Edgar Filing: SINGING MACHINE CO INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K/A

AMENDMENT TO

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

For the fiscal year ended MARCH 31, 2004

0 - 24968
Commission File Number

THE SINGING MACHINE COMPANY, INC.
(Exact Name Registrant as Specified in its Charter)

DELAWARE 95-3795478
(State of incorporation) (I.R.S. Employer Identification No.)

6601 LYONS ROAD, BUILDING A-7, COCONUT CREEK, FL 33073
(Address of principal executive offices)

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

Title of Each Class Name of Each Exchange on Which Registered
COMMON STOCK AMERICAN STOCK EXCHANGE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
|X| Yes |_| No

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

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

The aggregate market value of the Registrant's voting stock held by
non-affiliates, based upon the closing price for the common stock of $0.71 per
share as reported on the American Stock Exchange on June 18, 2004 was
approximately $6,249645 (based on 8,802,318 shares outstanding).

APPLICABLE ONLY TO CORPORATE ISSUERS: State the number of shares outstanding of
each of the Issuer's classes of common stock, as of the latest practicable date.

There were 8,802,318 shares of common stock, issued and outstanding at June 18,
2004.

DOCUMENTS INCORPORATED BY REFERENCE
NONE

THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY

INDEX TO ANNUAL REPORT ON FORM 10-KSB

FOR THE FISCAL YEAR ENDED MARCH 31, 2004

PAGE
-----

PART I 1
Item 1. Business 7
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders

PART II

Item 5. Market for Company's Common Equity and Related Stockholder Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 7A Quantitative and Qualitative Disclosures About Market Risk 30
Item 8. Financial Statements and Supplementary Date 30
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 30
Item 9A. Controls and Procedures 31

PART III

Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance With
Section 16(a) of the Exchange Act 33
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners and Management 43
Item 13. Certain Relationships and Related Transactions 44
Item 14. Principal Accountant Fees and Services 44

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 46

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Annual Report on Form 10-K, including
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," "intends," and words of similar import, constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in these forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in the section entitled "Management's Discussion and Analysis of
Financial Position and Results of Operations - Factors That May Affect Future
Results and Market Price of Stock."

Readers are cautioned not to place undue reliance on these forward-
looking statements, which reflect management's opinions only as of the date
hereof. We undertake no obligation to revise or publicly release the results of
any revisions to these forward- looking statements. Readers should carefully
review the risk factors described in other documents the Company files from time
to time with the Securities and Exchange Commission.

PART I

ITEM 1. BUSINESS

OVERVIEW

The Singing Machine Company, Inc. (the "Singing Machine" "we," "us" or
"our") is engaged in the development, production, distribution, marketing and
sale of consumer karaoke audio equipment, accessories and music. We contract for
the manufacture of all electronic equipment products with factories located in
Asia. We also produce and market karaoke music, including compact disks plus
graphics ("CD+G's"), and audiocassette tapes containing music and lyrics of
popular songs for use with karaoke recording equipment. All of our recordings
include two versions of each song; one track offers music and vocals for
practice and the other track is instrumental only for performance by the
participant. Virtually all of the cassettes sold by us are accompanied by
printed lyrics, and our karaoke CD+G's contain lyrics, which appear on the video
screen. We contract for the reproduction of music recordings with independent
studios.

We were incorporated in California in 1982. We originally sold our
products exclusively to professional and semi-professional singers. In 1988, we
began marketing karaoke equipment for home use. In May 1994, we merged into a
wholly owned subsidiary incorporated in Delaware with the same name. As a result
of that merger, the Delaware Corporation became the successor to the business
and operations of the California Corporation and retained the name The Singing
Machine Company, Inc. In July 1994, we formed a wholly owned subsidiary in Hong
Kong, now known as International SMC (HK) Ltd. ("International SMC" or "Hong
Kong subsidiary"), to coordinate our production and finance in Asia.

In November 1994, we closed an initial public offering of 2,070,000 shares
of our common stock and 2,070,000 warrants. In April 1997, we filed a voluntary
petition for relief under Chapter 11 of the U.S. Bankruptcy Code. On March 17,
1998, our plan of reorganization was approved by the U.S. Bankruptcy Court. On
June 10, 1998, our plan of reorganization had been fully implemented. Our common
stock currently trades on the American Stock Exchange under the symbol "SMD." We
were listed on the AMEX on March 8, 2001. Our principal executive offices are
located in Coconut Creek, Florida.

As used herein, the "Singing Machine," "we," us" and similar terms include
The Singing Machine Company, Inc. and its subsidiary, International SMC, unless
the context indicates otherwise.

RECENT DEVELOPMENTS

Our gross profit decreased to $1.8 million or 2.6% of total revenues in
fiscal 2004 compared to gross profit of $23.3 million or 24.4% of total revenues
in fiscal 2003. Gross profit decreased as a result of our need to sell inventory
at lower margins in order to generate cash from operations, increase liquidity
and liquidate prior year excess inventory. During fiscal 2004, we also recorded
inventory provisions totaling approximately $7 million and an impairment charge
for tooling totaling approximately $443,000, both of which also negatively
impacted our gross profit.

Our net loss for fiscal 2004 was $22.7 million, which includes inventory
write-downs of approximately $7.0 million, as well as non cash accruals for
litigation, severance pay, lease termination and other unusual or non-recurring
expenses in the aggregate amount of $4.6 million. A more detailed explanation of
our financial results is contained under "Management's Discussion and Analysis
of Results of Operations and Financial Condition" on pages 10-20.

PRODUCT LINES

We currently have a product line of 40 different models of karaoke
machines plus 7 accessories such as microphones, incorporating such features as
CD plus graphics player, sound enhancement, echo, tape record/playback features,
and multiple inputs and outputs for connection to compact disc players, video
cassette recorders, and home theater systems. Ten of these karaoke machines are
models that we plan on discontinuing after we sell our excess inventory in
fiscal 2005. Our machines sell at retail prices ranging from $30 for basic units
to $300 for semi-professional units. We currently offer our music in two formats
- multiplex cassettes and CD+G's with retail prices ranging from $6.99 to
$19.99. We currently have a song library of over 3,500 recordings, which we
license from publishers. Our library of master recordings covers the entire
range of musical tastes including popular hits, golden oldies, country, rock and
roll, Christian, Latin music and rap. We even have backing tracks for opera and
certain foreign language recordings.

MARKETING, SALES AND DISTRIBUTION

Our karaoke machines and music are sold nationally and internationally to
a broad spectrum of customers, primarily through mass merchandisers, department
stores, direct mail catalogs and showrooms, music and record stores, national
chains, specialty stores, and warehouse clubs. Our karaoke machines and karaoke
music are currently sold in such stores as Best Buy, Circuit City, Costco, J.C.
Penney, Kohl's, Radio Shack, and Sam's Club.

In fiscal 2004, approximately 61% of our sales were domestic sales and 39%
were international sales. Domestic sales are sales that are made in the United
States and international sales are sales that are made outside of the United
States. Our domestic sales are primarily made by our in-house sales team and our
independent sales representatives. Our independent sales representatives are
paid a commission based upon sales in their respective territories. We utilize
some of our outside independent sales representatives to help us provide service
to our mass merchandisers and other retailers. The sales representative
agreements are generally one (1) year agreements, which automatically renew on
an annual basis, unless terminated by either party on 30 days' notice. At March
31, 2004, we worked with 16 independent sales representatives in the United
States. Our international sales are primarily made by our in-house sales
representatives and our eight independent distributors.

We also market our products at various national and international trade
shows each year. We regularly attend the following trade shows and conventions:
the Consumer Electronics Show each January in Las Vegas; the American Toy Fair
each February in New York and the Hong Kong Electronics Show each October in
Hong Kong.

Our licensing agreements with MTV Networks, Inc., a division of Viacom
International, Inc., Hard Rock Academy, Inc. and Universal Music Entertainment,
Inc. have also helped us to expand our product name.

LICENSE AGREEMENTS

We entered into our licensing agreement with MTV in November 2000 and have
amended the agreement five times since that date. Our license covers the sale of
MTV products in the United States, Canada and Australia. During fiscal 2004, our
line consisted of nine MTV branded machines and a wide assortment of MTV branded
music. Our license agreement as amended with MTV, currently expires on August
31, 2004, subject to MTV's option, at its sole discretion, to extend the
agreement for an additional four month period. The license period contains a
minimum guaranteed royalty payment of $100,000, which is recoupable against
sales throughout the calendar year, unless the license agreement is cancelled.

We entered into our licensing agreement with Hard Rock Academy, a division
of Hard Rock Cafe in December 2001. This license agreement allows us to produce
and market a line of karaoke machines and complimentary music that are
co-branded with the Singing Machine and Hard Rock Academy name. The first
co-branded machine was produced during the fourth quarter of fiscal 2003. The
agreement originally contained a minimum guaranteed royalty payment, but in
September 2003 Hard Rock agreed to release us from our minimum guaranteed
payment obligations during the remaining term of the license agreement. This
agreement expires on December 31, 2005 and does not contain any automatic
renewal provisions.

In February 2003, we entered into a multi-year license agreement with
Universal Music Entertainment to market a line of Motown Karaoke machines and
music. This agreement and its subsidiary agreement signed in March 2003, allow
us to be the first to use original artist recordings for our CD+G formatted
karaoke music. Over the term of the license agreement, we are obligated to make
guaranteed minimum royalty payments in the amount of $300,000. The Universal
Music Entertainment license expires on March 31, 2006 and does not contain any
automatic renewal provisions.

We entered into a license agreement with Care Bears in September 2003.
Under this agreement, we are marketing a line of Care Bears branded karaoke
machines and music. Over the term of the license, we are obligated to make
guaranteed minimum royalty payments in the amount of $200,000. This license
expires on January 1, 2006 and does not contain any automatic renewal
provisions.

We entered into a license agreement with Nickelodeon, Inc., a division of
Viacom International, Inc. in December 2002. Under this agreement, we licensed
Nickelodeon branded machines and a wide assortment of music. This license will
expire on December 31, 2004 and will not be renewed.

We distribute all of our licensed products through our established
distribution channels, including Best Buy, Circuit City, Costco, JC Penny,
Kohl's, Radio Shack and Sam's Club. Our distribution network also includes the
online versions of these retail customers.

The following table sets forth the percentage of total sales that have
been generated under the MTV License, our Nickelodeon License and our other
licenses (Care Bears, Hard Rock Academy and Universal Music).

FOR THE FISCAL YEAR ENDED
DECEMBER 31,
------------------------------
2004 2003
------ ------

MTV 11.8% 32.3%
Nickelodeon 5.5% 0%
Other Licenses 3.9% 0%
------ ------
Total Licensed Sales 21.2% 32.3%

DISTRIBUTORSHIP AGREEMENTS

In November 2001, we signed an international distributorship agreement
with Arbiter Group, PLC ("Arbiter"). Arbiter is the exclusive distributor of
Singing Machine(R) karaoke machines and music products in the United Kingdom and
a non-exclusive distributor in all other European countries. The agreement
terminates on December 31, 2004, subject to an automatic renewal provision. If
either party does not give notice on or before December 1 of year during the
term of the agreement, the agreement will automatically be renewed for another
year on the same terms.

In March 2003, we signed an international distributorship agreement with
Top-Toy (Hong Kong) Ltd. Top Toy is the exclusive distributor of Singing
Machine(R) karaoke machines and music products in Denmark, Norway, Sweden,
Iceland and Faeroe Islands. The agreement is for three years, from April 1, 2003
through March 31, 2006. The agreement contains an automatic renewal provision
whereby if either party does not give notice at least 3 months before March 31,
2006, the agreement will automatically be renewed for another year on the same
terms.

We also have verbal agreements with six other independent distributors who
sell our products throughout Europe

SALES

As a percentage of total revenues, our net sales in the aggregate to our
five largest customers during the fiscal years ended March 31, 2004, 2003, and
2002, respectively, were approximately 53%, 67% and 87%, respectively. In fiscal
2004, three major customers accounted for 20%, 12% and 10% of our net revenues.

In fiscal 2004, Arbiter, Giochi and Best Buy accounted for more than 10%
of our net revenues. Arbiter and Giochi are independent distributors of our
products. In fiscal 2003 and 2002, Best Buy and Toys R Us each accounted for
more than 10% of our revenues. In fiscal 2003 Target and in fiscal 2002 Costco
also accounted for more than 10% of our revenues. Although we have
long-established relationships with all of our customers, we do not have
contractual arrangements with any of them. A decrease in business from any of
our major customers could have a material adverse effect on our results of
operations and financial condition.

During the last three years, our revenues from foreign operations have
increased. Sales by customer geographic regions were as follows:

FOR THE FISCAL YEAR ENDED
MARCH 31,
------------------------------------------------
2004 2003 2002
---------------- --------------- ---------------
North America $ 43,044,496 $ 77,696,780 $ 62,381,366
Latin America 753,399 1,366,496 45,073
Europe 25,783,789 15,714,846 --
Asia/Australia 959,444 835,644 49,314
---------------- --------------- ---------------
$ 70,541,128 $ 95,613,766 $ 62,475,753
================ =============== ===============

RETURNS

Returns of electronic hardware and music products by our customers are
generally not permitted except in approved situations involving quality defects,
damaged goods, goods shipped in error or goods that are shipped on a consignment
basis. Our policy is to give credit to our customers for the returns in
conjunction with the receipt of new replacement purchase orders. Our total
returns represented 9.4% and 10.4% of our net sales in fiscal 2004 and 2003,
respectively.

DISTRIBUTION

We distribute hardware products to retailers and wholesale distributors
through two methods: shipment of products from inventory held at our warehouse
facilities in Florida and California (domestic sales), and shipments directly
through our Hong Kong subsidiary and manufacturers in Asia of products (direct
sales). Domestic sales, which account for substantially all of our music sales,
are made to customers located throughout the United States from inventories
maintained at our warehouse facilities. In the fiscal year ended March 31, 2004,
approximately 39% of our sales were sales from our domestic warehouses
("Domestic Sales") and 61% were sales shipped directly from Asia ("Direct
Sales").

Domestic Sales. Our strategy of selling products from a domestic warehouse
enables us to provide timely delivery and serve as a "domestic supplier of
imported goods." We purchase karaoke machines overseas from certain factories in
China for our own account, and warehouse the products in leased facilities in
Florida and California. We are responsible for costs of shipping, insurance,
customs clearance, duties, storage and distribution related to such products
and, therefore, warehouse sales command higher sales prices than direct sales.
We generally sell from our own inventory in less than container-sized lots.

Direct Sales. We ship some hardware products sold by us directly to
customers from Asia through International SMC, our subsidiary. Sales made
through International SMC are completed by either delivering products to the
customers' common carriers at the shipping point or by shipping the products to
the customers' distribution centers, warehouses, or stores. Direct sales are
made in larger quantities (generally container sized lots) to customers' world
wide, who pay International SMC pursuant to their own international,
irrevocable, transferable letters of credit or on open account.

MANUFACTURING AND PRODUCTION

Our karaoke machines are manufactured and assembled by third parties
pursuant to design specifications provided by us. Currently, we have ongoing
relationships with six factories, located in Guangdong Province of the People's
Republic of China, who assemble our karaoke machines. During fiscal 2005, we
expect that 95% of our karaoke products will be produced by one of these
factories, which has agreed to extend financing to us. We are indebted to this
factory in the amount of $2.4 million and have worked out a payment plan
regarding our outstanding invoice. Additionally, this factory has agreed to
provide us with financing for fiscal year 2005. See "Management's Discussion and
Analysis of Financial Condition - Liquidity" beginning on page 17. We believe
that the manufacturing capacity of our factories is adequate to meet the demands
for our products in fiscal year 2005. However, if our primary factory in China
were prevented from manufacturing and delivering our karaoke products, our
operation would be severely disrupted while alternative sources of supply are
located. See "Risk Factors - We are relying on one factory to manufacture and
produce the majority of our karaoke machines for fiscal 2005" on page 22. In
manufacturing our karaoke related products, these factories use molds and
certain other tooling, most of which are owned by International SMC. Our
products contain electronic components manufactured by other companies such as
Panasonic, Sanyo, Toshiba, and Sony. Our manufacturers purchase and install
these electronic components in our karaoke machines and related products. The
finished products are packaged and labeled under our trademark, The Singing
Machine(R).

We have obtained copyright licenses from music publishers for all of the
songs in our music library. We contract with outside studios on a work-for hire
basis to produce recordings of these songs. After the songs have been recorded,
we author the CD+G's in our in house studio. We use outside companies to
mass-produce the CD+G's and audiocassettes, once the masters have been
completed.

While our equipment manufacturers purchase our supplies from a small
number of large suppliers, all of the electronic components and raw materials
used by us are available from several sources of supply, and we do not
anticipate that the loss of any single supplier would have a material long-term
adverse effect on our business, operations, or financial condition. Similarly,
we use a small number of studios to record our music (including our in house
production), we do not anticipate that the loss of any single studio would have
a material long-term adverse effect on our business, operations or financial
condition. To ensure that our high standards of product quality and factories
meet our shipping schedules, we utilize Hong Kong based employees of
International SMC as our representatives. These employees include product
inspectors who are knowledgeable about product specifications and work closely
with the factories to verify that such specifications are met. Additionally, key
personnel frequently visit our factories for quality assurance and to support
good working relationships.

All of the electronic equipment sold by us is warranted to the end user
against manufacturing defects for a period of ninety (90) days for labor and
parts. All music sold is similarly warranted for a period of 30 days. During the
fiscal years ended March 31, 2004, 2003 and 2002, warranty claims have not been
material to our results of operations.

COMPETITION

Our business is highly competitive. Our major competitors for karaoke
machines and related products are Craig and Memorex. We believe that competition
for karaoke machines is based primarily on price, product features, reputation,
delivery times, and customer support. We believe that our brand name is well
recognized in the industry and helps us compete in the karaoke machine category.
Our primary competitors for producing karaoke music are Pocket Songs, UAV,
Sybersound and Sound Choice. We believe that competition for karaoke music is
based primarily on popularity of song titles, price, reputation, and delivery
times.

In addition, we compete with all other existing forms of entertainment
including, but not limited to, motion pictures, video arcade games, home video
games, theme parks, nightclubs, television and prerecorded tapes, CD's, and
videocassettes. Our financial position depends, among other things, on our
ability to keep pace with changes and developments in the entertainment industry
and to respond to the requirements of our customers. Many of our competitors
have significantly greater financial, marketing, and operating resources and
broader product lines than we do.

TRADEMARKS

We have obtained registered trademarks for The Singing Machine name and
the logo in which the microphone is used in our name in the United States and in
the European Community. We have also filed trademark applications in Australia
and Hong Kong. In fiscal 2003, we filed an intent to use application for the
mark Karaoke Vision in the United States.

Our trademarks are a significant asset because they provide product
recognition. We believe that our intellectual property is significantly
protected, but there are no assurances that these rights can be successfully
asserted in the future or will not be invalidated, circumvented or challenged.

COPYRIGHTS AND LICENSES

We hold federal and international copyrights to substantially all of the
music productions comprising our song library. However, since each of those
productions is a re-recording of an original work by others, we are subject to
contractual and/or statutory licensing agreements with the publishers who own or
control the copyrights of the underlying musical compositions. We are obligated
to pay royalties to the holders of such copyrights for the original music and
lyrics of all of the songs in our library that have not passed into the public
domain. We are currently a party to many different written copyright license
agreements.

The majority of the songs in our song library are subject to written
copyright license agreements, oftentimes referred to as synchronization
licenses. Our written licensing agreements for music provide for royalties to be
paid on each song. The actual rate of royalty is negotiable, but typically
ranges from $0.09 to $0.18 per song on each CD that is sold. Similarly, the
terms of the licenses vary, but typically are for terms of 2 to 5 years. Our
written licenses typically provide for quarterly royalty payments, although some
publishers require reporting on a semi-annual basis.

We currently have compulsory statutory licenses for certain songs in our
song library which are reproduced on audiocassettes. The Federal Copyright Act
creates a compulsory statutory license for all non-dramatic musical works, which
have been distributed to the public in the United States. Royalties due under
compulsory licenses are payable quarterly and are based on the statutory rate.
We also have written license agreements for substantially all of the printed
lyrics, which are distributed with our audiocassettes, which licenses also
typically provide for quarterly payments of royalties at the statutory rate.

GOVERNMENT REGULATION

Our karaoke machines must meet the safety standards imposed in various
national, state, local and provincial jurisdictions. Our karaoke machines sold
in the United States are designed, manufactured and tested to meet the safety
standards of Underwriters Laboratories, Inc. ("ULE") or Electronic Testing
Laboratories ("ETL"). In Europe and other foreign countries, our products are
manufactured to meet the CE marking requirements. CE marking is a mandatory
European product marking and certification system for certain designated
products. When affixed to a product and product packaging, CE marking indicates
that a particular product complies with all applicable European product safety,
health and environmental requirements within the CE marking system. Products
complying with CE marking are now accepted to be safe in 28 European countries.
However, ULE or ETL certification does not mean that a product complies with the
product safety, health and environmental regulations contained in all fifty
states in the United States. Therefore, we maintain a quality control program
designed to ensure compliance with all applicable US and federal laws pertaining
to the sale of our products. Our production and sale of music products is
subject to federal copyright laws.

The manufacturing operations of our foreign suppliers in China are subject
to foreign regulation. China has permanent "normal trade relations" ("NTR")
status under US tariff laws, which provides a favorable category of US import
duties. China's NTR status became permanent on January 1, 2002, following
enactment of a bill authorizing such status upon China's admission to the World
Trade Organization ("WTO") effective as of December 1, 2001. This substantially
reduces the possibility of China losing its NTR status, which would result in
increasing costs for us.

SEASONALITY AND SEASONAL FINANCING

Our business is highly seasonal, with consumers making a large percentage
of karaoke purchases around the traditional holiday season in our second and
third quarter. These seasonal purchasing patterns and requisite production lead
times cause risk to our business associated with the underproduction or
overproduction of products that do not match consumer demand. Retailers also
attempt to manage their inventories more tightly, requiring that we ship
products closer to the time that retailers expect to sell the products to
consumers. These factors increase the risk that we may not be able to meet
demand for certain products at peak demand times, or that our own inventory
levels may be adversely impacted by the need to pre-build products before orders
are placed. As of March 31, 2004, we had inventory of $5.2 million (net of
reserves totaling $6.6 million) compared to inventory of $25.2 million as of
March 31, 2003 (net of reserves totaling $3.7 million). In fiscal 2003, we
overestimated the demand for our products and as result had $25 million of
excess inventory at year end.

Our financing of seasonal working capital during fiscal 2004 was different
from prior years because of the excess inventory that we had on hand as of March
31, 2003. During fiscal 2004, we purchased approximately $9.1 million of new
inventory and the remainder of our sales were from the liquidation of the excess
inventory on hand. We financed the purchase of new inventory with our short-term
lines of credit in Hong Kong and through financing, with one of our factories in
China.

During fiscal 2005, we plan on financing our inventory purchases by using
credit that has been extended to us by one of our factories in China, by using
our short term lines of credit in Hong Kong and with letters of credit that are
issued by our customers to be used as collateral for payment to our vendors. As
of June 30, 2004, we expect to order an aggregate of approximately $28 million
of inventory during fiscal 2005.

BACKLOG

We ship our products in accordance with delivery schedules specified by
our customers, which usually request delivery within three months of the date of
the order. In the consumer electronics industry, orders are subject to
cancellation or change at any time prior to shipment. In recent years, a trend
toward just-in-time inventory practices in the consumer electronics industry has
resulted in fewer advance orders and therefore less backlog of orders for the
Company. We believe that backlog orders at any given time may not accurately
indicate future sales. As of June 20, 2004, we had backlog of $32.8 million
compared to backlog of $33.4 million at the same period in 2003. We believe that
we will be able to fill all of these orders in fiscal year 2005. However, these
orders can be cancelled or modified at any time prior to delivery.

EMPLOYEES

As of March 31, 2004, we employed 40 persons, all of whom are full-time
employees, including three executive officers. Fifteen of our employees are
located at International SMC's corporate offices in Hong Kong. The remaining
twenty five employees are based in the United States, including two executive
positions; ten are engaged in warehousing and technical support, and thirteen in
accounting, marketing, sales and administrative functions.

ITEM 2. PROPERTIES

Our corporate headquarters are located in Coconut Creek, Florida in an
18,000 square foot office and warehouse facility, of which 7600 square feet has
been subleased. Our four leases for this office space expire on August 31, 2005.
We have leased 9,393 square feet of office and showroom space in Hong Kong from
which we oversee China based manufacturing operations. Our two leases for this
space in the Ocean Center building expire on April 30, 2005 and May 31, 2005,
respectively.

We have one warehouse facility in Compton California. The Compton
warehouse facility has 79,000 square feet and the lease expires on February 23,
2008. We terminated our lease for warehouse space in Rancho Dominguez,
California effective as of May 1, 2004.

We believe that the facilities are well maintained, in substantial
compliance with environmental laws and regulations, and adequately covered by
insurance. We also believe that these leased facilities are not unique and could
be replaced, if necessary, at the end of the term of the existing leases.

ITEM 3. LEGAL PROCEEDINGS

CLASS ACTION AND DERIVATIVE LAWSUIT

From July 2, 2003 through October 2, 2003, seven securities class action
lawsuits and a shareholder's derivative action were filed against us and certain
of our officers and directors in the United States District Court for the
Southern District of Florida on behalf of all persons who purchased our
securities during the various class action periods specified in the complaints.
On September 18, 2003, United States District Judge William J. Zlock entered an
order consolidating the seven (7) purported class action law suits and one (1)
purported shareholder derivative action into a single action case styled Frank
Bielansky v. the Company, Salberg & Company, P.A., et al - Case Number: 03-80596
- CIV - ZLOCK (the "Class Action"). The complaints that were filed allege
violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of
1934 and Rule 10(b)-5. The complaints seek compensatory damages, attorney's fees
and injunctive relief.

We entered into a settlement agreement with the plaintiffs in the Class
Lawsuit in March 2004. At a hearing in April 2004, the Court gave preliminary
approval for the settlement and directed that notices be sent to shareholders
pursuant to the Settlement Agreement. The notices advised shareholders of their
rights and responsibilities concerning the settlement. The Court has set a
hearing on July 30, 2004 before Judge Zlock to consider final approval of the
settlement.

Pursuant to the terms of the settlement agreement, we are required to make
a cash payment of $800,000 and Salberg & Company, P.A., our former auditor, is
required to make a payment of $475,000. Our cash payment of $800,000 is covered
by our liability insurance and our insurer has placed this payment in an escrow
account pending final approval of the Settlement. In addition, we are obligated
to issue 400,000 shares of our common stock. The pending settlement would also
obligate us to implement certain corporate governance changes, including an
expansion or our Board of Directors to six members with independent directors
comprising at least 2/3 of the total Board seats.

BANKRUPTCY FILING IN FISCAL YEAR 1997

We filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of Florida, case number 97-22199-BKC-RBR, on April 11, 1997. On March 17, 1998,
the U.S. Bankruptcy Court confirmed our First Amended Plan of Reorganization. As
of June 10, 1998, our plan has been fully implemented.

OTHER MATTERS

We are involved in various other litigation and legal matters, including
claims related to intellectual property, product liability which we are
addressing or defending in the ordinary course of business. Management believes
that any liability that may potentially result upon resolution of such matters
will not have a material adverse effect on our business, financial condition or
results of operation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our annual meeting of shareholders was held on February 26, 2004. Proxies
for the meeting were solicited pursuant to Regulation 14A of the Securities
Exchange Act of 1934 and there was no solicitation in opposition to that of
management.

All of management's nominees for directors as listed in the proxy
statement were elected with the number of votes cast for each nominee as
follows:

SHARES VOTED VOTES
"FOR" WITHHELD
-------------- ----------
Bernard Appel 7,986,945 52,617
Jay Bauer 7,986,945 52,617
Yi Ping Chan 7,373,655 665,907
Richard Ekstract 7,616,891 422,671

The proposal to approve an amendment to our Year 2001 Stock Option Plan to
allow for the grant of stock awards under the Year 2001 Stock Option Plan was
ratified and approved by the following votes:

SHARES VOTED SHARES VOTED SHARES BROKER
"FOR" "AGAINST" "ABSTAINING" "NON-VOTE"
-------------- -------------- -------------- -------------
1,921,599 1,351,142 45,720 4,721,101

The proposal to approve the appointment of Grant Thornton LLP as
independent accountants for the Company for the year ended March 31, 2004, was
ratified by the following vote:

SHARES VOTED SHARES VOTED SHARES BROKER
"FOR" "AGAINST" "ABSTAINING" "NON-VOTE"
-------------- -------------- -------------- -------------
7,605,366 8,122 2,794 --

PART II

ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock currently trades on the American Stock Exchange under the
symbol "SMD." Set forth below is the range of high and low information for our
common stock as traded on the American Stock Exchange during fiscal 2004 and
fiscal 2003. This information regarding trading on AMEX represents prices
between dealers and does not reflect retail mark-up or markdown or commissions,
and may not necessarily represent actual market transactions.

