UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

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

                    For the fiscal year ended March 31, 2005

                                    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 $0.76 per
share as reported on the American Stock Exchange on June 7, 2005 was
approximately $7,636,002 (based on 10,047,371 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 10,047,371 shares of common stock, issued and outstanding at June 7,
2005.


<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      NONE

                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY

                       INDEX TO ANNUAL REPORT ON FORM 10-K

                    FOR THE FISCAL YEAR ENDED MARCH 31, 2005

<TABLE>
<CAPTION>
                                                                                                 PAGE
                                                                                                 -----
                                   PART I
<S>      <C>                                                                                     <C>
Item 1.  Business                                                                                  2
Item 2.  Properties                                                                                6
Item 3.  Legal Proceedings                                                                         7
Item 4.  Submission of Matters to a Vote of Security Holders                                       7

                                   PART II

Item 5.  Market for Company's Common Equity and Related Stockholder Matters and Issuer Purchases
             of Equity Securities                                                                  8
Item 6.  Selected Financial Data                                                                   8
Item 7.  Management's Discussion and Analysis of Financial Condition and  Results of Operations    9
Item 7A  Quantitative and Qualitative Disclosures About Market Risk                               22
Item 8.  Financial Statements and Supplementary Data                                              22
Item 9.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure     22
Item 9A. Controls and Procedures                                                                  23
Item 9B. Other Information                                                                        23

                                  PART III

Item 10. Directors and Executive Officers of the Registrant                                       24
Item 11. Executive Compensation                                                                   26
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
             Matters                                                                              31
Item 13. Certain Relationships and Related Transactions                                           32
Item 14. Principal Accounting Fees and Services                                                   33

                                   PART IV

Item 15. Exhibits, Financial Statement Schedules                                                  33
</TABLE>

<PAGE>

                 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.


                                       1
<PAGE>

                                     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
China. 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. See "Legal Proceedings."

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 engineering, production, logistic and
finance in China.

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.

PRODUCT LINES

We currently have a product line of 27 different models of karaoke machines plus
10 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. Our machines sell at retail prices
ranging from $30 for basic units to $200 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 2500 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 2005, approximately 74 % of revenues were to the customers within the
US and 26% of revenues were international sales. Our sales within the US 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, 2005, we
worked with 14 independent sales representatives in the United States. Our
international sales are primarily made by our in-house sales representatives and
our 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. and Nickelodeon, both a
division of Viacom International, Inc and Universal Music Entertainment, Inc.
have also helped us to expand our product name. However, we are depending less
and less on the licensed products as we move forward.



                                       2
<PAGE>

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 is
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, 2005, 2004, and 2003,
respectively, were approximately 40%, 54% and 67%, respectively. In fiscal 2005,
top three major customers accounted for 9%, 8% and 8% of our net 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.

Sales by customer geographic regions are as follows:

                           FOR THE FISCAL YEARS ENDED
                                    March 31,

                                 2005               2004                2003
                             ---------------------------------------------------
North America                $28,227,140         $43,044,496         $77,696,780
Europe                         9,531,632          25,783,789          15,714,846
Others                           451,053           1,712,843           2,202,140
                             ---------------------------------------------------
                             $38,209,825         $70,541,128         $95,613,766
                             ===================================================

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. 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 9.2% and 9.4% of our net sales in fiscal 2005 and
2004, respectively.

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, expired on August 31, 2004,
however MTV chose to extend the agreement until December 31, 2004. The minimum
guarantee was $300,000, which has been paid in full as of March, 31, 2005. The
agreement was terminated on December 31, 2004. MTV has extended the selling off
period for one existing MTV licensed product to September 30, 2005. The company
has prepaid the royalty in the amount of $30,705 for the entire MTV licensed
inventory in April, 2005, which will be recorded as royalty expense for fiscal
2006. We also have a licensing agreement with MTV for an European country ended
October 31, 2005 with an option to extend until October 31, 2006.

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 expired on
December 31, 2004 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 Original Artist 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,
which has been paid in full as of March 31, 2005. The Universal Music
Entertainment license originally expires on March 31, 2006 and does not contain
any automatic renewal provisions. However, the agreement was extended to
December 31, 2006 without additional minimum guarantee payment.



