an early termination
      fee in the amount set forth below if such termination is effective in the
      period indicated:

                       AMOUNT                            PERIOD
          -----------------------------     -------------------------------
          (iv)  3.00% of Maximum Credit     From the date of the Second
                                            Amendment to and including
                                            February 2, 2001

          (v)   2.00% of Maximum Credit     From February 3, 2001 to and
                                            including February 2, 2002

          (vi)  1.00% of Maximum Credit     From and after February 3, 2002
                                            but excluding the Termination
                                            Date

      Such early termination fee shall be presumed to be the amount of damages
      sustained by Lender as a result of such early termination and Borrower
      agrees that it is reasonable under the circumstances currently existing.
      In addition, Lender shall be entitled to such early termination fee upon
      the occurrence of any Event of Default described in Sections 10.1(g) and
      10.1(h) hereof, even if Lender does not exercise its right to terminate
      this Agreement, but elects, at its option, to provide financing to
      Borrower or permit the use of cash collateral under the United States
      Bankruptcy Code. Borrower may elect to terminate this Agreement as of any
      date; provided, that Borrower shall provide Lender with fifteen (15) days'
      prior written notice of such election (which notice shall specify the
      effect date of such termination) and, on such date of termination, pay to
      Lender all amounts required to be paid upon termination of this Agreement
      in accordance with this SECTION 12.1. Any notice of termination given by
      Borrower to Lender pursuant to this SECTION 12.1 shall be irrevocable and
      binding, unless consented to in writing by Lender. The early termination
      fee provided for in this SECTION 12.1 shall be deemed included in the
      Obligations.

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<PAGE>
      2.10  DELETION OF SECTION 12.1(D). SECTION 12.1(D) of the Loan Agreement
is hereby deleted in its entirety.

      2.11  AMENDMENT OF SCHEDULE 9.9. Schedule 9.9 to the Loan Agreement is
hereby amended by deleting therefrom all references to indebtedness owing to
Bank One, Texas, NA.

                                   ARTICLE III
                  RATIFICATIONS, REPRESENTATIONS AND WARRANTIES

      3.01  RATIFICATIONS. Except as expressly amended hereby, the terms and
provisions of the Loan Agreement and the Letter Agreement are ratified and
confirmed and shall continue in full force and effect. Borrower and Lender agree
that the Loan Agreement, as amended hereby, and each agreement and instrument
executed in connection therewith, shall continue to be legal, valid, binding and
enforceable in accordance with their respective terms.

      3.02  REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and
warrants to Lender that (a) all corporate proceedings taken in connection with
Merger and all documents, instruments and other legal matters incident thereto
conform in all material respects to the Merger Agreement (as defined in the
Letter Agreement), and concurrently with the execution of this Amendment,
Sunrock has been provided copies of all such documentation; (b) the execution,
delivery and performance of this Amendment has been authorized by all requisite
corporate action on the part of Borrower and does not violate the Articles of
Incorporation or Bylaws of Borrower; (c) the representations and warranties
contained in the Loan Agreement, as amended hereby, are true and correct on and
as of the date hereof; (d) as of the date hereof no Event of Default under the
Loan Agreement has is continuing and no event or condition exists that with the
giving of notice or the lapse of time, or both, would be an Event of Default;
and (e) Borrower is in full compliance with all covenants and agreements
contained in the Loan Agreement and each agreement and instrument entered into
in connection therewith.

                                   ARTICLE IV
                            MISCELLANEOUS PROVISIONS

      4.01  SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties made herein and in the Loan Agreement shall survive the execution and
delivery of this Amendment, and no investigation by Lender or any closing shall
affect the representations and warranties or the right of Lender to rely upon
them.

      4.02  REFERENCE TO LOAN AGREEMENT. The Loan Agreement, as amended hereby,
and all other agreements, documents or instruments now or hereafter executed and
delivered pursuant to the terms thereof are hereby amended so that any reference
in the Loan Agreement or such other agreements, documents and instruments shall
mean a reference to the Loan Agreement, as amended hereby.