FISCAL PERIOD HIGH LOW
---------------------------------------------- --------- ---------

2004:
First quarter (April 1 - June 30, 2003) $ 7.94 $ 2.85
Second quarter (July 1 - September 30, 2003) 5.03 2.70
Third quarter (October 1 - December 31, 2003) 4.43 1.80
Fourth quarter (January 1 - March 31, 2004) 2.43 1.14

2003:
First quarter (April 1 - June 30, 2002) $ 16.89 $ 12.06
Second quarter (July 1 - September 30, 2002 12.74 8.05
Third quarter (October 1 - December 31, 2002) 13.49 8.50
Fourth quarter (January 1 - March 31, 2003) 9.19 5.30

As of July 1, 2004, there were approximately 311 record holders of
our outstanding common stock.

COMMON STOCK

We have never declared or paid cash dividends on our common stock and our
Board of Directors intends to continue its policy for the foreseeable future.
Future dividend policy will depend upon our earnings, financial condition,
contractual restrictions and other factors considered relevant by our Board of
Directors and will be subject to limitations imposed under Delaware law.

On March 14, 2002, we affected a 3 for 2 stock split for all shareholders
on record as of March 4, 2002.

SALES OF UNREGISTERED SECURITIES

Effective as of April 15, 2003, we issued an aggregate of 50,000 options
to Jack Dromgold as consideration for services that he had rendered to us. The
options had an exercise price of $7.60 per share and vested in five equal
installments over a five year period beginning on January 1, 2004. We issued
these options to Mr. Dromgold in reliance upon Section 4(2) of the Securities
Act, because he was knowledgeable, sophisticated and had access to comprehensive
information about us. We inadvertently failed to report these options in the
first quarter of fiscal 2004. These options expired in March 2004, ninety days
after Mr. Dromgold's resignation from our company.

ITEM 6. SELECTED FINANCIAL DATA

2004 2003 2002* 2001* 2000
------------ ------------ ------------ ------------ -----------

STATEMENT OF OPERATIONS:
Net Sales $ 70,541,128 $ 95,613,766 $ 62,475,753 $ 34,875,351 $ 19,032,320
Earnings(loss) before income taxes $(21,924,919) $ 1,416,584 $ 8,184,559 $ 4,188,021 $ 577,686
Income tax expense (benefit) $ 758,505 $ 198,772 $ 1,895,494 $ 494,744 $ 160,299
Net earnings (loss) $(22,683,424) $ 1,217,813 $ 6,289,065 $ 3,696,277 $ 737,985
BALANCE SHEET:
Working capital $ (1,382,939) $ 15,281,023 $ 14,577,935 $ 6,956,879 $ 2,985,120
Current ratio 0.90 1.72 3.82 4.37 7.77
Property, plant and equipment, net $ 983,980 $ 1,096,424 $ 574,657 $ 263,791 $ 99,814
Total assets $ 15,417,395 $ 38,935,294 $ 21,403,196 $ 10,509,682 $ 4,346,901
Shareholders' equity $ 216,814 $ 17,685,364 $ 16,225,433 $ 8,450,237 $ 3,906,286
PER SHARE DATA:
Earnings (loss) per common share
- basic $ (2.65) $ 0.15 $ 0.88 $ 0.59 $ 0.23
Earnings (loss) per common share
- diluted $ (2.65) $ 0.14 $ 0.79 $ 0.50 $ 0.19
Cash dividends paid 0.00 0.00 0.00 0.00 0.00

-----------
* Restated

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION

OVERVIEW

We had a challenging year in the twelve month period ended March 31, 2004
("fiscal 2004"). During fiscal 2004, we reported a net loss of $22.7 million, or
$2.65 per diluted share, on sales of $70.5 million which compares to net income
of $1.2 million in fiscal 2003 or $.14 per diluted share, on sales of $95.6
million. Sales decreased primarily from increased competition in the United
States and in international markets. In fiscal 2003, we overestimated the demand
for our products and as result had $25 million of excess inventory at year end.
In addition, both our retail customers and our international distributors
carried excess Singing Machine inventory into fiscal 2004, which impacted our
ability to sell into the trade and distribution channels.

Our gross profit decreased to $1.8 million or 2.6% of total revenues in
fiscal 2004 compared to gross profit of $23.3 million or 24.4% of total revenues
in fiscal 2003. Our net loss for fiscal 2004 was $22.7 million, which includes
several unusual operating expenses: litigation expenses severance expenses,
lease termination costs, write off of prepaid royalties tooling impairment
charges, write off of capitalized cost of reorganization intangible.

In July 2003, we made a decision to restate our audited financial
statements for the fiscal years ended March 31, 2002 and March 31, 2001 because
we revised our position on the taxation of the income of International SMC, our
Hong Kong subsidiary. See "Restatement" on pages 12-13. As a result of this
restatement we were named as a defendant in several class action lawsuits and a
derivative lawsuit. The shareholder complains were consolidated into one lawsuit
in the United States District Court for Southern Florida. We entered into a
settlement agreement with the class action plaintiffs in April 2004 and are
waiting for final approval of the settlement on July 30, 2004. See "Legal
Proceedings" on page 9. We incurred approximately $706,000 for the settlement
and related expenses, net of reimbursement from our insurance carrier.

In July 2003, we raised $1 million in subordinated debt financing from an
investment group comprised of an officer, directors and an associate of one of
our directors. On August 19, 2004, LaSalle amended the credit agreement, which
extended the loan until March 31, 2004 and waived the condition of default. On
September 8, 2003, we raised $4 million in an offering of 8% convertible
subordinated debentures to six accredited investors. The proceeds of the
debenture were used to pay down our accounts payable liabilities, finance
operations and pay down a portion of our loan with LaSalle. On December 31,
2003, we again violated the tangible net worth requirement and working capital
requirements under our credit agreement with LaSalle. On January 31, 2004, we
paid off our loan with LaSalle and LaSalle released its security interests in
our assets. We entered into a factoring agreement with Milberg Factors effective
as of February 9, 2004.

Despite the reduction in expenses and the additional capital, we still had
minimal liquidity during fiscal 2004. As such, we were forced to sell excess
inventory at or below cost. During fiscal 2004, we sold approximately 20.2% of
our inventory at prices at or below cost. As such, our gross profit decreased to
2.6% of our net sales. As of March 31, 2004, we did not have any advances
outstanding under our factoring agreement with Milberg; however, we were in
violation of the covenants relating to working capital and tangible net worth.
Because of our limited liquidity, we received a going concern uncertainty
paragraph on our audited financial statements for fiscal 2004. Although our cash
on hand as of July 1, 2004 is limited, we believe that we will have sufficient
cash from operations to fund our operating requirements for the next three
months. After three months, we expect to begin collecting accounts receivable
from the sales of our karaoke products in the second and third quarters. If
there is a need for additional funds, short term loans will be obtained. See
"Liquidity" beginning on page 17. We will continue to sell older inventory
models at discounted prices to generate cash as well as continuing to reduce
operating expenses.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain income
and expense items expressed as a percentage of the Company's total revenues:

2004 2003 2002*
-------- -------- --------
Total revenues 100.0% 100.0% 100.0%
Cost of sales 97.4% 75.6% 65.4%
Operating expenses 31.2% 22.7% 21.4%
Operating (loss) income (28.6%) 1.7% 13.2%
Other (expenses), income, net (2.5%) (0.2%) (0.1%)
(Loss) Income before taxes (31.1%) 1.5% 13.1%
Provision (benefit) for income taxes 1.1% .2% 3.0%
(Loss) income (32.2%) 1.3% 10.1%

------------
* As restated.

RESTATEMENT OF FINANCIAL STATEMENTS

In June 2003, management revised its position on taxation of its
subsidiary's income by the United States and by the Hong Kong tax authorities.

With regard to taxation in Hong Kong, our subsidiary had previously
applied for a Hong Kong offshore claim income tax exemption based on the
locality of profits of the Hong Kong subsidiary. Management believed that the
exemption would be approved because the source of all profits of the Hong Kong
subsidiary is from exporting to customers outside of Hong Kong. Accordingly, no
provision for income taxes was provided in the consolidated financial statements
as of March 31, 2002 and 2001. However, full disclosure was previously reflected
in the audited financial statements for years ended March 31, 2002 and 2001 of
the estimated amount that would be due to the Hong Kong tax authority should the
exemption be denied. Management is continuing its exemption application process.
However, due to the extended period of time that the application has been
outstanding, as well as management's reassessment of the probability that the
application will be approved, management has determined to restate the 2002 and
2001 consolidated financial statements to provide for such taxes. The effect of
such restatement is to increase income tax expense by $748,672 and 468,424 in
fiscal 2002 and 2001, respectively. However, we can claim United States foreign
tax credits in 2002 for these Hong Kong taxes, which is reflected in the final
restated amounts.

With regard to United States taxation of foreign income, we had originally
taken the position that the foreign income of the Hong Kong subsidiary qualified
for a deferral under the Internal Revenue Code allowing for such income to be
indefinitely deferred and not taxed in the United States until such income is
repatriated. Full disclosure of the amount and nature of the indefinite deferral
for fiscal year 2002 was reflected in the income tax footnote of the
consolidated financial statements for that year. The Internal Revenue Code,
regulations and case law regarding international income taxation is quite
complex and subject to interpretation. Each case is determined based on the
individual facts and circumstances. Due to certain inter-company loans made in
2002 and 2003, the profits previously considered to be indefinitely deferred
became partially taxable as "deemed dividends" under section 956 of the Internal
Revenue Code. Although certain arguments against the imposition of a "deemed
dividend" may be asserted, management has determined to restate the fiscal year
2002 consolidated financial statements based on its reassessment of its original
position. The effect of such restatement is to increase income tax expense by
$1,027,545 in fiscal year 2002, which includes the utilization of the foreign
tax credits referred to above.

The net effect of the above two adjustments is to decrease net income by
$1,776,217 and $468,424 in fiscal 2002 and 2001. The net effect on net income
per share is to decrease net income per share basic and diluted by $0.25 and
$0.23, respectively in fiscal 2002 and decrease net income per share basic and
diluted by $0.07 and $0.06, respectively in fiscal 2001.

FISCAL YEAR ENDED MARCH 31, 2004 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2003

NET SALES

Net sales for the fiscal year ended March 31, 2004 decreased to $70.5
million compared to revenues of $95.6 million in the fiscal year ended March 31,
2003. The decrease in net sales was due to both decreases in unit volume as well
as pricing, due to increases in competition in the United States and
international markets. In fiscal year 2004, 61% of our sales were direct sales,
which represent sales made by International SMC, and 39% were domestic sales,
which represent sales made from our warehouse in the United States.

The sales decreases occurred in all segments of our business. Our total
hardware sales decreased to $67.7 million, in fiscal 2004 compared to total
hardware sales of $87 million in fiscal 2003. The total decrease of hardware
sales of $19.3 million from the previous year sales level is the primary due to
the increasing market competition. Also we had to lower our price in order to
move the overstocked inventory from fiscal year 2003.

In addition, there was a significant decrease in our music sales. Music
sales decreased to $2.8 million, or 4% of net sales, in fiscal 2004, compared to
$9.1 million, or 9.5% of net sales, in fiscal 2003. The decrease in music sales
is also a result of increased competition in this category, both domestically as
well as internationally.

GROSS PROFIT

Gross profit for fiscal 2004 was $1,818,550 or 2.6% of total revenues
compared to $23,284,731 or 24.4% of sales for fiscal 2003. The decrease in gross
margin compared to the prior year is primarily due to the following factors: (i)
write-down of inventories, (ii) sales made at lower prices to generate cash from
operation, (iii) increased sales by International SMC, the gross profit margin
is lower for the sales shipped from Hong Kong due to the volume discount and
reduction of the warehousing and insurance expenses and (iv) tooling impairment
cost of $443,000.

At the end of fiscal 2004, our inventory levels were much higher than we
expected. We determined that due to liquidation sales, inventory would be sold
at a loss; therefore, a decrease in the value of specific inventory items was
made. The total amount of the provision for inventory was $6.6 million in fiscal
2004 compared to a provision of $3.7 million in fiscal 2003.

In addition to the write-down of inventories, due to competitive price
pressure, a significant amount of sales shipped in current year were made at
lower margins than in previous years. In the fourth quarter, we sold $1 million
of inventory with a negative margin of $366,751 (after applying inventory
valuation reserves).

Our product line did not sell as well as our retailers and mass merchants
had expected. As a result, we agreed to give our customers pricing concessions
and allowed them to return inventory to us. We issued over $1 million in
customer credits during the fourth quarter, which reduced our sales and gross
profit margins equally. Our gross margins were also negatively affected by the
return of $1.8 million in inventory.

Our decrease in our gross margin percentage in fiscal 2004 compared to
fiscal 2003 was also reduced by the mix of our sales. The percentage of sales
made by our Hong Kong subsidiary increased from 52% of the total sales in fiscal
2003 to 61% in fiscal 2004. Usually, sales made by International SMC
historically maintain a lower gross profit margin because there are no variable
expenses from these sales. Other variable expenses that are normally included
with sales are advertising allowances, returns and commissions.

Our gross profit may not be comparable to those of other entities, since
some entities include the costs of warehousing, inspection, freight charges and
other distribution costs in their cost of sales. We account for the above
expenses as operating expenses and classify them under selling, general and
administrative expenses

OPERATING EXPENSES

Operating expenses were $22,013,849 or 31.2% of net sales in fiscal 2004
compared to $21,670,501 or 22.7% of net sales in fiscal 2003. The primary
factors that contributed to the increase in operating expenses are:

o Increased compensation expenses in the amount of $953,000 in fiscal
2004 of which approximately $323,000 was for severance payments to
four former executive officers,

o Increased selling, general and administrative expenses of $2,706,000
due to

o increased legal fees in the amount of $1,080,000 of which
approximately $706,000 was for the class action settlement, and
increased consulting fees in the amount of approximately $370,000
which was related to consulting work performed by our lender,

o increased rent expenses in the amount of $690,000 due to the
expansion of the warehouse facility in Rancho Dominguez in fiscal
2003. The increase warehouse space was necessary to stock the
unanticipated unsold inventories in fiscal year 2004 and expenses of
$180,000 for early termination of the lease in Rancho Dominguez,
California

o a write off of the capitalized cost of reorganization of $185,000,

o increased accounting expenses in the amount of $426,000, which was
due to the additional work needed to restate our financial
statements for the fiscal years ended March 31, 2001 and 2002 and
work required on the filing of certain registration statements and

o increased bank fees and loan cost in the amount of $271,000, which
was related to the loan agreement with Lasalle bank.

This increase in expenses was offset by decreases in our advertising
expenses and our freight and handling charges in the amount of $2,692,000 and
$689,000, respectively. Advertising expense consists of two components:
co-operative advertising and direct advertising expense. Co-operative
advertising is paid directly to the customer and the allowances are based on the
amount of sales. The customer provides copies of advertising on which these
funds are spent and is reimbursed after review of such proof of performance. As
we believe that there is a separate and identifiable benefit associated with the
co-operative advertising, such amounts are recorded as a component of operating
expenses. Co-operative advertising expenses decreased to $2,340,439 in fiscal
2004 compared to $5,032,367 in fiscal 2003 because our sales decreased. Our
royalty expenses were $2,294,727 in fiscal 2004 compared to $2,257,653 in fiscal
2003. Our royalty expenses in fiscal 2004 included a write-off of $980,000 in
pre-paid royalties under our licensing agreement with MTV.

DEPRECIATION AND AMORTIZATION

Our depreciation and amortization expenses were $750,359 for fiscal 2004
compared to $622,298 for fiscal 2003. This increase in depreciation and
amortization expenses can be attributed to our investment in tooling and dies
for the new models, in addition to the acceleration in the depreciation method
used to write off the useful life of the tools and dies.

NET OTHER EXPENSES

Net other expenses were $1,729,620 in fiscal 2004 compared to $197,646 in
fiscal 2003. Net other expenses increased because our interest expense increased
to $1.7 million in fiscal 2004 compared to $406,000 in fiscal 2003. Our interest
expense increased because we recorded $917,853 for the amortization of the
discount and related deferred financing fees on our convertible debentures and
approximately $800,000 relates to interest expense on the LaSalle loan, interest
on the convertible debentures, interest on the insiders loan, and interest
expense incurred at our Hong Kong subsidiary. We expect interest expense to
increase further in fiscal 2005, as we will have a full year's worth of
amortization of the discount on the convertible debentures and related deferred
financing fees.

INCOME BEFORE TAXES

We had a net loss before taxes of $21,924,919 in fiscal 2004 compared to
net income of $1,416,584 in fiscal 2003.

INCOME TAX EXPENSE

Significant management judgment is required in developing our provision
for income taxes, including the determination of foreign tax liabilities,
deferred tax assets and liabilities and any valuation allowances that might be
required against the deferred tax assets. Management evaluates its ability to
realize its deferred tax assets on a quarterly basis and adjusts its valuation
allowance when it believes that it is more likely than not that the asset will
not be realized. At December 31, 2003 and March 31, 2004, we concluded that a
valuation allowance was needed against all of our deferred tax assets, as it was
not more likely than not that the deferred taxes would be realized. At March 31,
2004 and 2003, we had gross deferred tax assets of $8.2 million and $1.9
million, against which we recorded valuation allowances totaling $8.2 million
and $0, respectively.

For the fiscal year ended March 31, 2004, we recorded a tax provision of
$758,505. This occurred because the valuation allowance established against our
deferred tax assets exceeded the amount of the benefit created from carrying
back a portion of the current year's losses. The carry-back of the losses from
the current year resulted in an income tax receivable of $1.1 million, which is
included in refundable tax in the accompanying balance sheets. We have now
exhausted our ability to carry back any further losses and therefore will only
be able to recognize tax benefits to the extent that we has future taxable
income.

Our subsidiary has applied for an exemption of income tax in Hong Kong.
Therefore, no taxes have been expensed or provided for at the subsidiary level.
Although no decision has been reached by the governing body, the parent company
has reached the decision to provide for the possibility that the exemption could
be denied and accordingly has recorded a provision for Hong Kong taxes in fiscal
2003 and 2002. There was no provision for Hong Kong income taxes in fiscal 2004
due to the subsidiary's net operating loss for the year. Hong Kong income taxes
payable totaled $2.4 million at March 31, 2004 and 2003 and is included in the
accompanying balance sheets as income taxes payable.

We effectively repatriated approximately $2.0 million, $5.6 million and
$5.7 million from our foreign operations in 2004, 2003 and 2002, respectively.
Accordingly, these earnings were taxed as a deemed dividend based on U.S.
statutory rates. We have no remaining undistributed earnings of our foreign
subsidiary.

We operate within multiple taxing jurisdictions and are subject to audit
in those jurisdictions. Because of the complex issues involved, any claims can
require an extended period to resolve. In management's opinion, adequate
provisions for income taxes have been made.

NET LOSS/NET INCOME

As a result of the foregoing, we had a net loss of $22.7 million in 2004
compared to net income of $1.2 million in fiscal 2003.

FISCAL YEAR ENDED MARCH 31, 2003 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2002

NET SALES

Net sales for the fiscal year ended March 31, 2003 increased 53.0% to
$95,613,766 compared to $62,475,753 for the fiscal year ended March 31, 2002.
Our growth was driven in large part by the addition of international sales in
Europe, Asia, and Australia. We also generated $30,884,344 million or 32.3% of
our net sales from products sold under the MTV license in fiscal 2003.

Strong sales of our music titles were also driving forces in our revenue
growth for fiscal 2003. In fiscal 2003, our sales of music increased to
$8,894,743 or 9.3% of sales as compared to $6,306,547 or 10.1% of net sales in
fiscal 2002. In fiscal 2004, 52% of our sales were direct sales, which represent
sales made by International SMC, and 48% were domestic sales, which represent
sales made from our warehouse in the United States.

GROSS PROFIT

Gross profit for the fiscal year ended March 31, 2003 was $23,284,731 or
24.4% of sales as compared to $21,622,913 or 34.6% of sales for the fiscal year
ended March 31, 2002. The decrease in gross margin compared to the prior year is
due primarily to the following factors: (i) increased sales from International
SMC both to domestic and international customers; (ii) a write down of the value
of inventory and (iii) a reduction of sales due to a guaranteed gross profit
agreement with Transworld.

International sales were primarily in Europe, Canada and Australia. Sales
to international customers historically maintain lower selling prices, and thus,
a lower gross profit margin. The main reason for this is that the sales are made
to distributors in those countries and there are no additional variable
expenses. Other variable expenses that are seen in conjunction with U.S. sales
are advertising allowances, handling charges, returns and commissions.

In fiscal 2003, we entered into a guaranteed gross profit agreement with
Transworld, a specialty music retailer. We guaranteed Transworld that it would
earn a minimum gross profit of $3,573,000 from the sale of our karaoke products
during the period between September 1, 2002 through January 15, 2003. Under this
agreement, we agreed to pay Transworld for the difference between the gross
profit earned on its sales of our karaoke products and the minimum guarantee. As
of the settlement date of the contract, Transworld had not realized the minimum
guarantee of gross profit. As such, we had to provide them with a check in the
amount of $2.5 million, which was recorded in the fourth quarter of fiscal 2003
as a reduction to revenue.

At the end of fiscal 2003, our inventory level was much higher than we had
expected. As of March 31, 2003, we had inventory on hand of $25 million. We
determined that due to liquidation sales, inventory would be sold at a loss;
therefore, a decrease in the value of specific inventory items was made. The
total amount of the provision for inventory was $3,715,357 at March 31, 2003.

Gross profit may not be comparable to those of other entities, since some
entities include the costs of warehousing, inspection, freight charges and other
distribution costs in their cost of sales. We account for the above expenses as
operating expenses and classify them under selling, general and administrative
expenses.

OPERATING EXPENSES

Operating expenses were $21,670,501 or 22.7% of total revenues in fiscal
2003 up from $13,387,533 or 21.4% of total revenues, in fiscal 2002. The primary
factors that contributed to the increase of approximately $8.3 million in
operating expenses for the fiscal year 2003 are:

o increased advertising expenses of $2,654,729 due to increased use of
our outside advertising agency to oversee more advertising projects
for us, the production of a television commercial, as well as
cooperative advertising with customers, which is variable based on
the level of sales

o the increase in depreciation in the amount of $239,686 due to the
addition of molds for new product additions for fiscal year 2003,

o compensation expense in the amount of $1,151,012 due to the addition
of key personnel in Florida, at our California facility and at
International SMC, which include the executive vice-president of
sales, sales administration, music licensing coordinator, and music
production personnel, as well as warehouse employees and repair
personnel.

o increased freight and handling charges to customers in the amount of
$869,525,

o expansion of the California warehouse and its associated expenses in
the amount of $873,919,

o expansion of International SMC's operations and its related
expenses, in the amount of $580,906.

o increases in product development fees for the development of future
product in the amount of $571,370.

Other increases in operating expenses were to selling expenses, which are
considered variable. These expenses are based directly on the level of sales and
include royalty expenses and commissions. We also incurred $79,000 of expenses
for catalogue expenses and show expenses. These expenses are not variable and do
not change based on the level of sales. Show expenses are costs that are
associated with the Consumer Electronics Show and Toy Fair, such as promotional
materials, show space and mock up samples.

Our advertising expense increased $2,654,729 for the fiscal year ended
March 31, 2003 as compared to fiscal 2002. Advertising expense consists of two
components: co-operative advertising and direct advertising expense.
Co-operative advertising is paid directly to the customer and the allowances are
based on the amount of sales. The customer provides copies of advertising on
which these funds are spent, but has complete discretion as to the use of these
funds. As we believe that there is a separate and identifiable benefit
associated with the co-operative advertising, such amounts are recorded as a
component of operating expenses. Co-operative advertising expenses accounted for

$2,320,705 of the increase in advertising expenses. In fiscal 2002, we embarked
on our first television advertising and continued with the use of print
advertising, radio spots, sponsorships, promotions and other media. This is
considered direct advertising, whereby we actually contract for advertising of
the product. The increased costs for our advertising firm were $334,024 over the
prior year. The expense for direct advertising is at our discretion and is not
variable based on the level of sales attained. Both of these types of
advertising are direct expenses of the Company.

DEPRECIATION AND AMORTIZATION

Our depreciation and amortization expenses were $622,298 for the fiscal
year ended March 31, 2003 as compared to $394,456 for the fiscal year ended
March 31, 2002. The increase in depreciation and amortization expenses can be
attributed to the Company's acquisition of new molds and tooling for our
expanded product line, as well as minimal costs for additional computer
equipment and furniture for additional personnel.

OTHER EXPENSES

Net other expenses were $197,646 for the fiscal year ended March 31, 2003
as compared with net other expenses of $50,821 for the fiscal year ended March
31, 2002. Our interest expense increased during the fiscal year ended March 31,
2003 compared to the same period of the prior year primarily due to our
increased borrowings under our credit facility with LaSalle during this period.
Prior to August 2002, we had cash reserves to fund operations and did not need
to borrow under our revolving credit facility. However, in August 2002, we began
borrowing our credit facility with LaSalle. Our interest income decreased from
$16,934 during the fiscal year 2002 to $11,943 during the fiscal year 2003 due
to our interest earning's cash balance is lower than previous year. We expect
interest expense to increase in fiscal 2004 as compared to prior years due to
the credit facility accruing interest at a higher rate, effective as of August
19, 2003 when we entered into the Fourteenth Amendment to our credit facility.
As of December 31, 2003, our credit facility accrued interest at 6.5%, which is
prime plus 2.5%, our former default rate. Since interest is calculated based on
the average monthly balance of the credit facility, we can not reasonably
estimate the degree to which this year's expense will exceed last years. We do
know, however, that the interest spread is 1.75% higher than in the same period
last year.

INCOME TAX EXPENSE

Our tax expense is based on an aggregation of the taxes on earnings of
International SMC and our domestic operations. Income tax rates in Hong Kong are
approximately 16%, while the statutory income tax rate in the United States is
34%. Our effective tax rate in fiscal 2003 was 14% as compared to 23% in fiscal
2002. This decrease in the effective tax rate is a result of our company
generating a pretax loss in the United States in fiscal 2003, resulting in a tax
benefit, as compared to pretax income in the United States in fiscal 2002. Our
future effective income tax rate will fluctuate based on the level of earnings
of International SMC and our domestic operations.

NET INCOME

As a result of the foregoing, our net income was $1,217,812 for the fiscal
year ended March 31, 2003 compared to net income of $6,289,065 for fiscal 2002.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2004, we had cash on hand of $356,342 and current assets of
$13,161,819. Our current assets consist primarily of cash on hand of $356,342,
restricted cash of $874,283, accounts receivable of $3.8 million, inventories of
$5.2 million, an insurance receivable of $800,000 for settlement of the class
action lawsuit and a refundable tax credit of $1.18 million.

As of March 31, 2004, our current liabilities consist of accounts payable
of $3.9 million, accrued expenses of $3.48 million, customer credit on account
of $2.1 million, a bank overdraft of $62,282, subordinated debt of $1 million
and an income tax payable of $2.44 million. Our most significant account payable
is a $2.4 million obligation to a factory in China. We have agreed to a verbal
payment plan with the factory, which provides that we will begin making payments
in September 2004. The payments will continue through the year end March 2005,
We are current on approximately 80% of our accounts payable.

We entered into a factoring agreement with Milberg Factors, effective as
of February 9, 2004. Pursuant to the agreement, Milberg, at its discretion, will
advance us the lesser of 80% of our accounts receivable or $3.5 million. All
receivables submitted to Milberg are subject to a fee equal to 0.8% of the gross
invoice value. The average monthly balance of the line will incur interest at a
rate of prime plus .75%. Other terms of the agreement include minimum fees of
$200,000 per calendar year and include covenants requiring the Singing Machine
to maintain $7.5 million of tangible net worth and $7.5 million of working
capital at all times as defined in the agreement. To secure these advances,
Milberg received a security interest in all of our accounts receivable and
inventory located in the United States and a pledge of 66 2/3% of the stock in
International SMC (HK) Ltd., our wholly-owned subsidiary. This agreement is
effective for an initial term of two years, with successive automatic renewals
unless either party gives notice of termination.