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<PAGE>
      4.03  EXPENSES OF LENDER. As provided in the Loan Agreement, Borrower
agrees to pay on demand all costs and expenses incurred by Lender in connection
with the preparation, negotiation and execution of this Amendment, including,
without limitation, the costs and fees of Lender's legal counsel, and all costs
and expenses incurred by Lender in connection with the enforcement or
preservation of any rights under the Loan Agreement, as amended hereby, or any
agreement, document or instrument executed in connection therewith.

      4.04  SEVERABILITY. Any provision of this Amendment held by a court of
competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.

      4.05  SUCCESSORS AND ASSIGNS. This Amendment is binding upon and shall
inure to the benefit of Lender and Borrower and their respective successors and
assigns, except Borrower may not assign or transfer any of its rights or
obligations hereunder without the prior written consent of Lender.

      4.06  COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.

      4.07  HEADINGS. The headings, captions, and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.

      4.08  APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS EXECUTED
PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN AND
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
TEXAS.

      4.09  FINAL AGREEMENT. THE FINANCING AGREEMENTS (INCLUDING THE LOAN
AGREEMENT, THIS AMENDMENT AND THE LETTER AGREEMENT), AS AMENDED HEREBY,
REPRESENT THE ENTIRE EXPRESSION OF THE PARTIES WITH RESPECT TO THE SUBJECT
MATTER HEREOF IN THE DATE THIS AMENDMENT IS EXECUTED. THE FINANCING AGREEMENTS,
AS AMENDED HEREBY, MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS
OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NOT UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES. NO MODIFICATION, RESCISSION, WAIVER, RELEASE OR
AMENDMENT OF ANY PROVISION OF THIS AMENDMENT SHALL BE MADE, EXCEPT BY A WRITTEN
AGREEMENT SIGNED BY BORROWER AND LENDER.

      4.10  RELEASE. BORROWER HEREBY ACKNOWLEDGES THAT IT HAS NO DEFENSE,
COUNTERCLAIM, OFFSET, CROSS-COMPLAINT, CLAIM OR DEMAND OF ANY KIND OR NATURE
WHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF ITS
LIABILITY TO REPAY THE

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OBLIGATIONS (AS DEFINED IN THE LOAN AGREEMENT) OR TO SEEK AFFIRMATIVE RELIEF OR
DAMAGES OF ANY KIND OR NATURE FROM LENDER. BORROWER HEREBY VOLUNTARILY AND
KNOWINGLY RELEASES AND FOREVER DISCHARGES LENDER, ITS PREDECESSORS, AGENTS,
EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE CLAIMS, DEMANDS, ACTIONS,
CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN OR
UNKNOWN, ANTICIPATED OR UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED,
CONTINGENT, OR CONDITIONAL, AT LAW OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART
ON OR BEFORE THE DATE THIS AMENDMENT IS EXECUTED, WHICH THE BORROWER MAY NOW OR
HEREAFTER HAVE AGAINST LENDER, ITS PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS
AND ASSIGNS, IF ANY, AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF
CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, AND ARISING FROM
ANY LOANS (AS DEFINED IN THE LOAN AGREEMENT), INCLUDING, WITHOUT LIMITATION, ANY
CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING OR RECEIVING INTEREST
IN EXCESS OF THE HIGHEST LAWFUL RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS AND
REMEDIES UNDER THE LOAN AGREEMENT OR ANY FINANCING AGREEMENT, DOCUMENT OR
INSTRUMENT ENTERED INTO IN CONNECTION THEREWITH.

                            [Signature Page Follows]

                                        9
<PAGE>
                  Executed as of this ___ day of January, 2000.

                                    DSI TOYS, INC.