We borrowed approximately $250,000 under the factoring agreement in the
fourth quarter of fiscal 2004 and repaid all outstanding amounts. As of March
31, 2004, we did not have any advances outstanding under the factoring
agreement; however, we were in violation of the covenants relating to working
capital and tangible net worth. We terminated our factoring agreement with
Milberg Factors, effective as of July 14, 2004. We paid a $25,000 fee to
terminate this agreement prior to the scheduled expiration date of February 9,
2006. Milberg has agreed to release its security interest in all our assets and
accounts receivable. We are now actively seeking financing from other sources.

Our Hong Kong subsidiary, International SMC, has access to credit
facilities at Hong Kong Shanghai Bank and Fortis Bank. The primary purpose of
the facilities is to provide International SMC with access to letters of credit
so that it can purchase inventory for direct shipment of goods into the United
States and international markets. The facilities are secured by a corporate
guarantee from the U.S. parent company and restricted cash on deposit with the
lender. The maximum available credit under the facilities is $2.0 million. The
balance at March 31, 2004 and 2003 was $62,282 and $316,646, respectively. The
interest rate is approximate 4% per annum. As of March 31, 2004 there was no
availability under these facilities.

As of June 1, 2004, our cash on hand is limited. Our average monthly
operating costs are approximately $600,000 and we expect that we will need
approximately $1.5 million for working capital during the next three month
period between July and September. Our primary expenses are normal operating
costs including salaries, payments under the severance agreements for two of our
former executives, lease payments for our warehouse space in Compton, California
and other operating costs.

On July 14, 2004, a director Jay Bauer has advanced the Company a short
term loan of $200,000, to be used to meet working capital obligations. The loan
bears interest at 8.75% per annum and is due on demand.

Our commitments for debt and other contractual arrangements are summarized
as follows:

YEARS ENDING MARCH 31,
---------------------------------------------------------------------------
TOTAL 2005 2006 2007 2008 2009
---------- ---------- ---------- ---------- ---------- ----------

Merchandise License Guarantee $ 525,000 $ 375,000 $ 150,000 -- -- --
Property Leases $2,657,506 $ 838,792 $ 579,851 $ 495,545 $ 371,659 $ 371,659
Equipment Leases $ 120,263 $ 71,746 $ 19,502 $ 7,969 $ 13,044 $ 8,002
Subordinated Debt-related parties $1,000,000 -- $1,000,000 -- -- --
Convertible Debentures $4,000,000 -- $4,000,000 -- -- --

Each of the contractual agreements (except the equipment leases) provides
that all amounts due under that agreement can be accelerated if we default under
the terms of the agreement. For example, if we fail to make a minimum guaranteed
royalty payment that is required under a Merchandise License Agreement on a
timely basis, the licensor can declare us in default and require that all
amounts due under the Merchandise License Agreement are immediately due and
payable.

Merchandise license guarantee reflects amounts that we are obligated to
pay as guaranteed royalties under our various license agreements. In fiscal
2005, we have guaranteed minimum royalty payments under our license agreements
with Care Bears, MTV and Motown (Universal Music).

We have leases for office and warehouse space in California, Florida and
Hong Kong. We have equipment leases for forklifts and copy machines.

On September 8, 2003, we issued an aggregate of $4,000,000 of 8%
convertible debentures in a private offering to six accredited investors. The
debentures initially are convertible into 1,038,962 shares of our common stock
at $3.85 per share, subject to adjustment in certain situations. We also issued
an aggregate of 457,143 warrants to the investors. The exercise price of the
warrants is $4.025 per share and the warrants expire on September 7, 2006. We
have an obligation to register the shares of common stock underlying the
debentures and warrants.

On February 9, 2004 we amended our convertible debenture agreements to
increase the interest rate to 8.5% and to grant warrants to purchase an
aggregate of 30,000 shares of our common stock to the debenture holders on a
pro-rata basis. These concessions are in consideration of the debenture holder's
agreements to (i) enter into new subordination agreements with Milberg, (ii) to
waive all liquidated damages due under the transaction documents through July 1,
2004 and (iii) to extend the effective date of the Form S-1 registration
statement until July 1, 2004. The new warrants have an exercise price equal to
$1.52 per share and the fair value of these warrants was estimated by using the
Black-Scholes Option-Pricing Model and totaled $30,981. This amount was expensed
as a component of selling, general and administrative expenses. Pursuant to the
convertible debenture agreements, we were required to register the shares of
common stock underlying the debentures and detachable stock purchase warrants
issued in connection with the debentures. The registration of the common shares
was required to be effective by July 1, 2004. Because we did not have the
registration statement declared effective by July 14, 2004, we are in technical
default of the convertible debenture agreements. As such, we are accruing
liquidated damages in the amount of $80,000 per month. Additionally, the
convertible debenture holders could declare us in default of the convertible
debentures and accelerate all payments due under the convertible debentures,
which is the principal amount of $4 million plus any liquidated damages and
other fees that are assessed. One of the reasons that we are in technical
default is because we have not received all the information that we have
requested from the debenture holders for the registration statement. We are
working to cure our event of default by filing the registration statement as
soon as possible. Additionally, we are trying to enter into another amendment of
the convertible debentures and transaction documents with the convertible
debenture holders which would extend the filing date for the registration
statement and eliminate all liquidated damages. There can be no assurances that
we will be able to enter into an amendment of the convertible debenture
agreements.

WORKING CAPITAL REQUIREMENTS DURING THE SHORT AND LONG TERM

During the next twelve months period, we plan on financing our working
capital needs from

(i) Collection of accounts receivable;

(ii) Sales of existing inventory;

(iii) Seeking additional financial company for advance in account
receivables.

(iv) Continued support from factories in China in financing our purchases
of karaoke machines for fiscal 2005; and

(iv) Utilizing credit facilities that are available to International SMC
to finance all direct shipments.

Our sources of cash for working capital in the longer term, are the same
as our sources during the short term. We expect to receive a tax refund of $1.1
million at the end of September 2004. If we need additional financing we intend
to approach Milberg and request that it modify the terms of its factoring
agreement or permit us to obtain financing from a third party. However, we can
not assure that Milberg will be willing to waive any of the conditions of the
factoring agreement and/or let us seek capital from a third party. If we need to
obtain additional financing and fail to do so, it may have a material adverse
effect on our ability to meet our financial obligations and to continue our
operations.

During fiscal 2005, we will strive to keep our operating costs at a
minimum. In order to reduce the need to maintain inventory in our warehouse in
California and Florida, we intend to generate a larger share of our total sales
through sales directly from International SMC. The goods are shipped directly to
our customers from the ports in China and are primarily backed by customer
letters of credit. The customers take title to the merchandise at their
consolidators in China and are responsible for their shipment, duty, clearance
and freight charges to their locations. These sales in which the customer
purchase the good for delivery at a specific destination are referred to as
"FOB" sales. We will also assist our customers in the forecasting and management
of their inventories of our product.

We are also planning to finance a significant amount of our sales with
customer issued letters of credit, using International SMC's credit facility
with Hong Kong Bank and relying on financing from one of our factories in China.
We anticipate that total purchases of approximately $28 million that will be
financed by the above methods. We currently expect to order approximately $8
million in new inventory, which will be financed by using International SMC's
credit facility and financing from a Chinese factory.

However, these purchase orders can be cancelled at any time prior to
delivery and we can not assure you that our customers will complete these
purchases. In the event that we do not sell sufficient products in our second
and third quarter, we have considered other sources of financing, such as trying
to secure an additional credit facility, private offerings and/or a venture
capital investment. We expect that our profit margin for sales of our karaoke
products will continue to be under price pressure, because of the older
competition in the marketplace. During fiscal 2005, we plan on introducing three
new karaoke machines which will command higher prices and a higher profit
margin. The Company also will continue to cut our operating expenses.

We may incur an operating charge in fiscal 2004. In connection with the
settlement of the class action lawsuit, we have agreed to issue approximately
400,000 share of our common stock to the class action plaintiffs. The
convertible debentures and warrants provide that if we issue any additional
securities at a price that is lower than the set price of the debentures and the
warrants, the price of the debentures and warrants will be adjusted accordingly.
However, there is an exception for the stock issued for acquisitions or
strategic investments, the primary purpose of which is not for raise capital. We
believe that the issuance of the securities to the class action plaintiffs may
fall with this exception. We will need to discuss the issue with the
institutional investors to see if they agree with our position. There can be no
assurances that they will agree with our position that the conversion price of
the debentures and the exercise price of the warrants should not be adjusted.

Additionally, we are in default of the convertible debenture agreements
and related transaction documents. Under the terms of the convertible
debentures, we are accruing liquidated damages of $80,000 for each month that we
do not have a registration statement filed.

Except for the foregoing, we do not have any present commitment that is
likely to result in our liquidity increasing or decreasing in any material way.
In addition, except for the Singing Machine's need for additional capital to
finance inventory purchases, the Singing Machine knows of no trend, additional
demand, event or uncertainty that will result in, or that is reasonably likely
to result in, the Singing Machine's liquidity increasing or decreasing in any
material way

EXCHANGE RATES

We sell all of our products in U.S. dollars and pay for all of our
manufacturing costs in either U.S. or Hong Kong dollars. Operating expenses of
the Hong Kong office are paid in Hong Kong dollars. The exchange rate of the
Hong Kong dollar to the U.S. dollar has been fixed by the Hong Kong government
since 1983 at HK$7.80 to U.S. $1.00 and, accordingly, has not represented a
currency exchange risk to the U.S. dollar. We cannot assure you that the
exchange rate between the United States and Hong Kong currencies will continue
to be fixed or that exchange rate fluctuations will not have a material adverse
effect on our business, financial condition or results of operations.

SEASONAL AND QUARTERLY RESULTS

Historically, our operations have been seasonal, with the highest net
sales occurring in the second and third quarters (reflecting increased orders
for equipment and music merchandise during the Christmas selling months) and to
a lesser extent the first and fourth quarters of the fiscal year. Sales in our
fiscal second and third quarter, combined, accounted for approximately 86% of
net sales in fiscal 2004 and 2003, and 81% of net sales in fiscal 2002.

Our results of operations may also fluctuate from quarter to quarter as a
result of the amount and timing of orders placed and shipped to customers, as
well as other factors. The fulfillment of orders can therefore significantly
affect results of operations on a quarter-to-quarter basis.

INFLATION

Inflation has not had a significant impact on the Company's operations.
The Company has historically passed any price increases on to its customers
since prices charged by the Company are generally not fixed by long-term
contracts.

CRITICAL ACCOUNTING POLICIES

We prepared our consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. As
such, management is required to make certain estimates, judgments and
assumptions that it believes are reasonable based on the information available.
These estimates and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses for the periods presented. The significant accounting
policies which management believes are the most critical to aid in fully
understanding and evaluating our reported financial results included accounts
receivable - allowance for doubtful accounts, reserves on inventory, deferred
tax assets and our Hong Kong income tax exemption.

COLLECTIBILITY OF ACCOUNTS RECEIVABLE. The Singing Machine's allowance for
doubtful accounts is based on management's estimates of the creditworthiness of
its customers, current economic conditions and historical information, and, in
the opinion of management, is believed to be an amount sufficient to respond to
normal business conditions. Management sets 100% reserves for customers in
bankruptcy and other reserves based upon historical collection experience.
Should business conditions deteriorate or any major customer default on its
obligations to the Company, this allowance may need to be significantly
increased, which would have a negative impact on operations.

RESERVES ON INVENTORIES. The Singing Machine establishes a reserve on
inventory based on the expected net realizable value of inventory on an item by
item basis when it is apparent that the expected realizable value of an
inventory item falls below its original cost. A charge to cost of sales results
when the estimated net realizable value of specific inventory items declines
below cost. Management regularly reviews the Company's investment in inventories
for such declines in value.

INCOME TAXES. Significant management judgment is required in developing
our provision for income taxes, including the determination of foreign tax
liabilities, deferred tax assets and liabilities and any valuation allowances
that might be required against the deferred tax assets. Management evaluates its
ability to realize its deferred tax assets on a quarterly basis and adjusts its
valuation allowance when it believes that it is more likely than not that the
asset will not be realized. At December 31, 2003 and March 31, 2004, we
concluded that a valuation allowance was needed against all of our deferred tax
assets, as it was not more likely than not that the deferred taxes would be
realized. At March 31, 2004 and 2003, we had gross deferred tax assets of $8.2
million and $1.9 million, against which we recorded valuation allowances
totaling $8.2 million and $0, respectively.

For the fiscal year ended March 31, 2004, we recorded a tax provision of
$758,505. This occurred because the valuation allowance established against our
deferred tax assets exceeded the amount of the benefit created from carrying
back a portion of the current year's losses. The carry-back of the losses from
the current year resulted in an income tax receivable of $1.1 million, which is
included in refundable tax in the accompanying balance sheets. we have now
exhausted our ability to carry back any further losses and therefore will only
be able to recognize tax benefits to the extent that it has future taxable
income.

We effectively repatriated approximately $2.0 million, $5.6 million and
$5.7 from its foreign operations in 2004, 2003 and 2002, respectively.
Accordingly, these earnings were taxed as a deemed dividend based on U.S.
statutory rates. We have no remaining undistributed earnings of the Company's
foreign subsidiary.

OTHER ESTIMATES. We makes other estimates in the ordinary course of
business relating to sales returns and allowances, warranty reserves, and
reserves for promotional incentives. Historically, past changes to these
estimates have not had a material impact on our financial condition. However,
circumstances could change which may alter future expectations.

Set forth below and elsewhere in this Annual Report on Form 10-K and in
the other documents we file with the SEC are risks and uncertainties that could
cause actual results to differ materially from the results contemplated by the
forward looking statements contained in this Annual Report.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK

RISKS ASSOCIATED WITH OUR BUSINESS

WE HAVE SIGNIFICANT WORKING CAPITAL NEEDS AND IF WE ARE UNABLE TO OBTAIN
ADDITIONAL FINANCING, WHEN NEEDED, WE MAY NOT HAVE SUFFICIENT CASH FLOW TO RUN
OUR BUSINESS.

As of July 1, 2004, our cash on hand is limited. We need approximately
$1.5 million in working capital in order to finance our operations over the next
three months. We will finance our working capital needs from the collection of
accounts receivable, and sales of existing inventory. See "Liquidity" beginning
on page 17. As of March 31, 2004, our inventory was valued at $5.2 million. If
these sources do not provide us with adequate financing, we may try to seek
financing from a third party. If we are not able to obtain adequate financing,
when needed, it will have a material adverse effect on our cash flow and our
ability to run our business. If we have a severe shortage of working capital, we
may not be able to continue our business operations and may be required to file
a petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code or enter
into some other form of liquidation or reorganization proceeding.

WE MAY BE DEEMED TO INSOLVENT AND WE MAY GO OUT OF BUSINESS.

As of March 31, 2004, our cash position is limited. We are not able to pay
all of our creditors on a timely basis. We are current on approximately 80% of
our accounts payable, which total $3.9 million as March 31, 2004. We are not
current on our account payable of $2.4 million to our factory in China. If we
are not able to pay our current debts as they become due, we may be deemed to be
insolvent. We may be required to file a petition for bankruptcy under Chapter 11
of the U.S. Bankruptcy Code or enter into some other form of liquidation or
reorganization proceedings.

OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM RAISED SUBSTANTIAL DOUBT ABOUT
OUR ABILITY TO CONTINUE AS A GOING CONCERN AS OF MARCH 31, 2004 AND 2003.

We received a report dated June 16, 2004 from our independent certified
public accountants covering the consolidated financial statements for our fiscal
year ended March 31, 2004 that included an explanatory paragraph which stated
that the financial statements were prepared assuming the Singing Machine would
continue as a going concern. This report stated that our operating performance
in fiscal 2004 and our minimal liquidity raised substantial doubt about our
ability to continue as a going concern. If we are not able to raise additional
capital,we may need to curtail or stop our business operations. We may be
required to file a petition for bankruptcy under Chapter 11 of the U.S.
Bankruptcy Code or enter into some other form of liquidation or reorganization
proceedings.

WE ARE IN TECHNICAL DEFAULT OF THE TERMS OF THE CONVERTIBLE DEBENTURES AND THERE
COULD BE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS AND FINANCIAL RESULTS IF WE
ARE DEEMED TO BE IN DEFAULT.

We are in technical default of the terms of the $4 million in convertible
debentures that we issued to 6 institutional investors in September 2003. We had
an obligation to have the registration statement registering the securities
issued to the institutional investors filed and declared effective by July 1,
2004. As of July 14, 2004, the registration statement has not been declared
effective. As such, under the terms of the registration rights agreement we are
accruing liquidated damages in the amount of $80,000 for each month that the
registration statement is not declared effective. Additionally, the
institutional investors could declare us in default of the convertible
debentures and demand repayment of the debentures and all other amounts due
under the transaction documents evidencing their $4 million investment.

IF WE ARE UNABLE TO EFFECTIVELY AND EFFICIENTLY IMPLEMENT OUR PLAN TO REMEDIATE
THE MATERIAL WEAKNESSES WHICH HAVE BEEN IDENTIFIED IN OUR INTERNAL CONTROLS AND
PROCEDURES, THERE COULD BE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS OR
FINANCIAL RESULTS.

We have identified a number of material weaknesses in our internal
controls and procedures in connection with the audit of our financial statements
for fiscal 2004. See " Controls and Procedures" on page 30. The deficiencies in
our internal controls relate to:

o weaknesses in our financial reporting processes as a result of a
lack of adequate staffing in the accounting department,

o accounting for consigned inventory and inventory costing.

We are implementing a number of procedures to correct these weaknesses in
our internal controls. However, no assurances can be given that we will be able
to successfully implement our revised internal controls and procedures or that
our revised controls and procedures will be effective in remedying all of the
identified material weaknesses in our prior controls and procedures. In
addition, we may be required to hire additional employees, and may experience
higher than anticipated capital expenditures and operating expenses, during our
implementation of these changes. If we are unable to implement these changes
effectively or efficiently there could be a material adverse effect on our
operations or financial results.

A SMALL NUMBER OF OUR CUSTOMERS ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR
REVENUES, AND THE LOSS OF ONE OR MORE OF THESE KEY CUSTOMERS COULD SIGNIFICANTLY
REDUCE OUR REVENUES AND CASH FLOW.

We rely on a few large customers to provide a substantial portion of our
revenues. As a percentage of total revenues, our net sales to our five largest
customers during the fiscal period ended March 31, 2004, 2003 and 2002 were
approximately 53%, 67% and 87%, respectively. In fiscal 2004, three customers
accounted for 20%, 12% and 8% of our net sales. The customers are Arbiter,
Giochi and Best Buy respectively. We do not have long-term contractual
arrangements with any of our customers and they can cancel their orders at any
time prior to delivery. A substantial reduction in or termination of orders from
any of our largest customers would decrease our revenues and cash flow.

WE ARE RELYING ON ONE FACTORY TO MANUFACTURE AND PRODUCE THE MAJORITY OF OUR
KARAOKE MACHINES FOR FISCAL 2005, AND IF THE RELATIONSHIP WITH THIS FACTORY IS
DAMAGED OR INJURED IN ANY WAY, IT WOULD REDUCE OUR REVENUES AND PROFITABILITY.

We have worked out a verbal agreement with a factory in China to produce
all of our karaoke machines for fiscal 2005. We owe this factory approximately
$2.4 million as of June 30, 2004 and have worked out a payment plan with it. See
"Liquidity" beginning on page 17. If the factory is unwilling or unable to
deliver our karaoke machines to us, our business will be adversely affected.
Because our cash on hand is minimal, we are relying on revenues received from
the sale of our ordered karaoke machines to provide cash flow for our
operations. If we do not receive cash from these sales, we may not be able to
continue our business operations.

WE ARE SUBJECT TO THE RISK THAT SOME OF OUR LARGE CUSTOMERS MAY RETURN KARAOKE
PRODUCTS THAT THEY HAVE PURCHASED FROM US AND IF THIS HAPPENS, IT WOULD REDUCE
OUR REVENUES AND PROFITABILITY.

In fiscal 2004 and 2003, a number of our customers and distributors
returned karaoke products that they had purchased from us. Our customers
returned goods valued at $1.8 million, or 2.5% of our net sales in fiscal 2004.
Best Buy, one of our largest customers, returned approximately $2.75 million in
karaoke products that it had not been able to sell during the Christmas season
in fiscal 2003. Best Buy agreed to keep this inventory in its retail stores, but
converted the sale to a consignment sale. Although we were not contractually
obligated to accept this return of the karaoke products in fiscal 2004 or fiscal
2003, we accepted the return of the karaoke products because we valued our
relationship with our customers. Because we are dependent upon a few large
customers, we are subject to the risk that any of these customers may elect to
return unsold karaoke products to us in the future. If any of our customers were
to return karaoke products to us, it would reduce our revenues and
profitability.

WE ARE SUBJECT TO PRESSURE FROM OUR CUSTOMERS RELATING TO PRICE REDUCTION AND
FINANCIAL INCENTIVES AND IF WE ARE PRESSURED TO MAKE THESE CONCESSIONS TO OUR
CUSTOMERS, IT WILL REDUCE OUR REVENUES AND PROFITABILITY.

Because there is intense competition in the karaoke industry, we are
subject to pricing pressure from our customers. Many of our customers have
demanded that we lower our prices or they will buy our competitor's products. If
we do not meet our customer's demands for lower prices, we will not sell as many
karaoke products. In our fiscal year ended March 31, 2004, our sales to
customers in the United States decreased because of increased price competition.
During fiscal 2004, we sold 20.2% of our karaoke machines at prices that were
equal to or below cost. We will not be able to stay in business if we continue
to sell our karaoke machines at prices that are at or below cost. We are also
subject to pressure from our customers regarding certain financial incentives,
such as return credits or large advertising or cooperative advertising
allowances, which effectively reduce our selling prices. In fiscal 2004, we gave
our customers $2.1 million of credit on account because the sell-through of our
products was not as strong as we had expected. We also gave them advertising
allowances in the amount of $2.3 million during fiscal 2004 and $4.1 million
during fiscal 2003. We have historically offered advertising allowances to our
customers because it is standard practice in the retail industry.

WE EXPERIENCE DIFFICULTY FORECASTING THE DEMAND FOR OUR KARAOKE PRODUCTS AND IF
WE DO NOT ACCURATELY FORECAST DEMAND, OUR REVENUES, NET INCOME AND CASH FLOW MAY
BE AFFECTED.

Because of our reliance on manufacturers in Asia for our machine
production, our production lead times range from one to four months. Therefore,
we must commit to production in advance of customers orders. It is difficult to
forecast customer demand because we do not have any scientific or quantitative
method to predict this demand. Our forecasting is based on management's general
expectations about customer demand, the general strength of the retail market
and management's historical experiences. We overestimated demand for our
products in fiscal 2004 and had $25.2 million in inventory as of March 31, 2003.
Because of this excess inventory, we had liquidity problems in fiscal 2004 and
our revenues, net income and cash flow were adversely affected. We had a net
loss of $22.7 million in fiscal 2004 and our cash flow was limited in fiscal
2004.

WE ARE SUBJECT TO THE COSTS AND RISKS OF CARRYING INVENTORY FOR OUR CUSTOMERS
AND IF WE HAVE TOO MUCH INVENTORY, IT WILL AFFECT OUR REVENUES AND NET INCOME.

Many of our customers place orders with us several months prior to the
holiday season, but they schedule delivery two or three weeks before the holiday
season begins. As such, we are subject to the risks and costs of carrying
inventory during the time period between the placement or the order and the
delivery date, which reduces our cash flow. As of March 31, 2003, we had $25.2
million in inventory on hand, which impacted our cash flow and liquidity from
operations in fiscal 2004. As of March 31, 2004, our inventory was valued at
$5.2 million, after a $6.6 million reserve had been taken. It is important that
we sell this inventory during fiscal 2005, so we have sufficient cash flow for
operations.

OUR GROSS PROFIT MARGINS HAVE DECREASED OVER THE PAST YEAR AND WE EXPECT
COMPETITIVE MARKET.

Over the past year, our gross profit margins have decreased. In the fiscal
year ended March 31, 2004, our gross profit margin was 2.6% of net sales
compared to 24.4% of net sales in fiscal year ended March 31, 2003. This decline
resulted from the closeout of older models and excessive inventory, price
competition and increased sales by International SMC. Sales made by
International SMC increased from 52% of our sale in fiscal 2003 to 61% in Fiscal
2004. International SMC delivers our karaoke products to customers directly from
our manufacturer's factories in China and therefore does not provide logistics,
handling, warehousing and just in time inventory support, which services are
provided by our parent company in the United States. Accordingly, the average
sales price per unit realized by International SMC is significantly lower than
that of our parent company in the United States. We expect further price
competition and a continuing shift of sales volume to International SMC.
Accordingly, we expect that our gross profit margin will decrease in fiscal
2005.

OUR SENIOR CORPORATE MANAGEMENT TEAM IS NEW TO THE SINGING MACHINE AND IS
REQUIRED TO DEVOTE SIGNIFICANT ATTENTION TO OUR FINANCING AGREEMENTS AND
SETTLING OUR CLASS ACTION LAWSUITS.

Beginning on May 2, 2003, through the present date, four of our executive
officers have resigned We hired a new Chief Operating Officer, Yi Ping Chan on
April 1, 2003, and a new Chief Financial Officer, Jeff Barocas, on April 9,
2004. Three new directors have joined our Board since October 31, 2004 and one
of them has resigned since that date. Bernard Appel joined our Board effective
as of October 31 and Harvey Judkowitz joined on March 29, 2004. Richard Ekstract

jointed our Board on October 31, 2003 and resigned for personal reasons on June
2, 2004. We are in the process of searching for a new Chief Executive Officer
and new directors. It will take some time for our new management and our new
board of directors to learn about our business and to develop strong working
relationships with each other and our employees. Our new senior corporate
management's ability to complete this process has been and continues to be
hindered by the time that it needs to devote to other pressing business matters.
New management needs to spend significant time on overseeing our liquidity
situation and overseeing legal matters, such as our class action lawsuit. We
cannot assure you that this major restructuring of our board of directors and
senior management and the accompanying distractions, in this environment, will
not adversely affect our results of operations.

THE SEC IS CONDUCTING AN INFORMAL INVESTIGATION OF THE COMPANY AND IF WE HAVE
DONE SOMETHING ILLEGAL, WE WILL BE SUBJECT TO FINES, PENALTIES AND OTHER
SANCTIONS BY THE SEC.

In August 2003, we were advised that the SEC had commenced an informal
investigation of our company. It appears that the investigation is focused on
the restatement of our financial statements in fiscal 2002 and 2001; however,
the SEC may be reviewing other issues as well. If the SEC finds that our company
has not fully complied with all applicable federal securities laws, we could be
subject to fines, penalties and other sanctions imposed by the SEC.

WE ARE NAMED AS A DEFENDANT IN A CLASS ACTION LAWSUIT RELATING TO THE
RESTATEMENT OF OUR FINANCIAL STATEMENTS FOR FISCAL 2002 AND FISCAL 2001, WHICH
IF DETERMINED ADVERSELY TO US, COULD RESULT IN THE IMPOSITION OF DAMAGES AGAINST
US AND HARM OUR BUSINESS AND FINANCIAL CONDITION.

We are named as a defendant in a class action lawsuit which arose from the
restatement of our financial statements for fiscal 2002 and 2001. In this
lawsuit, the plaintiffs allege that our executive officers and our company
violated Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934
and Rule 10(b)-5. The plaintiffs seek compensatory damages, attorney's fees and
injunctive relief. While the specific factual allegations vary slightly in each
case, the complaints generally allege that our officers falsely represented the
Company's financial results during the relevant class periods. In March 2004, we
have entered into a settlement agreement with the class action plaintiffs. See
"Business - Legal Matters." This settlement is subject to approval by the court
and the shareholders who are members of the class action lawsuit at a hearing
which will be held on July 30, 2004.

If this settlement agreement is not approved by the court and members of
the class action lawsuit, we will need to expend additional times and resources
on resolving this matter, whether through continued settlement discussions or
through litigation. If a significant monetary judgment is rendered against us,
we are not certain that we will have the ability to pay such a judgment. Any
losses resulting from these claims could adversely affect our profitability and
cash flow.

OUR LICENSING AGREEMENT WITH MTV NETWORKS IS IMPORTANT TO OUR BUSINESS AND IF WE
WERE TO LOSE OUR MTV LICENSE IT WOULD AFFECT OUR REVENUES AND PROFITABILITY.

Our license with MTV Networks is important to our business. We generated
11.8% and 32.3% of our consolidated net sales from products sold under the MTV
license in fiscal 2004 and 2003, respectively. Our MTV license was extended
until July 30, 2004 with options for MTV to renew for an additional four months
period through December 31, 2004. If we were to lose our MTV license, it would
have an effect on our revenues and net income.