                                    By: /s/ ROBERT L. WEISGARBER
                                    Name:   Robert L. Weisgarber
                                    Title:  CFO/Vice President

                                    SUNROCK CAPITAL CORP.

                                    By: /s/ ROBERT J. KATCHA
                                    Name:   Robert J. Katcha
                                    Title:  Senior Vice PresidentEXHIBIT 10.7

                              EMPLOYMENT AGREEMENT

      This Employment Agreement ("Agreement") is hereby made and entered into
this 7th day of January, 2000, by and between DSI Toys, Inc., a Texas
corporation, whose principal business address is 1100 West Sam Houston Parkway,
Houston, Texas 77043 ("Employer" or "Company"), and Beth Reiling, an individual
("Employee").

                                    RECITALS

      A. Employer is in the business of inventing, developing, manufacturing and
marketing toys. Employer is a public company.

      B. Employee has extensive experience and expertise in the toy industry.

      C. Employer wishes to employ Employee and Employee wishes to become an
employee of Employer pursuant to the terms and conditions of this Agreement.

                                    ARTICLE 1

                                     GENERAL

            1.1 EMPLOYMENT. Employer hereby employs Employee and Employee hereby
accepts such employment with Employer upon the terms and conditions hereinafter
set forth. Employee shall perform such duties and responsibilities and exercise
such powers for the Employer as may from time to time be assigned or delegated
to her by Employer, including such duties as may be customary for a Vice
President, Girl's Division, in the toy industry. Employee acknowledges that
Employer shall be dependent upon Employee for its continued ongoing business
operations and that the provisions hereof are necessary for the successful
conduct of the business and affairs of the Company.

            1.2 POSITION. Employee shall be employed in the capacity and hold
the position of Vice President, Girl's Division. In such capacity, Employee
agrees to, at all times, exercise her best efforts for the benefit of the
Company and to thereby undertake to use and implement the management,
organizational, intellectual, technical and other skills of Employee to the best
of her ability on the Company's behalf. Employee shall be responsible to and
report to the Senior Vice President, New Business Development, of the Company.

            1.3 TERM. Subject to the provisions provided for and relating to
termination set forth herein, the term of Employee's employment pursuant to this
Agreement shall be for a period beginning on January 7, 2000, and ending on the
date that is three (3) years thereafter (said period being hereinafter referred
to as the "Employment Term").

                                     -1-
<PAGE>
                                    ARTICLE 2

                            REMUNERATION AND BENEFITS

            2.1 BASE SALARY. For all services rendered by Employee during the
Employment Term, Employer shall pay to Employee a salary of One Hundred Twenty
Thousand Dollars ($120,000.00) per year (the "Base Salary"). The Base Salary
shall begin to accrue and be paid on the Effective Date of this Agreement and
shall be distributed in semi-monthly installments in arrears through the
Employment Term.

                  (a) At a minimum, the Base Salary shall be adjusted annually
on the anniversary date to reflect any increase in the Consumer Price Index -
All Urban Wage Earners (the "Index"). The Base Salary shall not be adjusted
downward to reflect any decrease in the Index.

                  (b) The Base Salary may also be raised at any time during the
Employment Term at the discretion of the Company's Board of Directors.

            2.2 BENEFITS. Employee shall be eligible to participate in any and
all benefit plans which Employer may from time to time make generally available
to all employees of the Company, including but not limited to participation in
the Company's 401(k) plan, group life insurance and health insurance programs.

            2.3 EXTENT OF SERVICE. During the Employment Term, Employee agrees
to devote such amount of time, attention, energy and effort as is necessary to
further the business and profitability of Employer. Further, during the
Employment Term, Employee shall not be engaged in any other business activity
pursued for gain, profit or other pecuniary advantage. However, the foregoing
limitations shall not be construed as prohibiting Employee from making personal
investments in any business enterprise not competitive with that of Employer in
such form or manner as will neither require her services in the operations or
affairs of enterprises in which such investments are made, nor otherwise violate
the terms of this Agreement.

            2.4 OFFICES. Employer shall provide office space for Employee, with
provisions for secretarial and other support services necessary to the
maintenance and operations of such office, and the performance of Employee's
duties hereunder.

            2.5 EXPENSE ALLOWANCE. Employer shall reimburse Employee for all
approved, deductible business expenses reasonably incurred in the performance of
her duties hereunder.

            2.6 VACATIONS AND HOLIDAYS. Employee shall be entitled to fifteen
(15) vacation days annually in accordance with the policies established by
Employer's Board of Directors, as well as those public holidays duly observed by
Employer; provided, however, no more than ten (10) consecutive vacation days
shall be taken at any one time.

            2.7 INSURANCE. Employee shall be provided group life, disability and
health insurance coverages by Employer throughout the term of this Agreement. If
qualified, Employee

                                       -2-
<PAGE>
shall be provided a group life insurance policy with a death benefit of no less
than $200,000.00.

            2.8 BUSINESS TRAVEL. Employee shall be entitled to travel portal to
portal via business class on all international air travel performed for the
Company. All domestic air travel performed for the Company shall be via coach
class.

            2.9 CAR ALLOWANCE. Employee shall receive a car allowance of Five
Hundred Dollars ($500.00) per month.

                                    ARTICLE 3

                                   TERMINATION

            3.1 DEATH. In the event of the Employee's death during the
Employment Term, the Employer shall pay to Employee's executor(s),
administrator(s) or personal representative(s) an amount equal to the
installment of her Base Salary payable for the month in which she dies and for
no period thereafter. Employer shall have no other liabilities or other
obligations of any kind or character under this Agreement to Employee's
executor(s), administrator(s) or personal representative(s) except such accrued
salary and unused vacation that Employee is entitled at the time of death.

                  (a) It is expressly understood and agreed that the Company may
maintain key man term life insurance for the benefit of the Company on the life
of Employee. Additionally, the Company may maintain such other life insurance
for the benefit of Employer, the Company's shareholders, as from time to time
the Board of Directors of the Company deems reasonable and appropriate.

                  (b) Upon the death of Employee, any and all vested employee
benefits accrued for the benefit of Employee shall be distributed in accordance
with the provisions set forth in the subject plan agreement or arrangement
providing the applicable benefits, and otherwise distributed in accordance with
applicable laws.

            3.2 DISABILITY; FAILURE TO PERFORM DUTIES. In the event of
Employee's failure to perform her duties hereunder by reason of illness or
disability for a period equal to or in excess of ninety (90) consecutive days
during the Employment Term or for ninety (90) days during any twelve (12) month
period throughout the Employment Term, Employer shall have the option to
terminate this Agreement by giving thirty (30) days written notice of
termination to Employee. Upon such notice of termination, Employer shall pay to
Employee an amount equal to the installments of her Base Salary payable up to
the time this Agreement is terminated, and Employer shall distribute any and all
accrued employee benefits as of the date of termination to Employee in
accordance with the provision of the applicable benefit plan, agreement or
arrangement giving rise to the applicable benefits. Upon the termination of this
Agreement as a result of such disability, Employer shall have no other
liabilities or obligations of any kind or character to Employee under this
Agreement.

                                       -3-
<PAGE>
            3.3 TERMINATION FOR CAUSE. Employee may be terminated for cause by
Employer upon written notice to Employee. For purposes of this Agreement, "for
cause" shall be if Employee:

                  (a) Neglects the performance of her duties required to be
performed under the terms of this Agreement to the economic detriment of the
Company;

                  (b) Fails or refuses in the opinion of the Board of Directors
to comply with the reasonable policies, standards and regulations of the Company
which from time to time may be established;

                  (c) Is convicted of a crime or is charged with committing a
felony;

                  (d) Materially breaches any of the terms or conditions of this
Agreement; or

                  (e) Performs any action constituting fraud or an intentional
misrepresentation.