OUR BUSINESS IS SEASONAL AND THEREFORE OUR ANNUAL OPERATING RESULTS WILL DEPEND,
IN LARGE PART, ON OUR SALES DURING THE RELATIVELY BRIEF HOLIDAY SEASON.

Sales of consumer electronics and toy products in the retail channel are
highly seasonal, with a majority of retail sales occurring during the period
from September through December in anticipation of the holiday season, which
includes Christmas. A substantial majority of our sales occur during the second
quarter ended September 30 and the third quarter ended December 31. Sales in our
second and third quarter, combined, accounted for approximately 86% of net sales
in fiscal 2004, and 2003 and 81% of net sales in fiscal 2002.

IF WE ARE UNABLE TO COMPETE IN THE KARAOKE PRODUCTS CATEGORY, OUR REVENUES AND
NET PROFITABILITY WILL BE REDUCED.

Our major competitors for karaoke machines and related products are Craig
and Memorex. We believe that competition for karaoke machines is based primarily
on price, product features, reputation, delivery times, and customer support.
Our primary competitors for producing karaoke music are Compass, Pocket Songs,
Sybersound, UAV and Sound Choice. We believe that competition for karaoke music
is based primarily on popularity of song titles, price, reputation, and delivery
times. To the extent that we lower prices to attempt to enhance or retain market
share, we may adversely impact our operating margins. Conversely, if we opt not
to match competitor's price reductions we may lose market share, resulting in
decreased volume and revenue. To the extent our leading competitors reduce
prices on their karaoke machines and music, we must remain flexible to reduce
our prices. If we are forced to reduce our prices, it will result in lower
margins and reduced profitability. Because of intense competition in the karaoke
industry in the United States during fiscal 2004, we expect that the intense
pricing pressure in the low end of the market will continue in the karaoke
market in the United States in fiscal 2005. In addition, we must compete with
all the other existing forms of entertainment including, but not limited to:
motion pictures, video arcade games, home video games, theme parks, nightclubs,
television and prerecorded tapes, CD's and video cassettes.

IF WE ARE UNABLE TO DEVELOP NEW KARAOKE PRODUCTS, OUR REVENUES MAY NOT CONTINUE
TO GROW.

The karaoke industry is characterized by rapid technological change,
frequent new product introductions and enhancements and ongoing customer demands
for greater performance. In addition, the average selling price of any karaoke
machine has historically decreased over its life, and we expect that trend to
continue. As a result, our products may not be competitive if we fail to
introduce new products or product enhancements that meet evolving customer
demands. The development of new products is complex, and we may not be able to
complete development in a timely manner, or at all. Edward Steele, our former
Chief Executive Officer, has overseen our Product Development for the past
twelve years. Mr. Steele currently serves as a Senior Advisor and Director of
Product Development under a contract which expires on February 28, 2005. We have
not yet identified a successor who will oversee product development if Mr.
Steele were to leave our company. To introduce products on a timely basis, we
must:

o accurately define and design new products to meet market needs;

o design features that continue to differentiate our products from
those of our competitors;

o transition our products to new manufacturing process technologies;

o identify emerging technological trends in our target markets;

o anticipate changes in end-user preferences with respect to our
customers' products;

o bring products to market on a timely basis at competitive prices;
and

o respond effectively to technological changes or product
announcements by others.

We believe that we will need to continue to enhance our karaoke machines
and develop new machines to keep pace with competitive and technological
developments and to achieve market acceptance for our products.

OUR PRODUCTS ARE SHIPPED FROM CHINA AND ANY DISRUPTION OF SHIPPING COULD PREVENT
OR DELAY OUR CUSTOMERS' RECEIPT OF INVENTORY.

We rely principally on four contract ocean carriers to ship virtually all
of the products that we import to our warehouse facility in Compton California.
Retailers that take delivery of our products in China rely on a variety of
carriers to import those products. Any disruptions in shipping, whether in
California or China, caused by labor strikes, other labor disputes, terrorism,
and international incidents or otherwise prevent or delay our customers' receipt
of inventory. If our customers do not receive their inventory on a timely basis,
they may cancel their orders or return products to us. Consequently, our
revenues and net income would be reduced.

OUR MANUFACTURING OPERATIONS ARE LOCATED IN THE PEOPLE'S REPUBLIC OF CHINA,
SUBJECTING US TO RISKS COMMON IN INTERNATIONAL OPERATIONS. IF THERE IS ANY
PROBLEM WITH THE MANUFACTURING PROCESS, OUR REVENUES AND NET PROFITABILITY MAY
BE REDUCED.

We are dependent upon six factories in the People's Republic of China to
manufacture the majority of our karaoke machines. These factories will be
producing approximately 95% of our karaoke products in fiscal 2005. We do not
have written agreements with any of these factories. Our arrangements with these
factories are subject to the risks of doing business abroad, such as import

duties, trade restrictions, work stoppages, and foreign currency fluctuations,
limitations on the repatriation of earnings and political instability, which
could have an adverse impact on our business. Furthermore, we have limited
control over the manufacturing processes themselves. As a result, any
difficulties encountered by our third-party manufacturers that result in product
defects, production delays, cost overruns or the inability to fulfill orders on
a timely basis could adversely affect our revenues, profitability and cash flow.
Also, since we do not have written agreements with any of these factories, we
are subject to additional uncertainty if the factories do not deliver products
to us on a timely basis.

WE DEPEND ON THIRD PARTY SUPPLIERS FOR PARTS FOR OUR KARAOKE MACHINES AND
RELATED PRODUCTS, AND IF WE CANNOT OBTAIN SUPPLIES AS NEEDED, OUR OPERATIONS
WILL BE SEVERELY DAMAGED.

Our growth and ability to meet customer demand depends in part on our
capability to obtain timely deliveries of karaoke machines and our electronic
products. We rely on third party suppliers to produce the parts and materials we
use to manufacture and produce these products. If our suppliers are unable to
provide our factories with the parts and supplies, we will be unable to produce
our products. We cannot guarantee that we will be able to purchase the parts we
need at reasonable prices or in a timely fashion. In the last several years,
there have been shortages of certain chips that we use in our karaoke machines.
If we are unable to anticipate any shortages of parts and materials in the
future, we may experience severe production problems, which would impact our
sales.

CONSUMER DISCRETIONARY SPENDING MAY AFFECT KARAOKE PURCHASES AND IS AFFECTED BY
VARIOUS ECONOMIC CONDITIONS AND CHANGES.

Our business and financial performance may be damaged more than most
companies by adverse financial conditions affecting our business or by a general
weakening of the economy. Purchases of karaoke machines and music are considered
discretionary for consumers. Our success will therefore be influenced by a
number of economic factors affecting discretionary and consumer spending, such
as employment levels, business, interest rates, and taxation rates, all of which
are not under our control. Additionally, other extraordinary events such as
terrorist attacks or military engagements, which adversely affect the retail
environment may restrict consumer spending and thereby adversely affect our
sales growth and profitability.

WE MAY HAVE INFRINGED THE COPYRIGHTS OF CERTAIN MUSIC PUBLISHERS AND IF WE
VIOLATE FEDERAL COPYRIGHT LAWS, WE WILL BE SUBJECT TO MONETARY PENALTIES.

Over the past several years, we have received notices from several music
publishers who have alleged that we did not have the proper copyright licenses
to sell certain songs included in our compact discs with graphics discs
("CDG"s). CDG's are compact discs which contain the musical recordings of the
karaoke songs and graphics which contain the lyrics of the songs. We have
settled or are in the process of settling all of these copyright infringement
issues with these publishers. We have spent approximately $70,000 to settle
these copyright infringement suits in fiscal year 2003 and 2004. These copyright
infringement claims may have a negative effect on our ability to sell our music
products to our customers. If we do not have the proper copyright licenses for
any other songs that are included in our CD+G's and cassettes, we will be
subject to additional liability under the federal copyright laws, which could
include settlements with the music publishers and payment of monetary damages.

WE MAY BE SUBJECT TO CLAIMS FROM THIRD PARTIES FOR UNAUTHORIZED USE OF THEIR
PROPRIETARY TECHNOLOGY, COPYRIGHTS OR TRADE SECRETS AND ANY CLAIMS ASSERTED
AGAINST US COULD AFFECT OUR NET PROFITABILITY.

We believe that we independently developed the technology used in our
electronic and audio software products and that it does not infringe on the
proprietary rights, copyrights or trade secrets of others. However, we cannot
assure you that we have not infringed on the proprietary rights of third parties
or those third parties will not make infringement violation claims against us.
During fiscal 2000, Tanashin Denki, Ltd., a Japanese company that holds a patent
on a cassette tape drive mechanism alleged that some of our karaoke machines
violated their patents. We settled the matters with Tanashin in December 1999.
Subsequently in December 2002, Tanashin again alleged that some of our karaoke
machines violated their patents. We entered into another settlement agreement
with them in May 2003. In addition to Tanashin, we could receive infringement
claims from other third parties. Any infringement claims may have a negative
effect on our profitability and financial condition.

WE ARE EXPOSED TO THE CREDIT RISK OF OUR CUSTOMERS, WHO ARE EXPERIENCING
FINANCIAL DIFFICULTIES, AND IF THESE CUSTOMERS ARE UNABLE TO PAY US, OUR
REVENUES AND PROFITABILITY WILL BE REDUCED.

We sell products to retailers, including department stores, lifestyle
merchants, direct mail retailers, which are catalogs and showrooms, national
chains, specialty stores, and warehouse clubs. Some of these retailers, such as
K-Mart, FAO Schwarz and KB Toys, have engaged in leveraged buyouts or
transactions in which they incurred a significant amount of debt, and operated
under the protection of bankruptcy laws. As of June 1, 2004, we are aware of
only two customers, FAO Schwarz and KB Toys, which are operating under the
protection of bankruptcy laws. Deterioration in the financial condition of our
customers could result in bad debt expense to us and have a material adverse
effect on our revenues and future profitability.

A DISRUPTION IN THE OPERATION OF OUR WAREHOUSE CENTERS IN CALIFORNIA OR FLORIDA
COULD IMPACT OUR ABILITY TO DELIVER MERCHANDISE TO OUR STORES, WHICH COULD
ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY.

A significant amount of our merchandise is shipped to our customers from
one of our two warehouses, which are located in Compton, California, and Coconut
Creek, Florida. Events such as fire or other catastrophic events, any
malfunction or disruption of our centralized information systems or shipping
problems may result in delays or disruptions in the timely distribution of
merchandise to our customers, which could substantially decrease our revenues
and profitability.

OUR BUSINESS OPERATIONS COULD BE DISRUPTED IF THERE ARE LABOR PROBLEMS ON THE
WEST COAST.

During fiscal 2004, approximately 39% of our sales were domestic warehouse
sales, which were made from our warehouses in California and Florida. During the
third quarter of fiscal 2003, the dock strike on the West Coast affected sales
of two of our karaoke products and we estimate that we lost between $3 and $5
million in orders because we couldn't get the containers of these products off
the pier. If another strike or work slow-down occurs and we do not have a
sufficient level of inventory, a strike or work slow-down would result in
increased costs to us and may reduce our profitability.

THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE WHICH MAY CAUSE INVESTORS
TO LOSE ALL OR A PORTION OF THEIR INVESTMENT.

From June 1, 2003 through June 1, 2004, our common stock has traded
between a high of $6.55 and a low of $0.65. During this period, we have restated
our earnings, lost senior executives and Board members, had liquidity problems,
and incurred a net loss of $22.7 million in fiscal 2004. Our stock price may
continue to be volatile based on similar or other adverse developments in our
business. In addition, the stock market periodically experiences significant
adverse price and volume fluctuations which may be unrelated to the operating
performance of particular companies.

IF INVESTORS SHORT OUR SECURITIES, IT MAY CAUSE OUR STOCK PRICE TO DECLINE.

During the past year, a number of investors have held a short position in
our common stock. As of July 7, 2004, investors hold a short position in 252,000
shares of our common stock which represents 4.1% of our public float. The
anticipated downward pressure on our stock price due to actual or anticipated
sales of our stock by some institutions or individuals who engage in short sales
of our common stock could cause our stock price to decline. Additionally, if our
stock price declines, it may be more difficult for us to raise capital.

OUR OBLIGATION TO MAKE SEVERANCE PAYMENTS COULD PREVENT OR DELAY TAKEOVERS.

Our employment agreement with Yi Ping Chan requires us, under certain
conditions, to make substantial severance payments to him if he resigns after a
change of control. As of March 31, 2004, Mr. Chan is entitled to severance
payments of $250,000. These provisions could delay or impede a merger, tender
offer or other transaction resulting in a change in control of the Singing
Machine, even if such a transaction would have significant benefits to our
shareholders. As a result, these provisions could limit the price that certain
investors might be willing to pay in the future for shares of our common stock.
See "Executive Compensation - Employment Agreements" on page 33.

RISKS ASSOCIATED WITH OUR CAPITAL STRUCTURE

OUR COMMON STOCK MAY BE DELISTED FROM THE AMERICAN STOCK EXCHANGE, WHICH MAY
HAVE A MATERIAL ADVERSE IMPACT ON THE PRICING AND TRADING OF OUR COMMON STOCK.

Our common stock is quoted on the American Stock Exchange ("Amex"). The
Amex, as a matter of policy, will consider the suspension of trading in, or
removal from listing of, any stock when, in the opinion of Amex, (i) the
financial condition and/or operating results of an issuer appear to be
unsatisfactory; (ii) it appears that the extent of public distribution or the
aggregate market value of the stock has become so reduced as to make further
dealings on the Amex inadvisable; (iii) the issuer has sold or otherwise
disposed of its principal operating assets; or (iv) the issuer has sustained
losses which are so substantial in relation to its overall operations or its
existing financial condition has become so impaired that it appears
questionable, in the opinion of Amex, whether the issuer will be able to
continue operations and/or meet its obligations as they mature.

As of June 30, 2004, we have not received any notices from AMEX notifying
us that they will delist us. However, we cannot assure you that Amex will not
take any actions in the near future to delist our common stock. If our common
stock were delisted from the Amex, we would trade on the Over-the-Counter
Bulletin Board and the market price for shares or our common stock could
decline. Further, if our common stock is removed from listing on Amex, it may
become more difficult for us to raise funds through the sale of our common stock
or securities convertible into our common stock.

IF OUR OUTSTANDING DERIVATIVE SECURITIES ARE EXERCISED OR CONVERTED, OUR
EXISTING SHAREHOLDERS WILL SUFFER DILUTION.

As of March 31, 2004, there were outstanding stock options to purchase an
aggregate of 1,027,530 shares of common stock at exercise prices ranging from
$1.30 to $14.30 per share, not all of which are immediately exercisable. The
weighted average exercise price of the outstanding stock options is
approximately $3.95 per share. As of March 31, 2004, there were outstanding
immediately exercisable option to purchase an aggregate of 912,168 shares of our
common stock. There were outstanding stock warrants to purchase 591,040 shares
of common stock at exercise prices ranging from $1.52 to $4.03 per share, all of
which are exercisable. The weighted average exercise price of the outstanding
stock warrants is approximately $3.98 per share. In addition, we have issued
$4,000,000 of convertible debentures, which are initially convertible into an
aggregate of 1,038,962 shares of common stock. To the extent that the
aforementioned convertible securities are exercised or converted, dilution to
our stockholders will occur.

THE $4 MILLION PRIVATE PLACEMENT THAT WE CLOSED IN SEPTEMBER 2003 WILL AFFECT
OUR ABILITY TO RAISE CAPITAL IN THE FUTURE.

On September 8, 2003, we closed a private offering in which we issued $4
million of convertible debentures and stock purchase warrants to six
institutional investors. As part of this investment, we agreed to several
limitations on our corporate actions, some of which limit our ability to raise
financing in the future. If we enter into any financing transactions during the
one year period prior to September 8, 2004, we need to offer the institutional
investors the right to participate in such offering in an amount equal to the
greater of (a) the principal amount of the debentures currently outstanding or
(b) 50% of the financing offered to the outside investment group. For example,
if we offer to sell $10 million worth of our securities to an outside investment
group, the institutional investors will have the right to purchase up to $5
million of the offering. This right may affect our ability to attract other
investors if we require external financing to remain in operations. Furthermore,
for a period of 90 days after the effective date of the registration statement
registering shares of common stock issuable upon conversion of the convertible
debentures and the warrants, we cannot sell any securities.

Additionally, we cannot:

o sell any of our securities in any transactions where the exercise
price is adjusted based on the trading price of our common stock at
any time after the initial issuance of such securities.

o sell any securities which grant investors the right to receive
additional shares based on any future transaction on terms more
favorable than those granted to the investor in the initial offering

These limitations are in place until the earlier of February 20, 2006 or
the date on which all the debentures are converted into shares of our common
stock.

IF WE SELL ANY OF OUR SECURITIES AT A PRICE LOWER THAN $3.85 PER SHARE, THE
CONVERSION PRICE OF OUR DEBENTURES AT $3.85 PER SHARE WILL BE REDUCED AND THERE
WILL BE ADDITIONAL DILUTION TO OUR SHAREHOLDERS.

Given that our common stock is trading at a price of $0.50 per share as of
June 30, 2004, it is possible that we may need to sell additional securities for
capital at a price lower than $3.85 per share. If we sell any securities at a
price lower than $3.85 per share, the conversion price of our debentures
currently set at $3.85 per share will be reduced and there will be more dilution
to our shareholders if and when the debentures are converted into shares of our
common stock. If we issue or sell any securities at a price less than $3.85 per
share prior to September 8, 2004, the set price of the debentures will be
reduced by an amount equal to 75% of the difference between the set price and
the effective purchase price for the shares If such dilutive issuances occur
after September 8, 2004 but before the earlier of February 20, 2006 or when all
the debentures are converted into shares of our common stock, the set price will
be reduced by an amount equal to 50% of the difference between the set price and
effective purchase price of such shares. So, if we sold 1 million shares of our
common stock on June 30, 2004 for a price of $0.50 per share, the set price of
the debentures would be reduced by $2.51 to $1.34 and the aggregate number of
shares of our common stock that would be issued upon conversion of the
debentures would be increased from 1,038,962 shares to 2,985,075 shares. If the
price of our securities continues to decrease, and we continue to issue or sell
our securities at price below $3.85 per share, our obligation to issue shares
upon conversion of the debentures is essentially limitless.

FUTURE SALES OF OUR COMMON STOCK HELD BY CURRENT STOCKHOLDERS AND INVESTORS MAY
DEPRESS OUR STOCK PRICE.

As of March 31, 2004, there were 8,752,318 shares of our common stock
outstanding. Of these shares, approximately 5,954,796 shares are eligible for
sale under Rule 144. We have filed two registration statements registering an
aggregate 3,794,250 of shares of our common stock (a registration statement on
Form S-8 to register the sale of 1,844,250 shares underlying options granted
under our 1994 Stock Option Plan and a registration statement on Form S-8 to
register 1,950,000 shares of our common stock underlying options granted under
our Year 2001 Stock Option Plan). An additional registration statement on Form
S-1, of which this Prospectus is a part, was filed in October 2003, registering
an aggregate of 2,795,465 shares of our common stock. The market price of our
common stock could drop due to the sale of large number of shares of our common
stock, such as the shares sold pursuant to the registration statements or under
Rule 144, or the perception that these sales could occur.

OUR STOCK PRICE MAY DECREASE IF WE ISSUE ADDITIONAL SHARES OF OUR COMMON STOCK.

Our Certificate of Incorporation authorizes the issuance of 18,900,000
shares of common stock. As of March 31, 2004, we had 8,752,318 shares of common
stock issued and outstanding and an aggregate of 1,681,570 shares issuable under
our outstanding options and warrants. We also have an obligation to issue up to
1,038,962 shares upon conversion of our debentures and have reserved 207,791
additional shares for interest payment on the debentures. As such, our Board of
Directors has the power, without stockholder approval, to issue up to 7,282,359
shares of common stock.

Any issuance of additional shares of common stock, whether by us to new
stockholders or the exercise of outstanding warrants or options, may result in a
reduction of the book value or market price of our outstanding common stock.
Issuance of additional shares will reduce the proportionate ownership and voting
power of our then existing stockholders.

PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAKE IT DIFFICULT FOR A
THIRD PARTY TO ACQUIRE OUR COMPANY AND COULD DEPRESS THE PRICE OF OUR COMMON
STOCK.

Delaware law and our certificate of incorporation and bylaws contain
provisions that could delay, defer or prevent a change in control of our company
or a change in our management. These provisions could also discourage proxy
contests and make it more difficult for you and other stockholders to elect
directors and take other corporate actions. These provisions of our restated
certificate of incorporation include: authorizing our board of directors to
issue additional preferred stock, limiting the persons who may call special
meetings of stockholders, and establishing advance notice requirements for
nominations for election to our board of directors or for proposing matters that
can be acted on by stockholders at stockholder meetings.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact our financial
position, results of operations or cash flows due to adverse changes in
financial and commodity market prices and interest rates. We are exposed to
market risk in the areas of changes in United States and international borrowing
rates and changes in foreign currency exchange rates. In addition, we are
exposed to market risk in certain geographic areas that have experienced or
remain vulnerable to an economic downturn, such as China. We purchase
substantially all our inventory from companies in China, and, therefore, we are
subject to the risk that such suppliers will be unable to provide inventory at
competitive prices. While we believe that, if such an event were to occur we
would be able to find alternative sources of inventory at competitive prices, we
cannot assure you that we would be able to do so. These exposures are directly
related to our normal operating and funding activities. Historically and as of
March 31, 2004, we have not used derivative instruments or engaged in hedging
activities to minimize market risk.

INTEREST RATE RISK

As or March 31, 2004, we do not have any exposure to market risk resulting
from changes in interest rates. We have $4 million in convertible notes, which
have a fixed interest rate of 8.5% effective as of February 9, 2004.

FOREIGN CURRENCY RISK

We have a wholly-owned subsidiary in Hong Kong. Sales by these operations
made on a FOB China or Hong Kong basis are dominated in U.S. dollars. However,
purchases of inventory and Hong Kong operating expenses are typically
denominated in Hong Kong dollars, thereby creating exposure to changes in
exchange rates. Changes in the Hong Kong dollar/U.S. dollar exchange rates may
positively or negatively affect our gross margins, operating income and retained
earnings. We do not believe that near-term changes in the exchange rates, if
any, will result in a material effect on our future earnings, fair values or
cash flows, and therefore, we have chosen not to enter into foreign currency
hedging transactions. We cannot assure you that this approach will be
successful, especially in the event of a significant and sudden change in the
value of the Hong Kong dollar.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The financial statements and supplemental data required pursuant to this
Item 8 are included in this Annual Report on Form 10-K, as a separate section
commencing on page F-1 and are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

CHANGE OF ACCOUNTANTS IN MARCH 2003

On March 24, 2003, we dismissed Salberg & Company, P.A. ("Salberg &
Company"), as our independent certified public accountant. On March 27, 2003, we
engaged Grant Thornton, LLP ("Grant Thornton"), as our independent registered
public accounting firm. Our decision to change accountants was approved by our
Audit Committee on March 24, 2003.

The report of Salberg & Company on our consolidated financial statements
for fiscal 2002, fiscal 2001 did not contain an adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles. Furthermore, Salberg & Company did not advise us that:

1) internal controls necessary to develop reliable consolidated
financial statements did not exist, or

2) information had come to the attention of Salberg & Company which
made in unwilling to rely upon management's representations or made
it unwilling to be associated with the consolidated financial
statements prepared by management, or

3) the scope of the audit should be expanded significantly, or
information had come to the attention of Salberg & Company that it
has concluded will, or if further investigated might, materially
impact the fairness or reliability of a previously issued audit
report or the underlying consolidated financial statements, or the
consolidated financial statements issued or to be issued covering
the fiscal periods subsequent to March 31, 2002 (including
information that may prevent it from rendering an unqualified audit
report on those consolidated financial statements) or made in
unwilling to rely on management's representations or to be
associated with the consolidated financial statements prepared by
management or,

4) information has come to the attention of Salberg & Company that it
has concluded will, or if further investigated might, materially
impact the fairness or reliability of a previously issued audit
report or the underlying consolidated financial statements or the
consolidated financial statements issued or to be issued covering
the fiscal periods subsequent to March 31, 2002 through March 28,
2003, the date of the Form 8-K filing reporting our change in
accountants, that had not been resolved to the satisfaction of
Salberg & Company or which would have prevented Salberg & Company
from rendering an unqualified audit report on such consolidated
financial statements.

During our two most recent fiscal years and subsequent interim periods
through March 24, 2003, there were no disagreements with Salberg & Company on
any matters of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which, if not resolved to the
satisfaction of Salberg & Company would have caused it to make reference to the
subject matter of the disagreements in connection with its reports on these
financial statements for those periods.

We did not consult with Grant Thornton regarding the application of
accounting principles to a specific transaction, either completed or proposed,
or the type of audit opinion that might be rendered on our financial statements,
and no written or oral advice was provided by Grant Thornton that was a factor
considered by us in reaching a decision as to the accounting, auditing or
financial reporting issues.

RESTATEMENT

In July 2003, we revised our position on the taxation of the income of our
Hong Kong subsidiary by the United States and Hong Kong tax authorities, which
was contained in our audited financial statements for fiscal 2002. We discussed
these issues with Salberg & Company and it agreed to opine on the restated
financial statements. See "Restatement of Financial Statements" - Page 21.

ITEM 9A. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation ("Evaluation") of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rule
13a-15(f) or Rule 15d-15(f) under the Securities Exchange Act of 1934, within 90
days of the filing date of this report (the "Evaluation Date"). In the course of
the Evaluation, we identified significant material weaknesses in our internal
disclosure controls and procedures.

Management and Grant Thornton, have advised our Audit Committee that
during the course of the audit, they noted deficiencies in internal controls
relating to:

o weakness in our financial reporting process as a result of a lack of
adequate staffing in the accounting department, and

o accounting for consigned inventory and inventory costing.

Grant Thornton has advised the Audit Committee that each of these internal
control deficiencies constitute a material weakness as defined in Statement of
Auditing Standards No. 60. Certain of these internal control weaknesses may also
constitute material weaknesses in our disclosure controls. We have performed
substantial additional procedures designed to ensure that these internal control
deficiencies did not lead to material misstatements in our consolidated
financial statements and to enable the completion of Grant Thornton's audit of
our consolidated financial statements, notwithstanding the presence of the
internal control weaknesses noted above. Based on these additional procedures,
the Chief Executive Officer and Chief Financial Officer have concluded that as
of the Evaluation Date our disclosure controls and procedures are effective
except as described above, to ensure that the information required to be
disclosed by us in reports that we file or submit under the Securities Exchange
Act of 1934 are recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.

We have not yet been able to implement any substantial corrective actions
as of the date of this Annual Report on Form 10-K. We intend to implement
changes promptly to address these issues, and will consider implementation of
the following corrective actions as well as additional procedures:

1. Retention of outside professional advisors to evaluate our existing
internal controls and disclosure controls and make suggestions for
implementation;

2. Retention of additional personnel in finance positions;

3. Review and revision of our procedure for reporting consigned
inventory and inventory costing;

4. Use of significant outside resources to supplement our employees in
the preparation of the consolidated financial statements and other
reports filed or submitted under the Securities Exchange Act of
1934.

We will continue to evaluate the effectiveness of its disclosure controls
and internal controls and procedures on an ongoing basis, and will take further
action as appropriate.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information with respect to
our executive officers, directors and significant employees as of March 31,
2004.

NAME AGE POSITION
------------------ ----- ---------------------------------------------------------

Yi Ping Chan 40 Interim CEO, Chief Operating Officer, Director, Secretary
April J. Green* 40 Chief Financial Officer
John Dahl* 30 Executive Vice President of Finance
Josef A. Bauer 65 Chairman
Harvey Judkowitz 58 Director
Bernard Appel 72 Director
Richard Ekstract* 72 Director

------------
* Each of these persons has resigned subsequent to March 31, 2004.

Yi Ping Chan has served as our Chief Operating Officer from May 2, 2003
and as our Interim Chief Executive Officer since October 17, 2003. Prior to this
appointment, Chan was a consultant to Singing Machine. Mr. Chan was a founder
and general partner of MaxValue Capital Ltd., a Hong Kong-based management
consulting and investment firm, and co-founder and director of E Technologies
Ltd., Hong Kong, which specialized in health care technology transfer from April
1996 to March 2003. Prior to that, he was Chief Strategist and Interim CFO from
January 2000 to June 2002 of a Hong Kong-based IT and business process
consulting firm with operations in Hong Kong, China and the US. He also held a
senior management position with a Hong Kong-based venture capital and technology
holding company with operations in Hong Kong, China and the US. Mr. Chan earned
an MBA in 1994 and a MSEE in 1990 from Columbia University, and a BSEE with
Magna Cum Laude in 1987 from Polytechnic University, New York.

April Green served as our Chief Financial Officer from March 15, 2002
through April 9, 2004. She joined our company in June 1999 as our controller and
was promoted to the position of Director of Finance & Administration in January
1, 2000. She resigned as our Chief Financial Officer on April 9, 2004 and was
replaced by Jeff Barocas, our new Chief Financial Officer. See "New Chief
Financial Officer" on page 29 and "Separation Agreements" in exhibit 10.9. Prior
to joining us, Ms. Green held various positions of increasing responsibility
with Monogram International, a large, Florida-based novelty and toy company from
February 1993 to June 1999. At Monogram, Ms. Green rose from Staff Accountant to
Controller. Prior to June 1999, she served in a variety of financial positions
in the automotive industry in the Tampa area. Ms. Green is a Certified Public
Accountant, a member of the American Institute of Certified Public Accountants
(AICPA) and a member of the AWSCPA (American Woman's Society of CPA's).

John Dahl served as our Senior Vice-President of Finance from November 1,
2003 through April 13, 2004, when he resigned from this position. See
"Separation Agreements" in exhibit 10.11. Prior to joining us, Mr. Dahl served
as a consultant with American Express Tax Services from May 1999 through
December 2003. While Mr. Dahl was working with American Express, he was engaged
as a consultant on our account by LaSalle Business Credit, our prior lender.
Prior to March 1999, Mr. Dahl attended law school at Northern Illinois
University from September 1996 through May 1999.

Josef A. Bauer has served as a director from October 15, 1999. Mr. Bauer
previously served as a director of the Singing Machine from February 1990 until
September 1991 and from February 1995 until July 1997, when we began our Chapter
11 proceeding. Mr. Bauer presently serves as the Chief Executive Officer of the
following three companies: Banisa Corporation, a privately owned investment
company, since 1975; Trianon, a jewelry manufacturing and retail sales companies
since 1978 and Seamon Schepps, also a jewelry manufacturing and retail sales
company since 1999.).

Bernard S. Appel has served as a director since October 31, 2003. He spent
34 years at Radio Shack, beginning in 1959. At Radio Shack, he held several key
merchandising and marketing positions and was promoted to the positions of
President in 1984 and to Chairman of Radio Shack and Senior Vice President of
Tandy Corporation in 1992. Since 1993 through the present date, Mr. Appel has
operated the private consulting firm of Appel Associates, providing companies
with merchandising, marketing and distribution strategies, creative line
development and domestic and international procurement.

Richard Ekstract served as a director from October 31, 2003 through June
2, 2004. Since 1959, Mr.Ekstract has created, financed and launched more than
twenty periodicals about the consumer electronics industry, including Audio
Times, Consumer Electronics Monthly, Consumer Electronics Show Daily, Autosound
and Communications, Satellite Retailing, Video Business, Video Review, TWICE,
CARS, and License! From January 1999 through February 2001, Mr. Ekstrakt was the
managing partner of License Magazine, which was sold to Advanstar
Communications. From March 2001 through the present date, Mr. Ekstract has
served as the Managing Partner of Cottage & Gardens, LLC, a magazine providing
advice to consumers on a range of topics, including decorating, gardening,
homemaking and crafts. Mr. Ekstract was also founder and chairman of the Home
Office Association of America where he served as Chairman from March 1990
through January 1999.

Harvey Judkowitz has served as a director since March 29, 2004 and is the
Chairman of our Audit Committee. He is licensed as a Certified Public Accountant
in New York and Florida. From 1988 to the present date, Mr. Judkowitz has
conducted his own CPA practices. He currently serves as the Chairman and CEO of
UniPro Financial Services, a diversified financial services company. He also
sits on the Board of Directors and serves as the Chair of the Audit Committee of
the following public companies: Global Business Services, Inc., Pony Express
USA, Intellligent Motor Cars, Inc. and Kirshner Entertainment & Technologies,
Inc. He currently serves as the Interim Chief Financial Officer of Kirshner
Entertainment & Technologies, Inc.

NEW CHIEF FINANCIAL OFFICER

Effective as of April 9, 2004, we hired Jeff Barocas to serve as our Chief
Financial Officer. Prior to joining our company, Mr. Barocas was CFO at
Biometrics Security Technology, Inc., a Florida based security software
developer where he was responsible for all administrative functions, purchasing,
financial and SEC reporting and new business development for Latin America and
the Caribbean. From 1996 to 2002, he was CFO at Quipp, Inc., a Florida based
manufacturer of automated capital equipment for the newspaper industry. From
1986 to 1995, he was CFO at London International US Holdings, a Sarasota,
Florida consumer products and medical products company where he managed all
financial, information systems and material procurements activities. He is 56
years old.

BOARD COMMITTEES

We have an audit committee, an executive compensation/stock option
committee and a nominating committee. As of July 10, 2004, the audit committee
consists of Messrs. Judkowitz, Appel and Bauer. As of July 10, 2004, the audit
committee consists of Messrs. Judkowitz, Appel and Bauer. The Board has
designated Mr. Judkowitz as the "audit committee financial expert," as defined
by Item 401(h) of Regulation S-K of the Securities Exchange Act of 1934. The
Board has determined that Harvey Judkowitz and Bernard Appel are "independent
directors" within the meaning of the listing standards of the American Stock
Exchange. The audit committee recommends the engagement of independent auditors
to the board, initiates and oversees investigations into matters relating to
audit functions, reviews the plans and results of audits with our independent
auditors, reviews our internal accounting controls, and approves services to be
performed by our independent auditors. The executive compensation/stock option
committee consists of Messrs. Judkowitz, Appel and Bauer. The executive
compensation/stock option committee considers and authorizes remuneration
arrangements for senior management and grants options under, and administers our
employee stock option plan. The entire Board of Directors operates as a
nominating committee. The nominating committee is responsible for reviewing the
qualifications of potential nominees for election to the Board of Directors and
recommending the nominees to the Board of Directors for such election.

CODE OF ETHICS

We have adopted a Code of Business Conduct and Ethics, which is applicable
to all directors, officers and employees of the Singing Machine, including our
principal executive officer, our principal financial officer, our principal
accounting officer or controller or other persons performing similar functions.
The Code of Ethics is available on our website at www.singingmachine.com and is
filed as Exhibit 14.1 to this Annual Report on Form 10-K. We intend to post
amendments to or waives from our Code of Ethics (to the extent applicable to our
chief executive officer, principal financial officer, principal accounting
officer or controller or other persons performing similar functions) on our
website.

DIRECTOR'S COMPENSATION

During fiscal 2004, our employee directors did not receive any additional
or special compensation for serving as directors. During fiscal 2004, our
compensation package for our non-employee directors consisted of grants of stock
options and reimbursement of costs and expenses associated with attending our
Board meetings. Our three non-employee directors during fiscal 2003 were Jay
Bauer, Bernard Appel and Richard Ekstract. Effective as of February 26, 2004, we
granted each of our non-employee directors options under our Year 2001 Stock
Option Plan to purchase 20,000 shares of our common stock. The options have an
exercise price of $1.30 per share and vest over a three year period beginning on
February 26, 2005. These options expire five years after their vesting date.

During fiscal 2005, we will implement the following compensation policy
for our directors.

o Each non-employee director will receive an annual retainer of
$10,000, with $7,500 to be paid in cash and $2,500 to be paid in
stock, based at the closing price of our common stock on the date of
the annual shareholder's meeting or any other date selected by the
Board.

o Each non-employee director will also receive an initial stock option
grant for 20,000 shares upon joining our Board of Directors and each
continuing non-employee director will receive an annual stock option
grant for 20,000 shares for each additional year served on the Board
which will be awarded on the anniversary date of the Board member's
initial grant.

o Each non-employee director will be reimbursed for all reasonable
expenses incurred in attending Board meetings and will receive a fee
of $500 for each Board or committee meeting attended.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

To our knowledge, based solely on a review of the copies of such reports
furnished to the Company and written representations that no other reports were
required, the Company believes that during the year ended March 31, 2004, its
officers, directors and 10% shareholders complied with all Section 16(a) filing
requirements except for the following transactions. Mr. Bauer and Mr. Steele
each filed two Form 4's late in which reported on transaction in each late Form
4. Mr. Steele also filed three amendment to his Form 4 filings to correct
typographical errors. Mr. Ekstract filed four Form 4's late in which he reported
5 transactions late. Mr. Chan filed one Form 4 late in which he failed to report
one transaction. The Company's former officers and a former director (Jack
Dromgold, April Green and Howard Moore) each filed one Form 4 late which
reported on transaction in each late Form 4 and Mr. Dahl, a former officer,
filed his Form 3 late.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth certain compensation information for the
fiscal years ended March 31, 2004, 2003 and 2002 with regard to (i) Yi Ping
Chan, our Interim Chief Executive Officer and Chief Operating Officer, from
October 17, 2003 through the present date, (ii) Robert Weinberg, our Chief
Executive Officer from July 23, 2003 through October 17, 2003 and (iii) Edward
Steele, our Chief Executive Officer from June 1991 through July 23, 2003, and
each of our other executive officers whose compensation exceeded $100,000 on an
annual basis (the "Named Officers"):

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------- --------------------------
OTHER SECURITIES
NAME OF INDIVIDUAL AND ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS/SAR COMPENSATION(2)
----------------------------------- ------- -------- -------- ------------ ----------- ------------

Yi Ping Chan 2004 $247,470(4) -- $ 6,000 52,800 $ 12,180
Interim Chief Executive Officer and
Chief Operating Officer(3)

Edward Steele 2004 $378,809(4) -- $ 6,000 10,000 $ 17,949
Former Chief Executive Officer(5) 2003 $382,352 $ -- $ 8,671 30,000 $ 17,969
2002 $364,145 192,133 $ 8,258 15,000 $ 17,908

April J. Green 2004 $127,642 -- $ 3,600 4,380 $ 5,094
Chief Financial Officer(6) 2003 $122,200 $ 25,000 $ 3,900 20,000 $ 13,551
2002 $ 88,825 $ 25,000 $ 3,900 30,000 $ 7,091

John Dahl 2004 $ 78,834 -- $ 1,200 50,000 $ 350
Senior Vice President of Finance(7)

John Klecha 2004 $ 41,480 -- $ 1,000 0 $189,911(9)
Former Chief Operating Officer(8) 2003 $300,117 $ -- $ 6,555 24,000 $ 13,264
2002 $286,111 157,200 $ 6,242 15,000 $ 11,725

Jack Dromgold 2004 $183,266(4) -- $ 4,500 50,000 $110,622(11)
Former Vice President of Sales and 2003 $210,277 $ 50,000 $ 51,067 100,000 $154,072(12)
Marketing(10) 2002 -- -- -- -- --

Robert Weinberg 2004 $ 57,692 -- 3,000(14) -- --
Former Chief Executive Officer(13)

------------

(1) The amounts disclosed in this column for fiscal 2004, 2003 and 2002
include automobile expense allowances.

(2) Includes matching contributions under our 401(k) savings plan, medical
insurance pursuant to the executive's employment agreement and other
expenses described herein.

(3) Mr. Chan became our Interim Chief Executive Officer on October 17, 2004.

(4) Effective as of August 1, 2003, Mr. Chan, Mr. Dromgold and Mr. Steele
agreed to take 15% of their annual compensation in the form of stock for a
nine month period until March 31, 2004 (except Mr. Steele's agreement was
for an 8 month period until February 28, 2004 when his employment
agreement expired). During their respective time periods, Mr. Chan, Mr.
Dromgold and Mr. Steele received compensation in the amount of $20,125,
$17,535 and $63,136 in shares of the Singing Machine's common stock. The
average trading that was used to calculate the number of shares that would
be issued to each officer was $3.85 per share.

(5) Mr. Steele served as our Chief Executive Officer from September 1991
through July 23, 2003. He currently serves as our Senior Advisor and
Director of Product Development.

(6) Ms. Green served as our Chief Financial Officer from March 15, 2002
through April 9, 2004.

(7) Mr. Dahl served as our Senior Vice President of Finance from October 22,
2003 through April 13, 2003.

(8) Mr. Klecha served as our Chief Operating Officer from June 28, 1999
through May 2, 2003.

(9) Amounts paid to Mr. Klecha pursuant to his separation and release
agreement were $183,703 and $36,204 for medical insurance and matching
401(K) contributions.

(10) Mr. Dromgold joined us on April 15, 2002 and resigned on December 16,
2003.

(11) Amounts paid to Mr. Dromgold pursuant to his separation and release
agreement were $104,640 and our matching 401(k) contributions and medical
insurance were $4,582.

(12) Includes relocation expenses of $45,529, our matching contribution of
$8,543 under our 401(k) savings plan and medical insurance at a $100,000
value contributed to option granted to Mr. Dromgold and $60,565 paid to
Mr. Dromgold pursuant to his separation and release agreement.

(13) Mr. Weinberg served as our Chief Executive Officer from July 23, 2003 to
October 12, 2004.

(14) Represents 3 months of rent paid for Mr. Weinberg's apartment in Florida.

OPTION GRANTS IN FISCAL 2004

The following table sets forth information concerning all options granted
to our officers and directors during the year ended March 31, 2004. No stock
appreciation rights ("SAR's") were granted.

SHARES TOTAL OPTIONS POTENTIAL REALIZABLE VALE AT
UNDERLYING GRANTED TO ASSUMED ANNUAL RATES OF STOCK PRICE
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION APPRECIATION FOR OPTION TERM
GRANTED (1) FISCAL YEAR PER SHARE DATE 5% 10%
------------ --------------- --------------- ---------------- ----------------- ------------------

Yi Ping Chan 52,800 3.3% $ 1.97 12/18/14 $ 169,431 $ 269,791
Edward Steele 10,000 .6% $ 1.97 12/18/14 $ 32,089 $ 51,097
April J. Green 4,380 .3% $ 1.97 12/18/14 $ 14,055 $22,380
John Dahl 50,000 3.1% $ 1.97 12/18/14 $ 160,446 $ 255,484
John Klecha -- -- -- -- -- --
Jack Dromgold 50,000 3.1% $ 7.60 Cancelled(3) -- --
Robert Weinberg -- -- -- -- -- --

(1) All of these options were granted under a Year 2001 Stock Option Plan. The
Options granted to Mr. Steele, Ms. Green, Mr. Dahl and Mr. Dromgold vest
in five equal installments over a period of five years, beginning on
December 13, 2004 (except Mr. Dromgold's vesting began on April 15, 2004).
Mr. Chan's options vest in (except Mr. Chan's options vest in 3 equal
installments over a 3 year period).

(2) The dollar amounts under these columns are the result of calculations
based on the market price on the date of grant at an assumed annual rate
of appreciation over the maximum term of the option at 5% and 10% as
required by applicable regulations of the SEC and, therefore, are not
intended to forecast possible future appreciation, if any of the common
stock price. Assumes all options are exercised at the end of their
respective terms. Actual gains, if any, on stock option exercises depend
on the future performance of the common stock.

(3) Mr. Dromgold received a grant of 50,000 options on April 15, 2003. These
options expired on March 18, 2004, ninety days after Mr. Dromgold resigned
from our company.

AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED MARCH 31, 2004 AND OPTION
VALUES

The following table sets forth information as to the exercise of stock
options during the fiscal year ended March 31, 2004 by our officers listed in
our Summary Compensation Table and the fiscal year-end value of unexercised
options.

NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
AT FISCAL YEAR END FISCAL YEAR END (2)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME OF INDIVIDUAL UPON EXERCISE REALIZED(1) UNEXERCISABLE UNEXERCISABLE
-------------------------- ----------------- ------------- ---------------------- --------------------------

Yi Ping Chan -- -- 50,000/152,800 0/0
Edward Steele -- -- 322,500/10,000 0/0
April J. Green -- -- 30,000/19,380 0/0
John Dahl -- -- 0/50,000 0/0
John Klecha -- -- 0/0 0/0
Jack Dromgold -- -- 0/0 0/0
Robert Weinberg -- -- 0/0 0/0

EMPLOYMENT AGREEMENTS

Yi Ping Chan. Effective as of May 2, 2003, we entered into a three year
employment agreement with Yi Ping Chan, our current Chief Operating Officer. Mr.
Chan is entitled to receive an annual salary equal to $250,000 per year, plus
bonuses and increases in his annual salary at the sole discretion of our Board
of Directors. We agreed to grant Mr. Chan options to purchase 150,000 shares of
our common stock of which 50,000 options will vest each year and to reimburse
him for moving expenses of up to $40,000. We granted Mr. Chan options to
purchase 150,000 shares of our common stock, in July 2003. In the event of a
termination of his employment following a change of control, Mr. Chan would be
entitled to a lump sum payment of 100% of the amount of his total compensation
in the twelve months preceding such termination. During the term of his
employment agreement and for a period of two years after his termination for
cause and one year if he is terminated without cause, Mr. Chan cannot directly
or indirectly compete with our company in the karaoke industry in the United
States.

Eddie Steele. On February 27, 2004, we extended our employment agreement
with Eddie Steele for another year. Mr. Steele will serve as the Director of
Product Development for a one year period to expire on February 28, 2005. Under
his employment agreement, Mr. Steele is entitled to receive annual compensation
of $250,000 per year; however, Mr. Steele has agreed to take a 20% pay cut so
his base salary is $200,000 per year. The agreement also provides for
discretionary bonuses. In the event of a termination of his employment following
a change of control, Ms. Steele would be entitled to a lump sum payment of 50%
of the amount of his total compensation in the twelve months preceding such
termination. During the term of his employment agreement and for a period of one
year after his termination for cause, Mr. Steele cannot directly or indirectly
compete with our company in the karaoke industry in the United States.

SEPARATION AND CONSULTING AGREEMENTS

April Green. Ms. Green resigned as our Chief Financial Officer effective
as of April 9, 2004. In connection with her resignation, we entered into a
separation and release agreement with Ms. Green. Under this agreement, we agreed
to provide Ms. Green with a severance payment equal to $115,519, which consisted
of (1) salary payments in the amount of $100,000, (ii) a COBRA reimbursement
payment equal to $6,600 and (iii) payments for accrued vacation time equal to
$4,153 over a nine month period. In exchange, Ms. Green agreed to release the
Singing Machine from any liability in connection with the termination of her
employment.

John Dahl. Mr. Dahl resigned as our Senior Vice President of Finance
effective as of April 13, 2004. In connection with his resignation, we entered
into a separation and release agreement with Mr. Dahl. Under this agreement, we
agreed to provide Mr. Dahl with a severance payment equal to $51,050, which
consisted of (i) salary payments in the amount of $39,000, (ii) moving expenses
equal to $11,000 and (iii) COBRA reimbursement payments equal to $1,050 over a
five month period. In exchange, Mr. Dahl agreed to release the Singing Machine
from any liability in connection with the termination of his employment.

Jack Dromgold. Mr. Dromgold resigned as our Executive Vice President of
Sales, effective as of December 16, 2003. In connection with his resignation, we
entered into a separation and release agreement with him. Under this agreement,
we agreed to provide Mr. Dromgold with a payment equal to $161,939, which
consisted of (i) $50,000 in cash to be paid on December 16, 2003 (ii) $109,281
to be paid over a six month period and (iii) three months of COBRA reimbursement
payments. In exchange, Mr. Dromgold agreed to release the Singing Machine from
any liability in connection with the termination of his employment. We also
entered into a consulting agreement with Mr. Dromgold on December 16, 2003 to
provide us with consulting relating to our sales and marketing efforts for a
sixty day period. We amended this agreement on April 27, 2004 and issued 50,000
shares of our common stock to Mr. Dromgold.

John Klecha. Mr. Klecha resigned as our Chief Operating Officer and
President, effective as of May 2, 2003. In connection with his resignation, we
entered into a separation and release agreement. Under this agreement, we agreed
to provide Mr. Klecha with a severance payment equal to $183,707, which
consisted of (i) salary and auto allowance through May 31, 2003, (ii) four weeks
of accrued vacation time, (iii) four months of salary and automobile allowance
payments and (iv) seven months COBRA reimbursement payments. In exchange, Mr.
Klecha agreed to release the Singing Machine from any liability in connection
with the termination of his employment.

EQUITY COMPENSATION PLANS AND 401(K) PLAN

We have two stock option plans: our 1994 Amended and Restated Stock Option
Plan ("1994 Plan") and our Year 2001 Stock Option Plan ("Year 2001 Plan"). Both
the 1994 Plan and the Year 2001 Plan provide for the granting of incentive stock
options and non-qualified stock options to our employees, officers, directors
and consultants As of March 31, 2004, we had 358,700 options issued and
outstanding under our 1994 Plan and 668,830 options are issued and outstanding
under our Year 2001 Plan.

The following table gives information about equity awards under our 1994
Plan and the Year 2001 Plan.

WEIGHTED-AVERAGE NUMBER OF SECURITIES
NUMBER OF SECURITIES EXERCISE PRICE OF REMAINING AVAILABLE FOR EQUITY
TO BE ISSUED UPON OUTSTANDING COMPENSATION PLANS
EXERCISE OF OUTSTANDINGS OPTIONS, WARRANTS (EXCLUDING SECURITIES IN
PLAN CATEGORY OPTION, WARRANTS AND RIGHTS AND RIGHTS COLUMN (A))
--------------------------------------- ---------------------------- -------------------- -------------------------------

Equity Compensation Plans approved by 1,027,530 $3.95 784,195
Security Holders

Equity Compensation Plans Not 0 0 0
approved by Security Holders

1994 PLAN

Our 1994 Plan was originally adopted by our Board of Directors in May 1994
and it was approved by our shareholders on June 29, 1994. Our shareholders
approved amendments to our 1994 Plan in March 1999 and September 2000. The 1994
Plan reserved for issuance up to 1,950,000 million share of our common stock
pursuant to the exercise of options granted under the Plan. As of March 31,
2003, we had granted all the options that are available for grant under our 1994
Plan. As of March 31, 2004, we have 358,700 options issued and outstanding under
the 1994 Plan and all of these options are fully vested as of March 31, 2004.

YEAR 2001 PLAN

On June 1, 2001, our Board of Directors approved the Year 2001 Plan and it
was approved by our shareholders at our special meeting held September 6, 2001.
The Year 2001 Plan was developed to provide a means whereby directors and
selected employees, officers, consultants, and advisors of the Company may be
granted incentive or non-qualified stock options to purchase common stock of the
Company. The Year 2001 Plan authorizes an aggregate of 1,950,000 shares of the
Company `s common stock and a maximum of 450,000 shares to any one individual in
any one fiscal year. The shares of common stock available under the Year 2001
Plan are subject to adjustment for any stock split, declaration of a stock
dividend or similar event. At March 31, 2004, we have granted 423,980 options
under the Year 2001 Plan, 26,668 of which are fully vested.

The Year 2001 Plan is administered by our Stock Option Committee
("Committee"), which consists of two or more directors chosen by our Board. The
Committee has the full power in its discretion to (i) grant options under the
Year 2001 Plan, (ii) determine the terms of the options (e.g. - vesting,
exercise price), (iii) to interpret the provisions of the Year 2001 Plan and
(iv) to take such action as it deems necessary or advisable for the
administration of the Year 2001 Plan.

Options granted to eligible individuals under the Year 2001 Plan may be
either incentive stock options ("ISO's"), which satisfy the requirements of Code
Section 422, or nonstatutory options ("NSO's"), which are not intended to
satisfy such requirements. Options granted to outside directors, consultants and
advisors may only be NSO's. The option exercise price will not be less than 100%
of the fair market value of the Company's common stock on the date of grant.
ISO's must have an exercise price greater to or equal to the fair market value
of the shares underlying the option on the date of grant (or, if granted to a
holder of 10% or more of our common stock, an exercise price of at least 110% of
the under underlying shares fair market value on the date of grant). The maximum
exercise period of ISO's is 10 years from the date of grant (or five years in
the case of a holder with 10% or more of our common stock). The aggregate fair
market value (determined at the date the option is granted) of shares with
respect to which an ISO are exercisable for the first time by the holder of the
option during any calendar year may not exceed $100,000. If that amount exceeds
$100,000, our Board of the Committee may designate those shares that will be
treated as NSO's.

Options granted under the Year 2001 Plan are not transferable except by
will or applicable laws of descent and distribution. Except as expressly
determined by the Committee, no option shall be exercisable after thirty (30)
days following an individual's termination of employment with the Company or a
subsidiary, unless such termination of employment occurs by reason of such
individual's disability, retirement or death. The Committee may in its sole
discretion, provide in a grant instrument that upon a change of control (as
defined in the Year 2001 Plan) that all outstanding option issued to the grantee
shall automatically, accelerate and become full exercisable. Additionally, the
obligations of the Company under the Year 2001 Plan are binding on (1) any
successor corporation or organization resulting from the merger, consolidation
or other reorganization of the Company or (2) any successor corporation or
organization succeeding to all or substantially all of the assets and business
of the Company. In the event of any of the foregoing, the Committee may, at its
discretion, prior to the consummation of the transaction, offer to purchase,
cancel, exchange, adjust or modify any outstanding options, as such time and in
such manner as the Committee deems appropriate.

401(K) PLAN

Effective January 1, 2001, we adopted a voluntary 401(k) plan. All
employees with at least one year of service are eligible to participate in our
401(k) plan. In fiscal 2002, we made a matching contribution of 100% of salary
deferral contributions up to 3% of pay, plus 50.369% of salary deferral
contributions from 3% to 5% of pay for each payroll period. The amounts charged
to earnings for contributions to this plan and administrative costs during the
years ended March 31, 2004, 2003 and 2002 totaled approximately $55,402, $61,466
and $41,733, respectively.

REPORT OF THE EXECUTIVE COMPENSATION/STOCK OPTION COMMITTEE ON
EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION PHILOSOPHY

The Executive Compensation Committee believes that the Singing Machine
must maintain short and long-term executive compensation plans that enable us to
attract and retain well-qualified executives. Furthermore, we believe that our
compensation plans must also provide a direct incentive for our executives to
create shareholder value.

In furtherance of this philosophy, the compensation of our executives
generally consists of three components: base salary, annual cash incentives and
long-term performance-based incentives.

BASE SALARIES

During fiscal 2004, we had employment agreement with five of our executive
officers. We also employed one person as our Chief Executive officer for a
period of approximately 2 1/2 months without an employment agreement. The base
salaries of each of our executive officers was determined based on comparison to
executives with similar responsibilities at other public companies: The persons
that served as executive officers during fiscal 2004 are listed below.

Eddie Steele, who served as our Chief Executive Officer from September
1991 through August 3, 2004 and as our Director of Product Development from
August 3, 2004 through the present date.

Yi Ping Chan, who has served as our Chief Operating Officer since May 2,
2003 and Interim Chief Executive Officer since October 17, 2003 through the
present date.

Jack Dromgold, who served as our Senior Vice President of Sales from April
15, 2002 through December 16, 2003.

April Green, who served as our Chief Financial Officer from March 15, 2002
through April 9, 2004.

John Dahl, who served as our Vice President of Finance from October 22,
2003 through April 13, 2004.

Robert Weinberg served as our Chief Executive Officer from August 3, 2003
through October 17, 2003. We did not have an employment agreement with Mr.
Weinberg for his services as our Chief Executive Officer.

INCENTIVE CASH BONUSES

Generally, we award cash bonuses to our management employees and other
employees, based on their personal performance in the past year and overall
performance of our company. During fiscal 2004, we did not award any cash
bonuses to any of our executive officers because our financial performance was
weak. We had an operating loss of $22.6 million.

LONG TERM COMPENSATION - STOCK OPTION GRANTS

We have utilized stock options to motivate and retain executive officers
and other employees for the long-term. We believe that stock options closely
align the interests of our executive officers and other employees with those of
our stockholders and provide a major incentive to building stockholder value.
Options are typically granted annually, and are subject to vesting provisions to
encourage officers and employees to remain employed with the Company.

During fiscal 2004, we granted an aggregate of 167,180 options to our
senior executive officers. All options grants in fiscal 2004 were made under our
Year 2001 Stock Option Plan. See "Executive Compensation -Option Grants in Last
Fiscal Year" on pages 34-35 for information about the number of options granted
to each individual. Each of the option grants was at a price that was equal to
the closing price of our common stock on the date of grant.

RELATIONSHIP BETWEEN OUR COMPENSATION POLICIES AND CORPORATE PERFORMANCE

We believe that our executive compensation policies correlate with our
corporate performance. Our stock options are usually granted at a price equal to
or above the fair market value of our common stock on the date of grant. As
such, our officers only benefit from the grant of stock options if our stock
price appreciates. Generally, we try to tie bonus payments to our financial
performance. However, if an individual has made significant contributions to our
company, we will provide them with a bonus payment for their efforts even if our
company's financial performance has not been strong.