            Upon such determination, Employer may, at its option, terminate this
Agreement immediately without prejudice to any other remedy to which Employer
may be entitled either at law or in equity, or under this Agreement. In such
event, except as specifically provided in this Section 3.3, any of the
obligations of Employer under this Agreement shall be terminated as of the date
given in the notice of termination referred to hereinabove, following payment by
Employer to Employee of that portion of the Base Salary and vacation then
accrued, due and owing in accordance with Section 2.1 hereof. In the event
Employee is terminated for cause, Employee shall be paid her regular Base Salary
from the date of termination for a period of three (3) months, but no other
severance shall be paid to the Employee.

                                    ARTICLE 4

                                    COVENANTS

            4.1 DISCLOSURE OF INFORMATION. Employee recognizes and acknowledges
that she has and will have access to certain confidential information,
proprietary data and trade secrets of Employer, and of entities and individuals
controlling, controlled by or under common control with Employer ("affiliates"),
including but not limited to, contracts, patterns, devices, calculations,
drawings, productions, plans, specifications, records, compilations or
information, and other confidential information and data either compiled by
Employer or received from its customers or Employer, and that such information
is not generally available to the public and constitutes valuable, special and
unique property of the Employer. Employee shall not, during or after the term of
this Agreement, undertake in any fashion, to take commercial or proprietary
advantage of or profit from any such confidential information to any person or
firm, corporation, association or other entity for any reason or purpose
whatsoever, except to authorized representatives of Employer and as otherwise
may be proper in the course of performing her employment hereunder. Further,
Employee shall

                                       -4-
<PAGE>
maintain the confidentiality of all such information of Employer, its affiliates
or its customers for the sole use and benefit of Employer. All files, records,
documents, drawings, plans, specifications, contracts, products, equipment or
similar items relating to the business of Employer and/or the affiliates shall
not be removed from the premises of Employer and/or its affiliates without the
prior consent of Employer and/or its affiliates, as applicable.

                  (a) Employee further covenants and agrees to promptly return
and deliver to Employer all documents, information, or other material or
property of any kind or character which in any way relate to the business of
Employer or any of its affiliates or customers, whether or not asserted to be
the exclusive property of Employer; and, further, Employee shall not attempt to
retain copies or duplicates of any such property. In the event of a breach or a
threatened breach of these covenants by Employee, Employer and/or its
affiliates, in addition to all other remedies made available hereby or as a
matter of law or in equity, may seek an injunction restraining Employee from
disclosing, in whole or in part, such confidential information. In addition to
any other damages sustained by Employer, Employee shall pay to Employer all
profits, payments, earnings compensation or other emoluments paid or accruing to
Employee, directly or indirectly, by reason of Employee's disclosure of
information as provided herein. Nothing herein shall be construed as prohibiting
Employer and/or its affiliates from pursuing any other remedies available to it
or them for such breach or threatened breach, including the recovery of damages
from Employee.

            4.2 NON-COMPETITION. During the Employment Term, and if this
Agreement is terminated in accordance with Sections 3.3, for a period of one (1)
year from the date of Employee's termination of employment hereunder, Employee
shall not directly or indirectly, either for herself, or as an employer,
employee, owner, manager, independent contractor, consultant, agent, principal,
partner, co-venturer, shareholder, director, officer or in any other capacity,
engage or have any indirect interest in any person that is engaged, or to the
knowledge of Employee is planning to engage, in competition in any manner
whatsoever with the business of Employer including, without limitation, any
person that manufactures, markets, imports, sells or distributes toys. If the
Employment Term is terminated by Employer pursuant to Section 3.3 and Employer
elects to enforce the provisions of this Section 4.2, Employer shall be
obligated to pay Employee as additional consideration on or before the fifteenth
(15th) day of each month during the one (1) year period following termination of
the Employment Term an amount equal to one-twelfth (1/12) of Employee's then
existing Base Salary.