COMPENSATION OF CHIEF EXECUTIVE OFFICER

During fiscal 2004, we had three different individuals serving in the
position as Chief Executive Officer. Edward Steele served as our Chief Executive
Officer for approximately four months during fiscal 2004 from April 1, 2004
through August 3, 2004. His base salary for the period between June 1, 2003
through June 1, 2004 as contained in his employment agreement was $385,875 per
year. During this time period, Mr. Steele received salary payments equal to
$128,625. In July 2003, Mr. Steele agreed to accept 15% of his salary during the
eight month period between July 1, 2003 through February 28, 2004 in the form of
stock rather than cash. Although Mr. Steele resigned as the Chief Executive
Officer on August 3, 2003, he remains with our company and is employed as our
Director of Product Development.

Robert Weinberg served as our Chief Executive Officer for a period of
approximately two months from August 3, 2003 through October 17, 2003, when he
resigned for personal reasons. We did not have an employment agreement with Mr.
Weinberg. Mr. Weinberg received $53,000 for his two months as our CEO. Because
Mr. Weinberg lived in New Jersey, we agreed to pay him for the cost of renting
an apartment in South Florida when he visited our company's headquarters. We did
not grant any options or cash bonuses to Mr. Weinberg during his tenure as our
Chief Executive Officer.

Effective as of October 17, 2003, Yi Ping Chan became our Interim Chief
Executive Officer. Mr. Chan's salary is $250,000 per year, as set forth in his
employment agreement. In July 2003, Mr. Chan agreed to accept 15% of his salary
during the nine-month period between July 1, 2003 through March 31, 2004 in the
form of stock rather than cash. We also agreed to grant Mr. Chan options to
purchase 150,000 shares of our common stock, at an exercise price of $5.60 per
share, of which 50,000 options vest each year and to reimburse him for moving
expenses of up to $40,000.

We did not grant any cash bonuses to Mr. Chan in fiscal 2004 because our
financial performance did not justify cash bonuses to any of our employees. We
had a net operating loss of $ 22.6 million in fiscal 2004.

We awarded stock options to Mr. Chan in December 2003. We awarded Mr. Chan
options to purchase 52,800 shares of our common stock at an exercise price of
$1.97 per share. These options were granted under our Year 2001 Stock Option
Plan and were granted at a price that was equal to closing price of our common
stock on the date of grant. Mr. Chan's options vest at a rate of one-third per
year over a period of three years.

THE EXECUTIVE COMPENSATION COMMITTEE

Harvey Judkowitz, Chairman
Bernard Appel
Jay Bauer

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of our Executive Compensation Committee as of in the fiscal
year ended March 31, 2004 were Messrs. Appel, Bauer and Ekstract. Howard Moore
and Robert Weinberg served as members of the Compensation Committee for
approximately seven months in fiscal 2004 from April 1, 2004 through April 17,
2004. None of the members of the Compensation Committee in fiscal 2004 were or
are current officers or employees of the Singing Machine or any of its
subsidiaries (except Mr. Weinberg, a former member of our Compensation
Committee, served as our Chief Executive Officer from a two month period from
August 3 through October 17, 2003). None of these persons have served on the
board of directors or on the compensation committee of any other entity that has
an executive officer serving on our board of directors or on our Compensation
Committee.

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN

The graph below compares the performance of the Singing Machine's common
stock with the American Stock Market Index ("AMEX Index") and the Dow Jones -
Consumer Electronics Index ("Dow Jones-CSE"), during the period beginning March
31, 1999 through March 31, 2004. The graph assumes the investment of $100 on
March 31, 1999 in the Singing Machine's common stock, in the AMEX Index and the
Dow Jones-CSE Index. Total shareholder return was calculated on the basis that
in each case all dividends were reinvested.

[PERFORMANCE GRAPH OMITTED]

1999 2000 2001 2002 2003 2004
--------- --------- -------- --------- --------- ---------

The Singing Machine Company, Inc. 100.00 225.00 256.00 852.80 375.47 62.40
Dow Jones Consumer Electronics Index 100.00 219.40 131.81 109.14 69.68 112.51
AMEX Market Index 100.00 141.41 119.30 118.32 113.00 159.70

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table set forth as of June 15, 2004, certain information
concerning beneficial ownership of our common stock by:

o all directors of the Singing Machine,

o all executive officers of the Singing Machine.

o persons known to own more than 5% of our common stock;

Unless otherwise indicated, the address for each person is The Singing
Machine Company, Inc., 6601 Lyons Road, Building A-7, Coconut Creek, Florida
33073. As of June 15, 2003, we had 8,806,264 shares of our common stock issued
and outstanding.

As used herein, the term beneficial ownership with respect to a security
is defined by Rule 13d-3 under the Securities Exchange Act of 1934 as consisting
of sole or shared voting power (including the power to vote or direct the vote)
and/or sole or shared investment power (including the power to dispose or direct
the disposition of) with respect to the security through any contract,
arrangement, understanding, relationship or otherwise, including a right to
acquire such power(s) during the next 60 days. Unless otherwise noted,
beneficial ownership consists of sole ownership, voting and investment rights.

SHARES OF PERCENT OF
COMMON STOCK COMMON STOCK
---------------- -------------

Y.P. Chan
Interim CEO and Chief Operating Officer 67,652(1) *

Jeff Barocas
Chief Financial Officer 0 *

Joseph Bauer
Chairman 981,804(3) 11.15%

Bernard Appel
Director 0 *

Harvey Judkowitz
Director 0 *

John Klecha
Director 810,811(4) 9.20%

Wellington Management Company, LLP 939,400(5) 10.67%

All Directors and Executive Officers as a Group 1,049,456(6) 11.85%

------------
*Less than 1%.

(1) Includes 500,000 shares issuable upon the exercise of stock options that
are exercisable within 60 days of June 15, 2004.

(2) Includes 30,000 shares issuable upon the exercise of stock options that
are exercisable within 60 days of June 15, 2004.

(3) Includes 11,197 shares held by Mr. Bauer individually, 200,000 shares held
by Mr. Bauer's wife, 180,374 shares held by Mr. Bauer and his wife
jointly, 369,400 shares held by Mr. Auer's pension account, 217,500 shares
held in Mr. Bauer Family United Partnership and 3,333 share issuable upon
the exercise of stock options that can be exercisable within 60 days of
June 15, 2004.

(4) All of the information presented in this item with respect to Mr. Klecha's
beneficial ownership were extracted solely from his Amendment No. 2 to his
Schedule 13D filed on October 20, 2003.

(5) The address of Wellington Management Company, LLP is 75 State Street,
Boston, Massachusetts. All of the information presented in this item with
respect to this beneficial ownership was extracted solely from their
Schedule 136 filed on February 12, 2004.

(6) Includes 53,333 shares issuable upon the exercise of stock options that
are exercisable within 60 days of June 15, 2004.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On July 14, 2004, Jay Bauer notified us that he intends to advance us a
short-term loan of $200,000 to be used to meet working capital obligations.

On or about July 10, 2003, certain officers and directors of our company
advanced $1 million to our company pursuant to written loan agreements. The
officer was Yi Ping Chan and the directors were Jay Bauer and Howard Moore.
Additionally, Maureen LaRoche, a business associate of Mr. Bauer, participated
in the financing. These loans bear interest at the rate of 9.5% per annum. These
loans were subordinated to Milberg's factoring agreement, which we terminated
effective as of July 14, 2004. The Board has not yet determined when these loans
will be repaid.

On or about March 4, 2003, Jay Bauer, one of our directors advanced
$400,000 to International SMC pursuant to a letter agreement, which used the
funds to make an advance to a vendor for the purchase of raw materials for the
production of our machines. We were to repay Mr. Bauer's loan in two months on
or about May 4, 2003 and the loan bore interest at the rate of 8% per annum. We
repaid $200,000 on the loan on or about May 4, 2003 and the remaining balance
was paid on or about October 10, 2003.

ITEM 14.

The following is a summary of the fees billed to the Singing Machine by
Grant Thornton, LLP for professional services rendered for the fiscal years
ended March 31, 2004 and 2003:

FEE CATEGORY FISCAL 2004 FISCAL 2003
------------------ ------------ ------------
Audit Fees $ 180,532 $ 130,767
Audit-Related Fees 37,100 --
Tax Fees 103,958 56,261
All Other Fees 5,041 --
------------ ------------
Total Fees $ 326,631 $ 187,028
============ ============

Audit Fees. Consists of fees billed for professional services rendered for
the audit of the Singing Machine's consolidated financial statements and review
of the interim consolidated financial statements included in quarterly reports
and services that are normally provided by Grant Thornton LLP in connection with
statutory and regulatory filings or engagements.

Audit-Related Fees. Consists of fees billed for assurance and related
services that are reasonably related to the performance of the audit or review
of the Singing Machine's consolidated financial statements and are not reported
under "Audit Fees." These services include employee benefit plan audits,
accounting consultations in connection with acquisitions, attest services that
are not required by statute or regulation, and consultations concerning
financial accounting and reporting standards.

Tax Fees. Consists of fees billed for professional services for tax
compliance, tax advice and tax planning. These services include assistance
regarding federal, state and international tax compliance, tax audit defense,
customs and duties, mergers and acquisitions, and international tax planning.

All Other Fees. Consists of fees for products and services other than the
services reported above. In fiscal 2004, these services included general
business meetings between Grant Thornton and executives and directors of The
Singing Machine.

POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT
SERVICES OF INDEPENDENT AUDITORS

The Audit Committee's policy is to pre-approve all audit and permissible
non-audit services provided by the independent auditors. These services may
include audit services, audit-related services, tax services and other services.
Pre-approval is generally provided for up to one year and any pre-approval is
detailed as to the particular service or category of services and is generally
subject to a specific budget. The independent auditors and management are
required to periodically report to the Audit Committee regarding the extent of
services provided by the independent auditors in accordance with this
pre-approval, and the fees for the services performed to date. The Audit
Committee may also pre-approve particular services on a case-by-case basis.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

EXHIBITS

3.1 Certificate of Incorporation of the Singing Machine filed with the
Delaware Secretary of State on February 15, 1994 and amendments through
April 15, 1999 (incorporated by reference to Exhibit 3.1 in the Singing
Machine's registration statement on Form SB-2 filed with the SEC on March
7, 2000).

3.2 Certificate of Amendment of the Singing Machine filed with the Delaware
Secretary of State on September 29, 2000 (incorporated by reference to
Exhibit 3.1 in the Singing Machine's Quarterly Report on Form 10-QSB for
the period ended September 30, 1999 filed with the SEC on November 14,
2000).

3.3 Certificates of Correction filed with the Delaware Secretary of State on
March 29 and 30, 2001 correcting the Amendment to our Certificate of
Incorporation dated April 20, 1998 (incorporated by reference to Exhibit
3.11 in the Singing Machine's registration statement on Form SB-2 filed
with the SEC on April 11, 2000).

3.4 Amended By-Laws of the Singing Machine Singing Machine (incorporated by
reference to Exhibit 3.14 in the Singing Machine's Annual Report on Form
10-KSB for the year ended March 31, 2001 filed with the SEC on June 29,
2001).

4.1 Form of Certificate Evidencing Shares of Common Stock (incorporated by
reference to Exhibit 3.3. of the Singing Machine's registration statement
on Form SB-2 filed with the SEC on March 7, 2000). File No. 333-57722)

10.1 Factoring Agreement dated February 9, 2004 between Milberg Factors, Inc.
and the Singing Machine. (incorporated by reference to Exhibit 10.1 in the
Singing Machine's Quarterly Report on Form 10-Q filed with the SEC on
February 17, 2004, File No. 000-24968).

10.2 Security Agreement for Goods and Chattels dated February 9, 2004 between
Milberg Factors, Inc. and the Singing Machine. incorporated by reference
to Exhibit 10.2 in the Singing Machine's Quarterly Report on Form 10-Q
filed with the SEC on February 17,2004, File No. 000-24968).

10.3 Security Agreement for Inventory dated February 9, 2004 between Milberg
Factors, Inc. and the Singing Machine (incorporated by reference to
Exhibit 10.3 in the Singing Machine's Quarterly Report on Form 10-Q filed
with the SEC on February 17, 2004, File No. 000-24968).

10.4 Second Amendment to the Transaction Documents dated February 9, 2004
between Omicron Master Trust, SF Capital Partners, Ltd, Bristol Investment
Fund, Ltd., Ascend Offshore Fund, ltd., Ascend Partners, LP, Ascend
Partners Sapient L.P. and the Singing Machine (incorporated by reference
to Exhibit 10.4 in the Singing Machine's Quarterly Report on Form 10-Q
filed with the SEC on February 17, 2004, File No. 000-24968).

10.5 Form of Subordination Agreement executed by institutional Investors.
(Incorporated by reference to Exhibit 10.18 of the Singing Machine's
Amendment No. 1 to its registration statement on Form S-1 filed with SEC
on April, 2004)

10.6 Employment Agreement dated February 27, 2004 between the Singing Machine
and Eddie Steele.*

10.7 Employment Agreement dated May 2, 2003 between the Singing Machine and Yi
Ping Chan. (incorporated by reference to Exhibit 10.20 of the Singing
Machine's Annual Report on Form 10-KSB/A filed with the SEC on July 23,
2003, File No. 000-24968).

10.8 Separation and Release Agreement effective as of May 2, 2003 between the
Singing Machine and John Klecha (incorporated by reference to Exhibit 10.1
of the Singing Machine's Annual Report on Form 8-K filed with the SEC on
July 17, 2003, File No. 000-24968).

10.9 Separation and Release Agreement effective as of April 9, 2004 between the
Singing Machine and April Green.*

10.10 Separation and Release Agreement dated December 16,2003 between the
Singing Machine and Jack Dromgold.*

10.11 Separation and Release Agreement effective as of April 12, 2004 between
the Singing Machine and John Dahl.*

10.12 Industrial Lease dated March 1, 2002, by and between AMP Properties, L.P.
and the Singing Machine for warehouse space in Compton, California
(incorporated by reference to Exhibit 10.20 of the Singing Machine's
Annual Report on Form 10-KSB/A filed with the SEC on July 23, 2002, File
No. 000-24968).

10.13 Amended and Restated 1994 Management Stock Option Plan (incorporated by
reference to Exhibit 10.6 to the Singing Machine's registration statement
on Form SB-2 filed with the SEC on March 28, 2001, File No. 333-59684).

10.14 Year 2001 Stock Option Plan (incorporated by reference to Exhibit 10.1 of
the Singing Machine's registration statement on Form S-8 filed with the
SEC on September 13, 2002, File No. 333-99543).

10.15 Securities Purchase Agreement dated as of August 20, 2003 by and among the
Singing Machine and 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") (filed as Exhibit 10.1 to the Singing Machine's Registration
Statement filed with the SEC on October 9, 2003, File No. 333-109574).

10.16 Amendment dated September 5, 2003 to Securities Purchase Agreement between
the Singing Machine and the Investors (filed as Exhibit 10.2 to the
Singing Machine's Registration Statement filed with the SEC on October 9,
2003, File No. 333-109574).

10.17 Form of Debenture Agreement issued by the Singing Machine to each of the
Investors (filed as Exhibit 10.3 to the Singing Machine's Registration
Statement filed with the SEC on October 9, 2003, File No. 333-109574).

10.18 Form of Warrant Agreement issued by the Singing Machine to the Investors
(filed as Exhibit 10.4 to the Singing Machine's Registration Statement
filed with the SEC on October 9, 2003, File No. 333-109574).

10.19 Warrant Agreement between the Singing Machine and Roth Capital Partners,
LLC (filed as Exhibit 10.5 to the Singing Machine's Registration Statement
filed with the SEC on October 9, 2003, File No. 333-109574).

10.20 Registration Rights Agreement between the Singing Machine and each of the
Investors and Roth Capital Partners, LLC (filed as Exhibit 10.5 to the
Singing Machine's Registration Statement filed with the SEC on October 9,
2003, File No. 333-109574).

10.21 Domestic Merchandise License Agreement dated November 1, 2000 between MTV
Networks, a division of Viacom International, Inc. and the Singing Machine
(incorporated by reference to Exhibit 10.3 of the Singing Machine's
Quarterly Report on Form 10-Q for the quarter ended December 31, 2002,
filed with the SEC on February 14, 2003, File No. 000-24968).

10.22 Amendment dated January 1, 2002 to Domestic Merchandise License Agreement
between MTV Networks, a division of Viacom International, Inc. and the
Singing Machine (incorporated by reference to Exhibit 10.4 of the Singing
Machine's Quarterly Report on Form 10-Q for the quarter ended December 31,
2002, filed with the SEC on February 14, 2003, File No. 0000-24968).

10.23 Second Amendment as of November 13, 2002 to Domestic Merchandise License
Agreement between MTV Networks, a division of Viacom International, Inc.
and the Singing Machine (incorporated by reference to Exhibit 10.5 of the
Singing Machine's Quarterly Report on Form 10-Q for the quarter ended
December 31, 2002, filed with the SEC on February 2003, File No.
000-24968).

10.24 Third Amendment as of February 26, 2003 to Domestic Merchandise License
Agreement between MTV Networks, a division of Viacom International, Inc.
and the Singing Machine (incorporated by reference to Exhibit 10.10 of the
Singing Machine's Annual Report on Form 10-K for the fiscal year ended
March 31, 2003, filed with the SEC on July 17, 2003, File No. 000-24968).

10.25 Amendment to Domestic Licensing Agreement dated November 15, 2002 between
the Singing Machine and MTV Networks, a division of Viacom International,
Inc. (incorporated by reference to Exhibit 10.5 in the Singing Machine's
Quarterly Report on Form 10-Q filed with the SEC on February 17, 2004,
File No. 000-24968).

10.26 Fifth Amendment to Domestic Licensing Agreement dated December 23, 2003
between the Singing Machine and MTV Networks, a division of Viacom
International, Inc. (incorporated by reference to Exhibit 10.6 in the
Singing Machine's Quarterly Report on Form 10-Q filed with the SEC on
February 17, 2004, File No. 000-24968).

10.27 Sales Agreement effective as of December 9, 2003 between the Singing
Machine and CPP Belwin, Inc. and its affiliates (incorporated by reference
to Exhibit 10.7 in the Singing Machine's Quarterly Report on Form 10-Q
filed with the SEC on February 17, 2004, File No. 000-24968).

10.28 Distribution Agreement dated April 1, 2003 between the Singing Machine and
Arbiter Group, PLC.*

10.29 Loan Agreements dated August 13, 2003 in the aggregate amount of $1
million between the Company and each of Josef Bauer, Howard Moore & Helen
Moore Living Trust, Maureen G. LaRoche and Yi Ping Chan.*

10.30 Letter dated March 4, 2003 from Jay Bauer to the Singing Machine regarding
a $400,000 loan.*

14.1 Code of Ethics*

21.1 List of Subsidiaries*

23.1 Consent of Grant Thornton, LLP*

23.2 Consent of Salberg & Co.*

31.1 Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002*

31.2 Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002*

32.1 Certification of the Chief Executive Officer pursuant to U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002*

32.2 Certification of the Chief Financial Officer pursuant to U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002*

* Filed herewith

Reports on Form 8-K

On February 17, 2004, we filed a Current Report on Form 8-K pursuant to
Item 7 (Financial Statements and Exhibits) and Item 9 (Regulation FD Disclosure)
reporting our results for the nine months ended December 31, 2003.

On February 26, 2004, we filed a Current Report on Form 8-K pursuant to
Item 5 (Other Events and Required FD Disclosure). Announcing the results of our
shareholder's meeting held on February 26, 2004.

SIGNATURES

In accordance with the requirements of Section 13 and 15(d) of the
Securities Exchange Act of 1934, The Singing Machine Company, Inc. has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

THE SINGING MACHINE COMPANY, INC.

Dated: January 3, 2005 By: /s/ YI PING CHAN
------------------------------------
Interim Chief Executive Officer
(Principal Executive Officer)

In accordance with the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
The Singing Machine Company, Inc. and in the capacities and on the dates
indicated.

SIGNATURE CAPACITY DATE
---------------------------------- ------------------------------------ -----------------

/s/ YI PING CHAN Chief Executive Officer January 3, 2005
----------------------------------
Yi Ping Chan

/s/ JEFF BAROCAS Chief Financial Officer (Principal January 3, 2005
---------------------------------- Financial and Accounting Officer)
Jeff Barocas

/s/ JOSEF A. BAUER Director
----------------------------------
Josef A. Bauer

/s/ BERNARD APPEL Director
----------------------------------
Bernard Appel

/s/ HARVEY JUDKOWITZ Director
----------------------------------
Harvey Judkowitz

THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004

THE SINGING MACHINE COMPANY, INC.
AND SUBSIDIARY

THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY

INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statement of Cash Flows F-6
Consolidated Statements of Stockholders' Equity F-7
Notes to Consolidated Financial Statements F-8

F-1

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
The Singing Machine Company, Inc.

We have audited the accompanying consolidated balance sheets of The Singing
Machine Company, Inc. and subsidiary (the "Company") as of March 31, 2004 and
2003, and the related consolidated statements of operations, shareholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits.

We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Singing
Machine Company, Inc. and subsidiary as of March 31, 2004 and 2003 and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with accounting principles generally
accepted in the United States of America.

We have also audited Schedule II of The Singing Machine Company, Inc. and
subsidiary for the year ended March 31, 2004. In our opinion, this schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information therein.

The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed more fully in Note 2 to the
financial statements and as of June 16, 2004, the Company has minimal liquidity.
Additionally and as of March 31, 2004, the Company was in violation of the
tangible net worth covenant of its factoring agreement. This continuing
condition of minimal liquidity and the lack of adequate external financing
raises substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to increasing liquidity are also described
in Note 2 to the financial statements. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

/s/ Grant Thornton LLP

Miami, Florida June 16, 2004 (except for the last paragraph of Note 7, as to
which the date is July 14, 2004)

F-2

INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders:
The Singing Machine Company, Inc.
and Subsidiary

We have audited the accompanying consolidated statement of operations, changes
in stockholders' equity, and cash flows for the year ended March 31, 2002 of The
Singing Machine Company, Inc., and Subsidiary. These consolidated financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes, examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
The Singing Machine Company, Inc. and Subsidiary for the year ended March 31,
2002, in conformity with accounting principles generally accepted in the United
States of America.

As more fully described in Note 3 of the fiscal 2004, 2003 and 2002 consolidated
financial statements, subsequent to the issuance of the Company's 2002 and 2001
consolidated financial statements and our report thereon dated May 23, 2002,
management determined to restate the 2002 and 2001 consolidated financial
statements to reflect a change in their position regarding taxation of certain
corporate income and a resulting increase in the income tax provision for years
2002 and 2001. In our related report, we expressed an unqualified opinion. Our
opinion on the revised consolidated financial statements, as expressed herein,
remains unqualified.

/s/ SALBERG & COMPANY, P.A.
Boca Raton, Florida
May 23, 2002 (except for Note 3 as to which the date is July 14, 2003)

F-3

THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

MARCH 31, MARCH 31,
2004 2003
------------ ------------

ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 356,342 $ 268,264
Restricted Cash 874,283 838,411
Accounts Receivable, less allowances of $98,000 and $406,000, respectively 3,806,166 5,762,944
Due from manufacturers 95,580 1,091,871
Inventories, net 5,923,267 25,194,346
Prepaid expense and other current assets 783,492 1,449,505
Insurance receivable 800,000 --
Refundable tax 1,178,512 --
Deferred tax asset -- 1,925,612
------------ ------------
TOTAL CURRENT ASSETS 13,817,642 36,530,953

PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation of $2,871,000 and $1,473,000,
respectively 983,980 1,096,424

OTHER ASSETS
Other non-current assets 615,773 1,307,917
------------ ------------
TOTAL ASSETS $ 15,417,395 $ 38,935,294
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 62,282 $ 316,646
Accounts payable 4,651,675 7,553,007
Accrued expenses 3,481,905 1,443,406
Customer credits on account 2,111,484 933,002
Convertible debentures, net of unamortized discount of $2,554,511 1,445,489 --
Subordinated debt-related parties 1,000,000 400,000
Revolving credit facilities -- 6,782,824
Income taxes payable 2,447,746 3,821,045
------------ ------------
TOTAL CURRENT LIABILITIES 15,200,581 21,249,930
------------ ------------

SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value; 1,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, Class A, $.01 par value; 100,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $0.01 par value; 18,900,000 shares authorized;
8,752,318 and 8,171,678 shares
issued and outstanding 87,523 81,717
Additional paid-in capital 10,052,498 4,843,430
Accumulated (deficit)/retained earnings (9,923,207) 12,760,217
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 216,814 17,685,364
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 15,417,395 $ 38,935,294
============ ============

The accompanying notes are an integral part of these financial statements.

F-4

THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS

MARCH 31, MARCH 31, MARCH 31,
2004 2003 2002
------------ ------------ ------------

(AS RESTATED)
(NOTE 3)

NET SALES $ 70,541,128 $ 95,613,766 $ 62,475,753

COST OF SALES
Cost of Goods Sold 68,279,589 72,329,035 40,852,840
Impairment of Tooling 442,989 -- --
------------ ------------ ------------
GROSS PROFIT 1,818,550 23,284,731 21,622,913

OPERATING EXPENSES
Advertising 2,340,439 5,032,367 2,377,638
Commissions 1,024,883 997,529 1,294,543
Compensation 5,048,831 4,095,176 2,486,547
Freight & Handling 1,423,082 2,112,435 1,242,910
Royalty Expense 2,294,727 2,257,653 1,862,116
Selling, general & administrative expenses 9,881,887 7,175,341 4,123,779
------------ ------------ ------------
TOTAL OPERATING EXPENSES 22,013,849 21,670,501 13,387,533
------------ ------------ ------------

(LOSS) INCOME FROM OPERATIONS (20,195,299) 1,614,230 8,235,380
OTHER INCOME (EXPENSES)
Other income 22,116 196,537 215,840
Stock based guarantee fees -- -- (171,472)
Interest expense (1,752,952) (406,126) (112,123)
Interest income 1,216 11,943 16,934
------------ ------------ ------------
NET OTHER EXPENSES (1,729,620) (197,646) (50,821)
------------ ------------ ------------

(LOSS) INCOME BEFORE PROVISION
FOR INCOME TAXES (21,924,919) 1,416,584 8,184,559
PROVISION FOR INCOME TAXES 758,505 198,772 1,895,494
------------ ------------ ------------
NET (LOSS) INCOME $(22,683,424) $ 1,217,812 $ 6,289,065
============ ============ ============

(LOSS) EARNINGS PER COMMON SHARE:
Basic $ (2.65) $ 0.15 $ 0.88
Diluted $ (2.65) $ 0.14 $ 0.79
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES:
Basic 8,566,116 8,114,330 7,159,142
Diluted 8,566,116 8,931,385 7,943,473

The accompanying notes are an integral part of these financial statements.

F-5

THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS

FOR YEAR ENDING MARCH 31,
--------------------------------------------
2004 2003 2002
------------ ------------ ------------

(AS RESTATED)
(NOTE 3)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) earnings $(22,683,424) $ 1,217,812 $ 6,289,065
Adjustments to reconcile net (loss) earnings to net cash provided by
(used in) operating activities
Depreciation and amortization 750,359 622,298 394,456
Impairment of tooling and Intangible 628,405 -- --
Provision for inventory 3,446,518 3,715,357 --
Provision for bad debt (159,676) 393,737 45,078
Amortization of discount/deferred fees on convertible debentures 909,891 -- --
Stock compensation expense 632,451 -- 171,472
Deferred taxes 1,925,612 (1,734,194) --
Changes in assets and liabilities:
Accounts Receivable 2,116,454 (2,626,074) (2,626,329)
Due from manufacturer 996,291 (603,573) 210,798
Inventories 15,824,562 (19,635,351) (4,460,891)
Prepaid expenses and other assets 666,013 (1,020,895) (352,373)
Insurance receivable (800,000) -- --
Other non-current assets 1,204,630 (426,494) (91,631)
Accounts payable (2,901,332) 5,706,769 1,364,158
Accrued expenses 2,038,499 153,809 199,445
Customer credits on account 1,178,482 933,002 --
Current income taxes (2,551,811) 1,779,117 1,811,439
------------ ------------ ------------
Net cash provided by (used in) operating activities 3,221,924 (11,524,680) 2,954,687
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,266,321) (1,144,064) (613,691)
Proceeds from investment in factor -- -- 933,407
Proceeds from repayment of related party loans -- -- 125,117
Restricted cash (35,872) (324,727) (513,684)
Investment in and advances in unconsolidated subsidiary -- -- 298,900
------------ ------------ ------------
Net cash (used in) provided by financing activities (1,302,193) (1,468,791) 230,049
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from revolving credit facilities 28,863,712 47,825,725 21,856,653
Repayments to revolving credit facilities (35,646,536) (41,042,901) (21,856,653)
Proceeds from issuance of convertible debentures 4,000,000 -- --
Bank Overdraft (254,364) 316,645 --
Payment of fees related to convertible debt (255,000) -- --
Proceeds from subordinated debt-related parties, net 600,000 400,000 1,319,190
Proceeds from exercise of stock options and warrants 860,535 242,119 --
------------ ------------ ------------
Net cash (used in) provided by financing activities (1,831,653) 7,741,588 1,319,190
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 88,078 (5,251,883) 4,503,926
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 268,264 5,520,147 1,016,221
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 356,342 $ 268,264 $ 5,520,147
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
CASH PAID FOR THE YEAR ENDING MARCH 31, 2004
Interest $ 943,018 $ 406,126 $ 112,123
============ ============ ============
Income Taxes $ 1,388,804 $ 153,849 $ 102,415
============ ============ ============
NON-CASH FINANCING ACTIVITIES
Discounts for warrants issued in connection with and
beneficial conversion feature of convertible debentures $ 3,312,362 $ -- $ --
============ ============ ============
Financing fees in connection with convertible debentures
issuance, paid in stock and warrants $ 409,527 $ -- $ --
============ ============ ============
Warrants issued in connection with convertible
debentures amendment $ 30,981 $ -- $ --
============ ============ ============

The accompanying notes are an integral part of these financial statements.

F-6

THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

PREFERRED STOCK COMMON STOCK DEFERRED
--------------- -------------------------- PAID IN RETAINED GUARANTEE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS FEES TOTAL
------ ------ ----------- --------- ----------- ---------- ----------- ----------

Balance at March 31, 2001, -- -- 6,538,680 65,387 3,302,982 5,253,340 (171,472) 8,450,237
restated

Net earnings -- -- -- -- -- 6,289,065 -- 6,289,065
Exercise of warrants -- -- 581,100 5,811 -- 584,239 -- 590,050
Exercise of employee stock
options -- -- 900,525 9,005 720,135 -- -- 729,140
(4,531
Fractional share adjustment
pursuant to 3:2 stock split -- -- (278) (3) (4,528) -- -- )
Amortization of deferred
guarantee fees -- -- -- -- -- -- 171,472 171,472
------ ------ ----------- --------- ----------- ---------- ----------- ----------
Balance at March 31, 2002, -- -- 8,020,027 80,200 4,602,828 11,542,405 -- 16,225,433
restated

Net earnings -- -- -- -- -- 1,217,812 -- 1,217,812
Exercise of warrants -- -- 52,500 525 47,600 -- -- 48,125
Exercise of employee stock
options -- -- 99,151 992 193,002 -- -- 193,994
------ ------ ----------- --------- ----------- ---------- ----------- ----------
Balance at March 31, 2003 -- -- 8,171,678 81,717 4,843,430 12,760,217 -- 17,685,364

Net loss -- -- -- -- (22,683,424) -- -- (22,683,424)
Exercise of employee stock
options -- -- 448,498 4,485 1,076,885 -- -- 1,081,370
Warrants issued in connection
with convertible debenture
amendment -- -- -- -- 30,981 -- -- 30,981
Financing fees paid with
warrants -- -- -- -- 268,386 -- -- 268,386
Warrants issued in connection
with and beneficial
conversion feature of
convertible debentures -- -- -- -- 3,312,362 -- -- 3,312,362
Issuance of common stock -- -- 132,142 1,321 520,454 -- -- 521,775
------ ------ ----------- --------- ----------- ----------- ----------- ----------
Balance at March 31, 2004 -- $ -- 8,752,318 $ 87,523 $10,052,498 $(9,923,207) $ -- $ 216,814
====== ====== =========== ========= =========== =========== =========== ==========

The accompanying notes are an integral part of these financial statements.

F-7

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF ACCOUNTING POLICIES

OVERVIEW

The Singing Machine Company, Inc., a Delaware corporation, and Subsidiary (the
"Company," or "The Singing Machine") are primarily engaged in the development,
marketing, and sale of consumer karaoke audio equipment, accessories, and
musical recordings. The products are sold directly to distributors and retail
customers.

The preparation of The Singing Machine's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
revenues and expenses during the period. Future events and their effects cannot
be determined with absolute certainty; therefore, the determination of estimates
requires the exercise of judgment. Actual results inevitably will differ from
those estimates, and such differences may be material to the Company's financial
statements. Management evaluates its estimates and assumptions continually.
These estimates and assumptions are based on historical experience and other
factors that are believed to be reasonable under the circumstances. These
estimates and The Singing Machine's actual results are subject to the risk
factors listed in Quantitative and Qualitative Disclosure About Market Risk
section.

The management of the Company believes that a higher degree of judgment or
complexity is involved in the following areas:

INVENTORY. The Singing Machine reduces inventory on hand to its net realizable
value on an item by item basis when it is apparent that the expected realizable
value of an inventory item falls below its original cost. A charge to cost of
sales results when the estimated net realizable value of specific inventory
items declines below cost. Management regularly reviews the Company's investment
in inventories for such declines in value.

INCOME TAXES. Significant management judgment is required in developing The
Singing Machine's provision for income taxes, including the determination of
foreign tax liabilities, deferred tax assets and liabilities and any valuation
allowances that might be required against the deferred tax assets. Management
evaluates its ability to realize its deferred tax assets on a quarterly basis
and adjusts its valuation allowance when it believes that it is more likely than
not that the asset will not be realized. At December 31, 2003 and March 31,
2004, the Company concluded that a valuation allowance was needed against all of
the Company's deferred tax assets, as it was not more likely than not that the
deferred taxes would be realized. As of March 31, 2004 and 2003, The Singing
Machine had gross deferred tax assets of $8.2 million and $1.9 million, against
which the Company recorded valuation allowances totaling $8.2 million and $0,
respectively.

For the fiscal year ended March 31, 2004, the Company recorded a tax provision
of $758,505. This occurred because the valuation allowance established against
the Company's deferred tax assets exceeded the amount of the benefit created
from carrying back a portion of the current year's losses. The carry-back of the
losses from the current year resulted in an income tax receivable of $1.1
million, which is included in refundable tax in the accompanying balance sheets.
We have received the tax fund of $1.1 million on August 24, 2004, which has been
used to pay related parties' loan and the vendors. The Company has now exhausted
its ability to carry back any further losses and therefore will only be able to
recognize tax benefits to the extent that it has future taxable income.

The Company's subsidiary has applied for an exemption of income tax in Hong
Kong. Therefore, no taxes have been expensed or provided for at the subsidiary
level. Although no decision has been reached by the governing body, the parent
company has reached the decision to provide for the possibility that the
exemption could be denied and accordingly has recorded a provision for Hong Kong
taxes in fiscal 2003 and 2002. There was no provision for Hong Kong income taxes
in fiscal 2004 due to the subsidiary's net operating losses.

F-8

Hong Kong income taxes payable totaled $2.4 million at March 31, 2004 and 2003
and is included in the accompanying balance sheets as income taxes payable.

The Company effectively repatriated approximately $2.0 million, $5.6 million and
$5.7 million from its foreign operations in 2004, 2003 and 2002, respectively.
Accordingly, these earnings were taxed as a deemed dividend based on U.S.
statutory rates. The Company has no remaining undistributed earnings of the
Company's foreign subsidiary.

The Company operates within multiple taxing jurisdictions and is subject to
audit in those jurisdictions. Because of the complex issues involved, any claims
can require an extended period to resolve. In management's opinion, adequate
provisions for income taxes have been made.

OTHER ESTIMATES. The Singing Machine makes other estimates in the ordinary
course of business relating to sales returns and allowances, warranty reserves,
and reserves for promotional incentives. Historically, past changes to these
estimates have not had a material impact on the Company's financial condition.
However, circumstances could change which may alter future expectations.

THE FOLLOWING ARE THE COMPANY'S REMAINING ACCOUNTING POLICIES.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of The Singing
Machine Company, Inc. and its wholly-owned Hong Kong Subsidiary, International
SMC (HK) Limited ("Hong Kong Subsidiary"). All intercompany accounts and
transactions have been eliminated in consolidation.

STOCK SPLITS

On March 15, 2002, the Company affected a 3 -for -2 stock split. All share and
per share data have been retroactively restated in the accompanying consolidated
financial statements to reflect the split.

FOREIGN CURRENCY TRANSLATION

The functional currency of the Hong Kong Subsidiary is its local currency. The
financial statements of the subsidiary are translated to U.S. dollars using
year-end rates of exchange for assets and liabilities, and average rates of
exchange for the year for revenues, costs, and expenses. Net gains and losses
resulting from foreign exchange transactions are included in the consolidated
statements of operations and were not material during the periods presented. The
effect of exchange rate changes on cash at March 31, 2004, 2003 and 2002 were
also not material.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents. Cash balances
March 31, 2004 and 2003 include approximately $140,000 and $73,000,
respectively, held in foreign banks by the Hong Kong Subsidiary.

COMPREHENSIVE EARNINGS (LOSSES)

Other comprehensive earnings (losses) is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources, including foreign currency translation
adjustments and unrealized gains and losses on derivatives designated as cash
flow hedges. For years ended March 31, 2004, 2003 and 2002, there was no other
comprehensive earnings (losses).

F-9

INVENTORIES

Inventories are comprised of electronic karaoke audio equipment, accessories,
and compact discs and are stated at the lower of cost or market, as determined
using the first in, first out method. Inventory consigned to customers at, March
31, 2004 and 2003 was $300,914 and $56,695, respectively.

The following table represents the major components of inventory:

MARCH 31, MARCH 31,
2004 2003
----------- -----------
Finished Goods $ 5,801,917 $24,092,406
Inventory in
Transit $ 121,350 $ 1,101,940
----------- -----------

Total Inventories $ 5,923,267 $25,194,346
=========== ===========

LONG-LIVED ASSETS

The Company reviews long-lived assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying amounts may
not be recoverable. If the undiscounted future cash flows attributable to the
related assets are less than the carrying amount, the carrying amounts are
reduced to fair value and an impairment loss is recognized in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
During the year ended March 31, 2004, the Company recorded an impairment charge
totaling $442,989 on certain tooling. The charge was the result of the Company's
decision to discontinue certain inventory models.

SHIPPING AND HANDLING COSTS

Shipping and handling costs are classified as a separate component of operating
expenses and those billed to customers are recorded as revenue in the statement
of operations.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, less accumulated depreciation and
amortization. Expenditures for repairs and maintenance are charged to expense as
incurred. Depreciation is provided for in amounts sufficient to relate the cost
of depreciable assets to their estimated useful lives using accelerated and
straight-line methods.

REVENUE RECOGNITION

Revenue from the sale of equipment, accessories, and musical recordings are
recognized upon the later of (a) the time of shipment or (b) when title passes
to the customers, all significant contractual obligations have been satisfied
and collection of the resulting receivable is reasonably assured. Revenues from
sales of consigned inventory are recognized upon sale of the product by the
consignee. Net sales are comprised of gross sales net of a provision for actual
and estimated future returns, discounts and volume rebates. The provision for
actual and estimated sales returns for fiscal year ended March 31, 2004, 2003
and 2002 was $6.6 million, $9.9 million and $6.3 million, respectively. The
total returns represents 9.4%, 10.4% and 10.0% of the net sales for fiscal year
ended March 31, 2004 , 2003 and 2002, respectively.

DUE FROM MANUFACTURER

The Hong Kong Subsidiary operates as an intermediary to purchase karaoke
hardware from factories located in China on behalf of the Company. Certain
manufacturers credited the Company for the return of inventory to the factory
for rework. The credit received for the returns of the machine were $72,879,
$449,411and 640,801 for the year ended March 31, 2004, 2003 and 2002. The
manufacturers also credited the Company $740,940 for volume incentive rebates on
purchases in fiscal 2003, which was recorded as a reduction of the inventory.
The balance due from these manufacturers as of March 31, 2004 and 2003 was
$95,580 and $1,091,871, respectively and will be applied to future purchases of
inventory.

F-10

CUSTOMER CREDITS ON ACCOUNT

Customer credits on account represent customers that have received credits in
excess of their accounts receivable balance. These balances were reclassified
for financial statement purposes as current liabilities until paid or applied to
future purchases.

STOCK BASED COMPENSATION

The Company accounts for stock options issued to employees using the intrinsic
value method in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation cost is measured on the date of grant as
the excess of the current market price of the underlying stock over the exercise
price. Such compensation amounts are amortized over the respective vesting
periods of the option grant. The Company applied the disclosure provisions of
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation- Transition and Disclosure an amendment of FASB
Statement No. 123", which permits entities to provide pro forma net earnings
(loss) and pro forma earnings (loss) per share disclosures for employee stock
option grants as if the fair-valued based method defined in SFAS No. 123 had
been applied to options granted.

Had compensation cost for the Company's stock-based compensation plan been
determined using the fair value method for awards under that plan, consistent
with SFAS No. 123, "Accounting for Stock Based Compensation", the Company's net
earnings (loss) would have been changed to the pro-forma amounts indicated below
for the years ended March 31:

FISCAL YEARS ENDED MARCH 31
-------------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------

Net (loss) earnings, as reported $ (22,683,424) $ 1,217,812 $ 6,289,065
Deductes: Total stock-based employee
compensation expensed determined under
fair value based method $ (723,058) $ (1,740,624) $ (115,489)

Net (loss) earnings, pro forma $ (23,406,482) $ (522,812) $ 6,173,576

Net (loss) earnings per share - basic As reported $ (2.65) $ 0.15 $ 0.88
Pro forma $ (2.73) $ (0.06) $ 0.86

Net (loss) earnings per share - diluted As reported $ (2.65) $ 0.14 $ 0.79
Pro forma $ (2.73) $ (0.06) $ 0.78

The effect of applying SFAS No. 123 is not likely to be representative of the
effects on reported net earnings (loss) for future years due to, among other
things, the effects of vesting.

For financial statement disclosure purposes and for purposes of valuing stock
options and warrants issued to consultants, the fair market value of each stock
option granted was estimated on the date of grant using the Black- Scholes
Option-Pricing Model in accordance with SFAS No. 123 using the following
weighted-average assumptions:

o Fiscal 2004: expected dividend yield 0%, risk- free interest rate of
4%, volatility between 80% and 110% and expected term of three
years.

o Fiscal 2003: expected dividend yield 0%, risk- free interest rate of
4%, volatility 71% and expected term of three years.

o Fiscal 2002: expected dividend yield 0%, risk- free interest rate of
6.08% to 6.81%, volatility 42% and expected term of two years.

F-11

ADVERTISING

Costs incurred for producing and communicating advertising of the Company, are
charged to operations as incurred. The Company had entered the cooperative
advertising agreements with its major clients, which specifically indicated that
the client have to spend the cooperative advertising fund in mutually agreed
events. The percentage of the cooperative advertising allowance ranges from 2%
to 5% of the purchase. The clients have to advertise the Company's products in
the client's catalog, local news paper and other advertising media. The client
must submit the proof of the performance (such as copy of the advertising show
the Registrant product) to the Company to request for the allowance. The client
does not have the ability to spend the allowance at their discretion. The
Company believes that the identifiable benefit from the cooperative advertising
program, and the fair value of the advertising benefit is equal or greater than
the cooperative advertising expense. Advertising expense for the years ended
March 31, 2004, 2003 and 2002 was $2,340,439, $5,032,367 and $2,377,638,
respectively.

RESEARCH AND DEVELOPMENT COSTS

All research and development costs are charged to results of operations as
incurred. These expenses are shown as a component of selling, general &
administrative expenses in the consolidated statements of operations. For the
years ended March 31, 2004, 2003 and 2002, these amounts totaled $302,144,
$674,925 and $181,866, respectively.

EARNINGS PER SHARE

In accordance with SFAS No. 128, "Earnings per Share", basic (loss) earnings per
share is computed by dividing the net (loss) earnings for the year by the
weighted average number of common shares outstanding. Diluted earnings per share
is computed by dividing net earnings by the weighted average number of common
shares outstanding including the effect of common stock equivalents.

The following table presents a reconciliation of basic earnings, loss per share
and diluted earnings per share:

FISCAL YEARS ENDED MARCH 31
-------------------------------------------
2004 2003 2002
------------ ------------ ------------
(Restated)

Net (loss) earnings $(22,683,424) $ 1,217,812 $ 6,289,065
(Loss) earnings available to common shareholders $(22,683,424) $ 1,217,812 $ 6,289,065
Weighted average shares outstanding - basic 8,566,116 8,114,330 7,159,142
(Loss) earnings per share - basic $ (2.65) $ 0.15 $ 0.88

Effect of dilutive securities:

Stock options/Warrants -- 817,055 784,331

Convertible debentures -- -- --

Weighted average shares outstanding - diluted 8,566,116 8,931,385 7,943,473
Earnings per share - diluted $ (2.65) $ 0.14 $ 0.79

For fiscal years ended 2004, 2003 and 2002, 2,657,532, 0 and 0 common stock
equivalents were not included in the computation of diluted earnings per share
as their effect would have been antidilutive.

FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosures of information about the fair value of certain financial instruments
for which it is practicable to estimate that value. For purposes of this
disclosure, the fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation.

The carrying amounts of the Company's short-term financial instruments,
including accounts receivable, accounts payable and accrued expenses
approximates fair value due to the relatively short period to maturity for these
instruments.

RECLASSIFICATIONS

Certain prior years amounts have been reclassified to conform to the current
year presentation.

F-12

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities (and Interpretation of ARB No. 51)" ("FIN 46"). FIN
46 addresses consolidation by business enterprises of certain variable interest
entities, commonly referred to as special purpose entities. The adoption of FIN
46 did not have a material effect on the Company's financial condition, results
of operations, or cash flows.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments with Characteristics of both Liabilities and Equity."
This statement amends and clarifies accounting for derivatives instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133. This statement is effective for contracts
entered into or modified after June 30, 2003, except as for provisions that
relate to SFAS No. 133 implementation issues that have been effective for fiscal
quarters that began prior to June 15, 2003, which should continue to be applied
in accordance with their respective dates. The adoption of SFAS No. 149 did not
have a material impact on the Company's financial condition, results of
operations, or cash flows.

In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This Statement
establishes standards for classifying and measuring certain financial
instruments that embody obligations of the issuer and have characteristics of
both liabilities and equity and is effective financial instruments entered into
or modified after May 31, 2003; otherwise effective at the beginning of the
first interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities which are subject to the
provisions of this Statement for the first fiscal period beginning after
December 15, 2003 the adoption of SFAS No. 150 did not have a material impact on
the Company's financial condition, results of operations, or cash flows.

NOTE 2 - GOING CONCERN

The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.

The Company has an accumulated deficit in shareholders equity and is
experiencing difficulty in keeping payments current with various vendors. As a
result, the Company's independent registered public accounting firm has
expressed substantial doubt in the Company's ability to continue as a going
concern in their report for the years ended March 31, 2004 and 2003, which was
included in the Company's annual report on Form 10-K.

Operations will be financed using the following methods:

o Vendor Financing. The Company's key vendors in China have agreed to
manufacture on behalf of the Company, without advanced payments.

o A significant amount of committed customer orders have been sold
under customer letters of credit terms. The customer's letters of
credit will be used as collateral to provide advances to our
vendors. The customers will pay and take title of the karaoke
machines in China as the karaoke machines are shipped. This will
generate immediate funds to pay the vendors and generate additional
cash flows.

o Asset based lending facility with an US bank for factoring credit of
$2.5 million to financing the account receivables in the USA

On June 16 2004, Edward Steele, former officer and director, advanced
$40,000 to us. The loan was interest free and paid in full on August 30, 2004.

On July 14, 2004, Josef A. Bauer, a director, advanced a short-term loan
of $200,000 to us which we used to meet our working capital obligations. The
interest rate on the loan is 8.5% per annum and the loan is payable on demand.
On August 26, 2004, we repaid Mr. Buaer a total of $202,109, including $2,109 in
interest.

There can be no assurances that forecasted results will be achieved or
that additional financing will be obtained. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset amounts or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.

F-13

NOTE 3 - RESTATEMENT OF FINANCIAL STATEMENTS FOR THE FISCAL YEARS 2002 AND 2001

In June 2003, management revised its position on taxation of its subsidiary's
income by the United States and by the Hong Kong tax authorities.

With regard to taxation in Hong Kong, the Company's subsidiary had previously
applied for a Hong Kong offshore claim income tax exemption based on the
locality of profits of the Hong Kong subsidiary. Management believed that the
exemption would be approved because the source of all profits of the Hong Kong
subsidiary is from exporting to customers outside of Hong Kong. Accordingly, no
provision for income taxes was provided in the consolidated financial statements
as of March 31, 2002 and 2001. However, full disclosure was previously reflected
in the audited financial statements for years ended March 31, 2002 and 2001 of
the estimated amount that would be due to the Hong Kong tax authority should the
exemption be denied. Management is continuing its exemption application process.
However, due to the extended period of time that the application has been
outstanding, as well as management's reassessment of the probability that the
application will be approved, management has determined to restate the 2002 and
2001 consolidated financial statements to provide for such taxes. The effect of
such restatement is to increase income tax expense by $748,672 and $468,424 in
fiscal 2002 and 2001, respectively. However, the Company can claim United States
foreign tax credits in 2002 for these Hong Kong taxes, which is reflected in the
final restated amounts.

With regard to United States taxation of foreign income, the Company had
originally taken the position that the foreign income of the Hong Kong
subsidiary qualified for a deferral under the Internal Revenue Code allowing for
such income to be indefinitely deferred and not taxed in the United States until
such income is repatriated. Full disclosure of the amount and nature of the
indefinite deferral for fiscal year 2002 was reflected in the income tax
footnote of the consolidated financial statements for that year. The internal
revenue code, regulations and case law regarding international income taxation
is quite complex and subject to interpretation. Each case is determined based on
the individual facts and circumstances. Due to certain inter-company loans made
in 2002 and 2003, the profits previously considered to be indefinitely deferred
became partially taxable as "deemed dividends" under section 956 of the Internal
Revenue Code. Although certain arguments against the imposition of a "deemed
dividend" may be asserted, management has determined to restate the fiscal year
2002 consolidated financial statements based on its reassessment of its original
position. The effect of such restatement is to increase income tax expense by
$1,027,545 in fiscal year 2002, which includes the utilization of the foreign
tax credits referred to above.

In September, 2004, management revised the cash flow for the quarters ended June
30, 2003, September 30, 2003 and December 31, 2003 and years ended March 31,
2003 and 2004. The amendments are related to the reclassification of the
"Restrict Cash" and "Bank Overdraft". There is no effect to the Statement of
Operations. The following table shows the reclassification of the cash flow:

F-14

THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
COMPRESSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

FOR QUARTERS ENDED
---------------------------------------------------------------------------------
06/30/03 06/30/03 09/30/03 09/30/03 12/31/03 12/31/03
-------- -------- -------- -------- -------- --------
AS REPORTED AS AMENDED AS REPORTED AS AMENDED AS REPORTED AS AMENDED
----------- ---------- ----------- ---------- ----------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)

Cash flows from operating activities
Net Income $ (2,317,352) $ (2,317,352) $ (2,974,021) $ (2,974,021) $(13,424,622) $(13,424,622)
Net Cash Used in Operating Activities (10,948) 282,757 (4,678,328) (4,380,280) (4,998,092) (4,998,092)
------------ ------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in Investing Activities (299,186) (322,897) (157,178) (186,370) (434,065) (462,067)
------------ ------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by Financing Activities 128,282 (141,712) 5,673,244 5,404,388 5,399,850 5,427,852
------------ ------------ ------------ ------------ ------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (181,852) (181,852) 837,738 837,738 (32,307) (32,307)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 268,265 268,265 268,265 268,265 268,265 268,265
------------ ------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 86,413 $ 86,413 $ 1,106,003 $ 1,106,003 $ 235,958 $ 235,958
============ ============ ============ ============ ============ ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 188,469 $ 188,469 $ 350,192 $ 350,192 $ 591,817 $ 591,817
============ ============ ============ ============ ============ ============
Cash paid during the year for income taxes $ -- $ -- $ 205,000 $ 205,000 $ 205,000 $ 205,000
============ ============ ============ ============ ============ ============

FOR YEARS ENDED
-------------------------------------------------------
03/31/03 03/31/03 03/31/04 03/31/04
-------- -------- -------- --------
AS REPORTED AS AMENDED AS REPORTED AS AMENDED
----------- ---------- ----------- ----------

Cash flows from operating activities
Net Income $ 1,217,812 $ 1,217,812 $(22,683,424) $(22,683,424)
Net Cash Used in Operating Activities (11,532,761) (11,524,660) 3,221,924 3,221,924
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in Investing Activities (1,144,064) (1,468,791) (1,266,321) (1,302,193)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by Financing Activities 7,424,943 7,741,589 (1,867,525) (1,831,853)
------------ ------------ ------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (5,251,882) (5,251,882) 88,078 88,078
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,520,147 5,520,147 268,264 268,264
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 268,265 $ 268,265 $ 356,342 $ 356,342
============ ============ ============ ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 406,126 $ 406,126 $ 943,018 $ 943,018
============ ============ ============ ============
Cash paid during the year for income taxes $ 153,849 $ 153,849 $ 1,3688,804 $ 1,388,804
============ ============ ============ ============

F-15

NOTE 4 - ACCOUNTS RECEIVABLE FACTORING AGREEMENT

On February 9, 2004, the Company entered into a factoring agreement with Milberg
Factors, Inc. ("Milberg") of New York City. The agreement allows the Company, at
the discretion of Milberg, to factor its outstanding receivables without
recourse up to a maximum of the lesser of $3.5 million or 80% of eligible
accounts receivable, less certain reserves determined by Milberg. The Company
will pay 0.8% of gross receivables in fees and the average balance of the line
will be subject to interest on a monthly basis at prime plus 0.75% with a
minimum rate not to decrease below 4.75%. The agreement contains minimum
aggregate charges in any calendar year of $200,000, limits on incurring any
additional indebtedness and the Company must maintain tangible net worth and
working capital above $7.5 million. Milberg also received a security interest in
all of the Company's accounts receivable and inventory located in the United
States and a pledge of 66 2/3% of the Hong Kong Subsidiary. For the year ending
March 31, 2004, the Company incurred $141,455 in related charges which are
included in selling, general and administrative expenses in the accompanying
statements of operations.

No accounts were factored for the year ended March 31, 2004 or 2003. As of March
31, 2004, the Company was in violation of the minimum tangible net worth and
working capital requirements and subsequent to March 31, 2004, the agreement was
terminated.

NOTE 5 - PROPERTY AND EQUIPMENT

A summary of property and equipment is as follows:

USEFUL MARCH 31 MARCH 31
LIVE 2004 2003
--------- ---------- ----------
Computer and office equipment 5 years 465,810 313,222

Furniture and fixtures 5-7 years 381,164 341,777

Leasehold improvement * 103,776 110,841

Molds and tooling 3 years 2,903,822 1,803,435
---------- ----------
3,854,572 2,569,275

Less: Accumulated depreciation (2,870,592) (1,472,850)
---------- ----------
$ 983,980 $1,096,425
========== ==========

* Shorter of remaining term of lease or useful life

NOTE 6 - RESTRICTED CASH

The Company, through the Hong Kong Subsidiary, maintains a letter of credit
facility and short term loan with a major international bank. The Hong Kong
Subsidiary was required to maintain a separate deposit account in the amount
$874,283 and $838,411 at March 31, 2004 and 2003, respectively. This amount is
shown as restricted cash in the accompanying balance sheets.

NOTE 7 - LOANS AND LETTERS OF CREDIT

CREDIT FACILITY

The Hong Kong Subsidiary maintains separate credit facilities at two
international banks. The primary purpose of the facilities is to provide the
Subsidiary with the following abilities:

o Overdraft protection facilities ;

o Issuance and negotiation of letters of credit,

o Trust receipts; and

o A Company credit card .

The facilities are secured by a corporate guarantee from the US company,
restricted cash on deposit with the lender and require that the Company maintain
a minimum tangible net worth of $2.7 million. The Hong Kong Subsidary was in
compliance with requirements. The maximum available credit under the facility is
2.0 million. The credit facilities have been increased to $4 million by
increasing the fixed deposit with the bank, which is used as collateral. The
balances due under the facility March 31, 2004 and 2003 were $62,282 and
316,646, respectively. The interest rate is approximately 4%. At March 31, 2004,
the Company has used all credit facilities to open the letter of credit to the
factories for the purchase. The company does not have any additional
availability under these facilities.

On April 26, 2001, the Company executed a Loan and Security Agreement with a
commercial lender, which as amended was due to expire on March 31, 2004. As of
January 31, 2004 the loan was paid in full, the facility was terminated and the
UCC filings were released.