            4.3 AGREEMENT NOT TO SOLICIT. During the Employment Term, and if
this Agreement is terminated in accordance with Section 3.3, for a period of one
(1) year from the date of Employee's termination of employment hereunder,
Employee will not, either directly or indirectly, on her own or in the service
of another:

                  (a) Knowingly call upon, solicit, divert or attempt to solicit
or divert any of the business contacts of Employer;

                  (b) Knowingly employ any employee of Employer or solicit,
divert, recruit or induce any employee of Employer to leave the employ of
Employer, whether or not such employment is at will; and/or

                                       -5-
<PAGE>
                  (c) Knowingly induce or advise any service provider, customer,
factory or representative of Employer to terminate or materially alters its then
existing relationship with Employer.

                                    ARTICLE 5

                            MISCELLANEOUS PROVISIONS

            5.1 MISCELLANEOUS PROVISIONS. The following miscellaneous provisions
shall apply to the terms and conditions of this Agreement:

                  (a) Pursuit of any one remedy shall not preclude pursuit of
any other remedies provided for herein or by law. No waiver of one violation of
this Agreement shall be deemed or construed to constitute a waiver of any
similar violations subsequently occurring, or any other violation whatsoever.

                  (b) This Agreement shall be construed under the laws of Texas,
and the rights and obligations of each of the parties to this Agreement during
the term hereof and upon its termination shall be governed exclusively by Texas
law.

                  (c) This instrument contains all of the understandings and
agreements of whatsoever kind and nature existing between the parties hereto
with respect to this Agreement, and the rights, interests, understandings,
agreements and obligations of the respective parties and their prior oral
agreements.

                  (d) This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which shall
constitute one and the same Agreement.

                  (e) If any one or more of the provisions contained in this
Agreement are held to be invalid or unenforceable in any respect, such
invalidity or unenforceability shall not affect any other provision hereof, and
the intent manifested thereby shall be recognized.

                  (f) Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, other than the parties hereto
and their respective heirs and successors, any legal or equitable rights, remedy
or claim under or in respect to this Agreement, or any provisions herein
contained.

                  (g) This Agreement may not be amended, altered or modified
except by a written instrument signed by each of the parties.

                  (h) If any legal proceeding, arbitration or other action is
brought or threatened for the enforcement or interpretation of this Agreement,
or because of any alleged dispute, breach, default or misrepresentation in
connection with any of the provisions of this Agreement, and

                                       -6-
<PAGE>
the prevailing party in any such action should incur any legal fees, including,
but not limited to, attorneys' fees, paralegal fees, expert witness fees, and
other similar costs, a successful prevailing party or parties to any such
dispute or action will be entitled to recover their reasonable attorneys' fees
and additional legal costs incurred, together with any other relief to which
he/it may otherwise be entitled, as determined by an arbitrator, judgment at
trial, upon appeal or petition.

            5.2 SUCCESSORS BOUND; SURVIVAL OF COVENANTS. The rights and
obligations of the parties hereunder shall inure to the benefit of and shall be
binding upon the successors of each respective party. The representations,
warranties, covenants, and agreements of the parties, as well as any rights and
benefits of the parties, shall survive the execution hereof and following the
Employment Term to the extent so provided herein.

            5.3. ARBITRATION. All disputes, controversies or differences which
may arise between the parties out of or in relation to or in connection with
this Agreement, or for the breach thereof, shall be finally settled by
arbitration in accordance with the Rules of the American Arbitration
Association. Any such arbitration shall be convened and take place in Houston,
Texas. Any such arbitration shall be absolute and binding upon the parties.

      IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on and
as of the date first above written.

"EMPLOYEE"                 "EMPLOYER"
                           DSI TOYS, INC., A TEXAS CORPORATION

/s/ BETH REILING           By: /s/ ROBERT WEISGARBER
    Beth Reiling
                           Title:  Chief Financial Officer

                                       -7-

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