RELATED PARTY LOANS

On July 14, 2004, Josef A. Bauer, a director, advanced a short-term loan
of $200,000 to us which we are to use to meet our working capital obligations.
The interest rate on the loan is 8.5% per annum and the loan is payable on
demand. On August 26, 2004, we repaid Mr. Buaer a total of $202,109, including
$2,109 in interest.

F-16

On June 16, 2004, Edward Steele, former officer and director, advanced
$40,000 to us. The loan was interest fee and paid in full on August 30, 2004.

On or about July 10, 2003, certain officers and directors of our company
advanced $1 million to our company pursuant to written loan agreements. The
officer was Yi Ping Chan and the directors were Josef A. Bauer and Howard Moore.
Mr. Moore resigned from our Board, effective as October 17, 2003. Additionally,
Maureen LaRoche, a business associate of Mr. Bauer, participated in the
financing. The loans accrue interest at 9.5% per annum and as of September 30,
2004, all interest was accrued, and the unpaid amount totaled approximately
$23,750. These loans were originally scheduled to be repaid by October 31, 2003
and are now due on demand.

NOTE 8 - CONVERTIBLE DEBENTURES WITH WARRANT

In September 2003, the Company issued $4 million of 8% Convertible
Debentures in a private offering which are due February 20, 2006 ("Convertible
Debentures"). The net cash proceeds received by the Company were $3,745,000
after deduction of cash commissions and other expenses.

The Convertible Debentures are convertible at the option of the holders
and were initially convertible into 1,038,962 common shares at a conversion
price of $3.85 per common share subject to certain anti-dilution adjustment
provisions, at any time after the closing date. The repayment of the Convertible
Debentures was subordinated to a factoring agreement with Milberg Factors, which
was terminated as of July 14, 2004.

These Convertible Debentures were issued with 457,143 detachable stock
purchase warrants with an exercise price of $4.025 per share. These warrants may
be exercised at anytime after September 8, 2003 and before September 7, 2006 and
are subject to certain anti-dilution provisions. The warrants are also subject
to an adjustment provision; whereas the price of the warrants may be changed
under certain circumstances.

The Convertible Debentures bear interest at the stated rate of 8% per
annum. Interest is payable quarterly on March 1, June 1, September 1, and
December 1. The interest may be payable in cash, shares of Common Stock, or a
combination thereof subject to certain provisions and at the discretion of the
Company.

In accounting for this transaction, the Company allocated the proceeds
based on the relative estimated fair value of the stock purchase warrants and
the convertible debentures. This allocation resulted in a discount on the
convertible debentures of $3.3 million, which is being amortized over the life
of the debt on a straight-line basis to interest expense, which is not
materially different from effective interest method.

On February 9, 2004, the Company amended its convertible debenture
agreements to increase the interest rate to 8.5% and to grant warrants to
purchase an aggregate of 30,000 shares of the Company's common stock to the
debenture holders on a pro-rata basis. These concessions are in consideration of
the debenture holder's agreements to (i) enter into new subordination agreements
with Milberg, (ii) to waive all liquidated damages due under the transaction
documents through July 1, 2004 and (iii) to extend the effective date of the
Form S-1 registration statement until July 1, 2004. The new warrants have an
exercise price equal to $1.52 per share and the fair value of these warrants was
estimated by using the Black-Scholes Option-Pricing Model and totaled $30,981.
This amount was expensed as a component of selling, general and administrative
expenses during the three months ended December 31, 2003. Pursuant to the
Convertible Debenture agreements, the Company was required to register the
shares of common stock underlying the debentures and detachable stock purchase
warrants issued in connection with the debentures. The registration of the
common shares was required to be effective by July 1, 2004.

On November 8, 2004, the Company executed a letter agreement with the
debenture holders, whereby the Company agreed to change the interest rate on the
debenture to 9% in exchange for the debenture holders agreeing to (i) execute a
subordination agreement with Crestmark Bank, (ii) waive all liquidated damages
due under the transaction documents through January 7, 2005, and (iii) withdraw
any demand for repayment under the debenture.

According to the anti-dilution adjustment provision, If the Singing
Machine sells shares of its common stock at an effective price less than Set
Price, the debentures' holders are entitled to convert their debentures into
shares at a new conversion price, which equals to the original set price minus
75% of the difference between the Set Price and the new price if the event
occurs before September 8, 2004. On July 30, 2004, the Singing Machine received
the court approval of the Class Action Lawsuit (case# 03-CV-80596). The Singing
Machine issued 400,000 shares to the plaintiff as part of the settlement on
September 23, 2004. The market closing price on July 30, 2004 was $0.60 per
share. The event has triggered the conversion price reset for the convertible
debentures.

F-17

According to the Emerging Issue Task Force (EITF) Issue No. 00-27, if the
terms of a contingent conversion option do not permit an issuer to compute the
number of shares that the holder would receive if the contingent event occurs
and the conversion price is adjusted, an issuer should wait until the contingent
event occurs and then compute the resulting number of shares that would be
received pursuant to the new conversion price. The incremental intrinsic value
that resulted from the price reset equals additional shares multiplied by the
stock market price at the issuing date of the debentures, which would be
recorded as discount of convertible debentures and amortized over the remaining
life of the debentures. The new adjusted conversion price is $1.41 [3.85-
(3.85-0.60) X 75%] while the conversion price of each warrant is $1.46. As of
July 30,2004, the number of shares issuable upon conversion of the debentures is
2,831,858. As a result, an additional discount of $687,638 was recorded, which
is being amortized over the remaining life of the debentures. Total amortization
for fiscal year ended March 31, 2004 totaled $757,851 and the unamortized
discount totaled $2,554,511 at March 31, 2004.

In connection with the Convertible Debentures the Company paid financing
fees as follows: 103,896 stock purchase warrants, with a fair value of $268,386,
28,571 shares of common stock with a fair value of $141,141, and cash of
$255,000. Total financing fees of $664,527 were recorded as deferred fees and
are being amortized over the term of the debentures.

The unamortized deferred fees are reported in other non-current assets in
the accompanying balance sheets and total $512,487.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

LEGAL MATTERS

CLASS ACTION From July 2, 2003 through October 2, 2003, seven securities class
action lawsuits and a shareholder's derivative action were filed against the
Company and certain of its officers and directors in the United States District
Court for the Southern District of Florida on behalf of all persons who
purchased the Company's securities during the various class action periods
specified in the complaints. On September 18, 2003, United States District Judge
William J. Zlock entered an order consolidating the seven (7) purported class
action law suits and one (1) purported shareholder derivative action into a
single action case styled Frank Bielansky v. the Company, Salberg & Company,
P.A., et al - Case Number: 03-80596 - CIV - ZLOCK (the "Class Action"). Salberg
& Company, P.A. is our former independent auditor. The complaints that were
filed allege violations of Section 10(b) and Section 20(a) of the Securities
Exchange Act of 1934 and Rule 10(b)-5. The complaints seek compensatory damages,
attorney's fees and injunctive relief.

The Company entered into a settlement agreement with the plaintiffs in the Class
Action in March 2004. At a hearing in April 2004, the Court gave preliminary
approval for the settlement and directed that notices be sent to shareholders
pursuant to the settlement agreement. The notices advised shareholders of their
rights and responsibilities concerning the settlement. We entered into a
settlement agreement with the plaintiffs in the Class Action in March 2004.

Pursuant to the terms of the settlement agreement, the Company is required to
make a cash payment of $800,000 and Salberg & Company, P.A., our former auditor,
is required to make a payment of $475,000. Our cash payment of $800,000 is
covered by our liability insurance and our insurer has placed this payment in an
escrow account pending final approval of the Settlement. In addition, the
Company is obligated to issue 400,000 shares of its common stock and may also
provide other non-cash consideration. The pending settlement would also obligate
the Company to implement certain corporate governance changes, including an
expansion of its Board of Directors to six members with independent directors
comprising at least 2/3 of the total Board seats.

As of March 31, 2004, the Company recorded an expense equal to the total
estimated cost of the settlement less the amount expected to be reimbursed by
the Company's insurance carrier. The net charge associated with this matter
totaled approximately $462,000 and is included as a component of selling,
general and administrative expenses in the accompanying statements of
operations.

The court entered an order approving the settlement agreement on July 30, 2004.
The Company has issued the 400,000 thousand shares to the plaintiffs on November
22, 2004 and $800,000 was placed in escrow for the benefit of the plaintiffs.

F-18

OTHER MATTERS. In August 2003, we were advised that the Securities and Exchange
Commission had commenced an informal inquiry of our company. We are cooperating
fully with the SEC staff. It appears that the investigation is focused on the
restatement of our audited financial statements for fiscal 2002 and 2001. We
have been advised that an informal inquiry should not be regarded as an
indication by the SEC or its staff that any violations of law have occurred or
as a reflection upon any person or entity that may have been involved in those
transactions.

The Company entered into a settlement agreement with an investment banker on
November 17, 2003. Pursuant to this agreement, the Company agreed to pay the sum
of $181,067 over a five month period and issue to the investment banker 40,151
shares of stock with a fair value of $94,355. As of the date of the settlement
agreement, the Company expensed the total amount of the settlement, which is
included as selling, general and administrative expenses in the accompanying
statements of operations. As of March 31, 2004, the unpaid balance totaled
$72,427 and is included in accounts payable in the accompanying balance sheets.

The Company is also subject to various other legal proceedings and other claims
that arise in the ordinary course of its business. In the opinion of management,
the amount of ultimate liability, if any, in excess of applicable insurance
coverage, is not likely to have a material effect on the financial condition,
results of operations or liquidity of the Company. However, as the outcome of
litigation or other legal claims is difficult to predict, significant changes in
the estimated exposures could occur, which could have a material impact on the
Company's operations.

LEASES

The Company has entered into various operating lease agreements for office and
warehouse facilities in Coconut Creek, Florida, Compton, California, Rancho
Dominguez, California and Kowloon, Hong Kong. The leases expire at varying
dates. Rent expense for fiscal 2004, 2003 and 2002 was $1,542,041, $901,251 and
$333,751, respectively.

In addition, the Company maintains various warehouse and computer equipment
operating leases.

Future minimum lease payments under property and equipment leases with terms
exceeding one year as of March 31, 2004 are as follows:

PROPERTY LEASES EQUIPMENT LEASES
---------------- ----------------
Year ending March 31:
2005 $ 838,792 $ 71,746
2006 579,851 19,502
2007 495,545 7,969
2008 371,659 13,044
2009 371,659 8,002
---------------- ----------------
$ 2,657,506 $ 120,263
================ ================

EMPLOYMENT AGREEMENTS

The Company has employment contracts with three key officer and one
employee as of March 31, 2004. The agreements provide for base salaries, with
annual cost of living adjustments and travel allowances and expire through March
31, 2006. In the event of a termination for cause or in the event of a change of
control, as defined in the agreements, the employees would be entitled to a lump
sum payment in the aggregate of $533,000.

MERCHANDISE LICENSE AGREEMENTS

The Company entered into a licensing agreement with MTV in November 2000 and had
amended the agreement five times since that date. This license covers the sale
of MTV products in the United States, Canada and Australia. During fiscal 2004,
the Company's product line consisted of nine MTV branded machines and a wide
assortment of MTV branded music. The license agreement as amended with MTV
currently expires on December 31, 2004, subject to MTV's option, at its sole
discretion, to extend the agreement. The minimum payment for the calendar year
2004 is $300,000, which is recoupable against sales throughout the calendar
year, unless the license agreement is cancelled. The remaining future minimum
payment is $200,000 as March 31, 2004.

F-19

In February 2003, the Company entered into a multi-year license agreement with
Universal Music Entertainment to market a line of Motown Karaoke machines and
music. This agreement and its subsidiary agreement signed in March 2003, allow
the Company to be the first to use original artist recordings for our CD+G
formatted karaoke music. Over the term of the license agreement, the Company is
obligated to make guaranteed minimum royalty payments over a specified period of
time in the amount of $300,000. The Universal Music Entertainment license
expires on March 31, 2006 and does not contain any automatic renewal provisions.
The remaining future minimum payment is $175,000 as of March 31, 2004.

The Company entered into a license agreement with Care Bears in September 2003.
Under this agreement, the Company licensed Care Bears branded machines and
electronic products. This license expires on January 1, 2006. Over the term of
the license agreement, the Company is obligated to make guaranteed minimum
royalty payments over a specific period of time in the amount of $200,000. The
Company had amended the agreement in September to reduce the minimum payment
$85,000 with the expiration date on December 31, 2004. The remaining future
minimum payment is $175,000 as of March 31, 2004.

NOTE 10 - STOCKHOLDERS' EQUITY

COMMON STOCK ISSUANCES

During the fiscal ended March 31, 2004, the Company issued 580,640 shares of its
common stock. Of these shares, 28,571 were issued in lieu of a cash payment of
commission and closing costs relating to the Convertible Debentures. Certain
executives received 63,420 shares of common stock in lieu of a portion of their
cash compensation and bonuses for fiscal 2004. The fair value of this stock,
$290,464 was charged to compensation expense. 40,151 shares of stock were issued
in lieu of a settlement with an investment banker, at an estimated fair value of
$94,355. The remaining 448,498 shares of stock issued were through the exercise
of vested stock options.

On May 11, 2004, the Company issued 50,000 shares of common stock to a former
executive for consulting services rendered. The Company expensed the consulting
costs in the three months ended December, 31, 2003, the period which services
were provide.

During period presented, the Company issued the following shares of stock.

Years ended March 31, Number of shares issued Proceed to company
--------------------- ----------------------- ------------------
2004 580,640 $ 860,535

2003 515,651 $ 242,119

2002 1,481,347 $ 1,319,190

GUARANTEE FEES

During the year ended March 31, 2000, the Company issued 525,000 shares of
common stock to two officers of the Company in exchange for guarantees related
to the Company's factor agreement, and letter of credit agreement. These
guarantee fees totaled $590,625 and were amortized over a period of 31 months.
For the year ended March 31, 2002, $171,472 of deferred fees were charged to
operations. There were no remaining deferred guarantee fees at March 31, 2002.

EARNINGS PER SHARE

In accordance with SFAS No. 128, "Earnings per Share", basic (loss) earnings per
share are computed by dividing the net (loss) earnings for the year by the
weighted average number of common shares outstanding. Diluted earnings per share
is computed by dividing net earnings for the year by the weighted average number
of common shares outstanding including the effect of common stock equivalents.

F-20

In fiscal 2004, 2,657,532 common stock equivalents were not included in the
computation of diluted earnings per share as their effect would have been
antidilutive. Additionally, there were 1,618,570 common stock options and
warrants outstanding with exercise prices between $1.30 and $14.30. In addition,
there was a potential 1,038,962 shares that may be issued in connection with the
Convertible Debentures if certain conditions exist. However, the Convertible
Debentures are now convertible into 2,836,879 shares of common stock because of
a reset conversion price.

STOCK OPTIONS

On June 1, 2001, the Board of Directors approved the 2001 Stock Option Plan
(`Plan"), which replaced the 1994 Stock Option Plan, as amended, (the "1994
Plan"). The Plan was developed to provide a means whereby directors and selected
employees, officers, consultants, and advisors of the Company may be granted
incentive or non-qualified stock options to purchase common stock of the
Company. As of March 31, 2004, the Plan is authorized to grant options up to an
aggregate of 1,950,000 shares of the Company's common stock and up to 300,000
shares for any one individual in any fiscal year. As of September 30, 2004, the
Company had granted 1,101,490 options under the Year 2001 Plan, leaving
1,027,530 options available to be granted. As of September 30, 2004, the Company
had 358,700 options issued and outstanding under its 1994 Plan.

The exercise price of employee common stock option issuances in 2004, 2003 and
2002 was equal to the fair market value on the date of grant. Accordingly, no
compensation cost has been recognized for options issued under the Plan in these
years. A summary of the options issued as of presented period and changes during
the years is presented below.

In accordance with SFAS No. 123, for options issued to employees, the Company
applies the intrinsic value method of APB Opinion No. 25 and related
interpretations in accounting for its options issued. The following table sets
forth the issuances of stock options for the periods presented.

FISCAL 2004 FISCAL 2003 FISCAL 2002
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ---------- ---------- ---------- ---------- ----------

STOCK OPTIONS:

BALANCE AT BEGINNING OF PERIOD 1,543,250 $ 4.43 1,094,475 $ 2.11 2,433,300 $ 1.31

GRANTED 423,980 2.66 597,000 7.88 82,800 3.92

EXERCISED (448,500) 1.91 (143,725) 1.63 (1,406,625) .87

FORFEITED (491,200) 6.75 (4,500) 2.04 (15,000) 2.04
---------- ---------- ----------
BALANCE AT END OF PERIOD 1,027,530 $ 3.95 1,543,250 $ 4.43 1,094,475 $ 2.11
========== ========== ==========
OPTIONS EXERCISABLE AT END OF PERIOD 630,168 $ 4.48 976,250 $ 2.45 647,738 $ 2.11

WEIGHTED AVERAGE FAIR VALUE OF OPTIONS
GRANTED DURING THE PERIOD 2.65 $ 8.19 $ 1.54

The following table summarizes information about employee stock options
outstanding at March 31, 2004 :

NUMBER WEIGHTED AVERAGE NUMBER
OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
AT MARCH 31, 2004 CONTRACTUAL LIFE EXERCISE PRICE AT MARCH 31, 2004 EXERCISE PRICE
------------------ ------------------- -------------------- ------------------ --------------------
$1.30 - $1.97 288,330 8.43 $ 1.73 20,001 $ 1.30
$2.04 373,700 2.39 $ 2.04 373,000 $ 2.04
$3.83 -$7.26 215,000 7.20 $ 5.66 91,667 $ 5.67
$9.00 -$14.30 150,500 6.47 $ 10.47 145,500 $ 10.43
------------------ ------------------
1,027,530 630,168
================== ==================

F-21

STOCK WARRANTS

During fiscal year 2004, the Company issued a total of 591,040 stock purchase
warrants as follows. In September, 2003, 457,143 of the warrants were issued to
investors in connection with the $4 million debenture offering (see Note 8) and
103,896 warrants were issued to the respective investment banker. The estimated
fair value of the warrants issued to the investors in the amount of $1,180,901
was recorded as a discount on the debentures and the estimated fair value of the
warrants issued to the investment banker in the amount of $268,386 has been
record as deferred fees. Both amounts are being amortized over the term of the
debentures. In February 2004, the Company issued an additional 30,001 warrants
to the investors in connection with a settlement agreement (see Note 8). The
estimated fair value of these warrants totaled $30,981, which was expensed as
component of selling, general and administrative expenses. The weighted average
fair value of warrants issued during fiscal 2004 was $2.67.

On July 30, 2004, the exercise price for 457,143 warrants issued to the
debentures' holder has been adjusted from $4.05 to $1.46 pursuant to
antidilution provision (see Note 8).

NOTE 11 - INCOME TAX

The Company files separate tax returns for the parent and for the Hong Kong
Subsidiary. The income tax expense (benefit) for federal, foreign, and state
income taxes in the consolidated statement of operations consisted of the
following components for 2004, 2003 and 2002:

2004 2003 2002
------------ ------------ ------------
(as restated)
Current:
U.S. Federal $ (1,071,709) $ 663,816 $ 1,027,545
Foreign -- 1,230,650 748,672
State (95,398) 38,500 119,277
Deferred 1,925,612 (1,734,194) --
------------ ------------ ------------
$ 758,505 $ 198,772 $ 1,895,494
============ ============ ============

The United States and foreign components of earnings (loss) before income taxes
are as follows:

2004 2003 2002
------------- ------------- -----------
UNITED STATES $ (21,362,610) $ (5,952,129) $ 3,669,341
FOREIGN (562,309) 7,368,713 4,515,218
------------- ------------- -----------
$ (21,924,919) $ 1,416,584 $ 8,184,559
============= ============= ===========

The actual tax expense differs from the "expected" tax expense for the
years ended March 31, 2004, 2003 and 2002 (computed by applying the U.S. Federal
Corporate tax rate of 34 percent to income before taxes) as follows:

2004 2003 2002
--------------- --------------- ---------------

(AS
RESTATED)

Expected tax expense (benefit) $ (7,454,472) $ 481,880 $ 2,782,750
State income taxes, net of Federal income tax benefit (426,796) (43,204) 78,723
Permanent differences 5,830 69,114 --
Deemed Dividend 410,513 1,011,628 1,027,545
Change in valuation allowance 8,160,924 -- (1,059,089)
Tax rate differential on foreign earnings 92,781 (1,326,368) (812,739)
Other (30,274) 5,723 (121,696)
--------------- --------------- ---------------
Actual tax expense $ 758,505 $ 198,772 $ 1,895,494
=============== =============== ===============

F-22

The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are as follows:

2004 2003 2002
----------- ----------- -----------

(As restated)
Deferred tax assets:
Inventory differences $ 2,309,488 $ 1,491,021 $ --
State net operating loss carryforward 502,417 171,019 89,315
Federal net operating loss carryforward 2,425,186 -- --
Hong Kong net operating loss carryforward 98,404 -- --
Hong Kong foreign tax credit 2,447,746 -- --
AMT credit carryforward 70,090 -- --
Bad debt reserve 33,323 137,958 4,087
Reserve for sales returns 161,726 110,303 55,886
Stock based expense 13,056 -- --
Charitable contributions 58,037 -- --
Amortization of reorganization intangible 68,981 28,076 36,400
----------- ----------- -----------
Total Gross Deferred Assets 8,175,397 1,938,377 198,744
Less valuation allowance (8,160,924) -- --
Deferred tax liability 1,938,377 -- --
Depreciation (14,473) (12,765) (7,326)
----------- ----------- -----------
Net Deferred Tax Asset $ (0.00) $ 1,925,612 $ 191,418
=========== =========== ===========

NOTE 12 - SEGMENT INFORMATION

The Company operates in one segment and maintains its records accordingly. The
majority of sales to customers outside of the United States are made by the Hong
Kong Subsidiary. Sales by geographic region for the period presented are as
follows:

Fiscal 2004 Fiscal 2003 Fiscal 2002
----------- ----------- -----------
United States $43,044,496 $77,696,780 $62,381,366
Asia -- 21,310 49,314
Australia 959,444 814,334 --
Europe 25,783,789 15,714,846 --
Latin America 753,399 1,366,496 45,073
----------- ----------- -----------
$70,541,128 $95,613,766 $62,475,753
=========== =========== ===========

The geographic area of sales is based primarily on the location where the
product is delivered.

F-23

NOTE 13 - EMPLOYEE BENEFIT PLANS

The Company has a 401(k) plan for its employees to which the Company makes
contributions at rates dependent on the level of each employee's contributions.
Contributions made by the Company are limited to the maximum allowable for
federal income tax purposes. The amounts charged to operations for contributions
to this plan and administrative costs during the years ended March 31, 2004,
2003 and 2002 totaled $55,402, $61,466 and $41,733, respectively. The amounts
are included as a component of compensation expenses in the accompanying
statements of operations. The Company does not provide any post employment
benefits to retirees.

NOTE 14 - CONCENTRATIONS OF CREDIT RISK, CUSTOMERS, SUPPLIERS, AND FINANCING

The Company derives primarily all of its revenues from retailers of products in
the U.S. Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of accounts receivable. The Company's
allowance for doubtful accounts is based upon management's estimates and
historical experience and reflects the fact that accounts receivable are
concentrated with several large customers whose credit worthiness have been
evaluated by management. At March 31, 2004, 65% of accounts receivable were due
from three customers: two from the U.S. and one from an International Customer.
Accounts receivable from three customers that individually owed over 10% of
accounts receivable at March 31, 2004 was 31%, 24% and 10%. Accounts receivable
from four customers that individually owed over 10% of accounts receivable at
March 31, 2003 was 22%, 19%, 15% and 11%. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral.

Revenues derived from five customers in 2004, 2003 and 2002 were 54%, 67% and
87% of revenues, respectively. Revenues derived from three customers in 2004
,2003, and 2002, respectively, which individually purchased greater than 10% of
the Company's total revenues, were 20%, 12% and 10% in 2004, 21%, 17% and 15% in
2003, 37%, 28%, and 10% in 2002.

The Company is dependent upon foreign companies for the manufacture of all of
its electronic products. The Company's arrangements with manufacturers are
subject to the risk of doing business abroad, such as import duties, trade
restrictions, work stoppages, foreign currency fluctuations, political
instability, and other factors, which could have an adverse impact on its
business. The Company believes that the loss of any one or more of their
suppliers would not have a long-term material adverse effect because other
manufacturers with whom the Company does business would be able to increase
production to fulfill their requirements. However, the loss of certain suppliers
in the short-term could adversely affect business until alternative supply
arrangements are secured.

During fiscal years 2004, 2003 and 2002, manufacturers in the People's Republic
of China ("China") accounted for approximately 96%, 94% and 95%, respectively,
of the Company's total product purchases, including all of the Company's
hardware purchases.

Net sales derived from the Hong Kong Subsidiary aggregated $43.1 million in
2004, $49.3 million in 2003 and $27.2 million in 2002. The carrying value of net
assets held by the Company's Hong Kong based subsidiary was $ 14.4 million at
March 31, 2004.

NOTE 15 - QUARTERLY FINANCIAL DATA - UNAUDITED

The following financial information reflects all normal recurring adjustments
that are, in the opinion of management, necessary for a fair statement of the
results of the interim periods. The quarterly unaudited results for the years
2004 and 2003 are set forth in the following table:

F-24

BASIC DILUTED
EARNINGS EARNINGS
NET EARNINGS (LOSS) (LOSS)
SALES GROSS PROFIT (LOSS) PER SHARE PER SHARE
------------- ------------- ------------- ------------ ------------

(In thousands) (In thousands) (In thousands)
2004
First quarter 7,628 1,726 (2,317) (0.28) (0.28)
Second quarter 32,852 5,420 (657) (0.08) (0.08)
Third quarter 28,690 (2,601) (10,451) (1.20) (1.20)
Fourth quarter 1,371 (2,727) (9,259) (1.09) (1.09)
------------- ------------- ------------- ------------ ------------
Total 70,541 1,818 -22,684 (2.65) (2.65)
============= ============= ============= ============ ============

2003
First quarter 4,152 1,660 (1,191) (0.15) (0.15)
Second quarter 32,977 9,416 3,827 0.47 0.44
Third quarter 48,870 13,431 3,321 0.41 0.39
Fourth quarter 9,615 (1,222) (4,739) (0.58) (0.58)
------------- ------------- ------------- ------------ ------------
Total 95,614 23,285 1,218 0.15 0.10
============= ============= ============= ============ ============

2002
First quarter 5,523 1,861 (115) (0.03) (0.03)
Second quarter 15,749 5,310 1,825 0.27 0.23
Third quarter 34,159 11,439 4,690 0.96 0.82
Fourth quarter 7,045 3,013 (111) 0.02 (0.02)
------------- ------------- ------------- ------------ ------------
Total 62,476 21,623 6,289 1.22 1.00
============= ============= ============= ============ ============

(1) Includes additional inventory write-downs totaling $4.8 million and
deferred tax valuation allowance adjustment in the amount of $1.9 million.

(2) Includes additional inventory write-downs totaling $1.7 million.

F-25

SUPPLEMENTAL DATA

SCHEDULE II

REDUCTION TO
BALANCE AT CHARGED TO ALLOWANCE CREDITED TO BALANCE AT
BEGINNING OF COSTS AND FOR COSTS AND END OF
DESCRIPTION PERIOD EXPENSES WRITE OFF EXPENSES PERIOD
-------------------------------------------------- ----------- ----------- ----------- ----------- -----------

Year ended March 31, 2004
Reserves deducted from assets to which they apply:
Allowance for doubtful accounts $ 405,759 $ 70,788 $ (148,074) $ (230,464) $ 98,009
Deferred tax valuation allowance $ -- $ 8,160,924 $ $ $ 8,160,924
Inventory reserve $ 3,715,357 $ 7,627,926 $ $(4,181,408) $ 7,161,875

Year ended March 31, 2003
Reserves deducted from assets to which they apply:
Allowance for doubtful accounts $ 12,022 $ 412,055 $ -- $ (18,318) $ 405,759
Deferred tax valuation allowance $ -- $ -- $ -- $ -- $ --
Inventory reserve $ -- $ 3,715,357 $ -- $ -- $ 3,715,357

Year ended March 31, 2002
Reserves deducted from assets to which they apply:
Allowance for doubtful accounts $ 9,812 $ 45,078 $ (42,868) $ -- $ 12,022
Deferred tax valuation allowance $ -- $ -- $ -- $ -- $ --
Inventory reserve $ -- $ -- $ -- $ -- $ --

F-26