                                       3
<PAGE>

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 originally
expires on January 1, 2006 and does not contain any automatic renewal
provisions. In October 2004, we have signed a termination agreement to cease the
license by December 31, 2004. We are obligated to pay minimum royalty payments
in the amount of $200,000, which has been paid in full as of November 20, 2004.

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
originally expires on December 31, 2004. The company has extended the agreement
to December 31, 2005. Over the term of the license agreement, we are obligated
to make guaranteed minimum royalty payments in the amount of $450,000, which has
been paid in full as of March 31, 2005.

We distribute all of our licensed products through our established distribution
channels, including Best Buy, Circuit City, Costco, JC Penney, 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
                                    March 31,

                                          2005        2004        2003
                                      -------------------------------------
MTV                                          17.6%       11.8%       32.3%
Nickelodeon                                   0.5%        5.5%          0%
Other Licenses                                2.5%        3.9%          0%
                                      -------------------------------------
Total Licenses Sales                         20.5%       21.2%       32.3%
                                      =====================================

In the future, we might use our own brand or other brands.

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 China 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, 2005,
approximately 36% of our sales were sales from our domestic warehouses
("Domestic Sales") and 64% were sales shipped directly from China ("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, domestic 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 China 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 2006, we anticipate that
50% of our karaoke products will be produced by one of these factories, which
has agreed to extend financing to us. We believe that the manufacturing capacity
of our factories is adequate to meet the demands for our products in fiscal year
2006. However, if our primary factory in China was 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 2006" on page 16. 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).



                                       4
<PAGE>

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, 2005, 2004 and 2003, 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 intent to use an application for the
"Karaoke Vision" mark in the United States. The application has not been
finalized as of March 31, 2005.

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.



                                       5
<PAGE>

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. 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, 2005,
we had inventory of 3.1 million (net of reserves totaling $1.7 million) compared
to inventory of $5.9 million as of March 31, 2004 (net of reserves totaling $6.6
million).

Our financing of seasonal working capital during fiscal 2005 was from selling of
the inventory carried over from prior year. We were able to pay down the overdue
debt to one of our major suppliers in China from $2.1 million to $700 thousand
in fiscal 2005. We financed the purchase of new inventory with our short-term
lines of credit in Hong Kong and through factory financing in China.

During fiscal 2006, we plan on financing our inventory purchases by using credit
that has been extended to us by the 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.

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 15, 2005, we had backlog of $22 million
compared to backlog of $32.8 million at the same period in fiscal 2005. We
believe that we will be able to fill all of these orders in fiscal year 2006.
However, these orders can be cancelled or modified at any time prior to
delivery. This backlog does not take into account of any sales ordered by
customers directly from our domestic inventory with order turnaround time of one
to two weeks. We normally have to keep the minimum inventory in our domestic
warehouses for this type of sales.

EMPLOYEES

As of March 31, 2005, we employed 31 persons, all of whom are full-time
employees, including two executive officers. Sixteen of our employees are
located at International SMC's corporate offices in Hong Kong. The remaining
fifteen employees are based in the United States, including two executive
positions, two engaged in warehousing and technical support, and eleven in
accounting, marketing, sales and administrative functions.

ITEM 2. PROPERTIES

Our corporate headquarters are located in Coconut Creek, Florida in a 7,000
square feet office and warehouse facility.

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
have subleased approximately 40,000 square feet. We terminated our lease for
warehouse space in Rancho Dominguez, California effective as of May 1, 2004.

We have lease 3,579 square feet of office space in Hong Kong from which we
oversee China based manufacturing operations. The lease expires April 30, 2008.



                                       6
<PAGE>

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.

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. The Court set a hearing
on July 30, 2004 before Judge Zlock to consider final approval of the
settlement. At the hearing, Judge Zlock signed the order giving final approval
to the settlement. The terms of the settlement will be implemented after all
final appeals period have expired.

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. In addition, we are obligated to issue 400,000 shares of our common
stock to the plaintiffs. The settlement obligates 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.

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 was included as a component of selling,
general and administrative expenses for the fiscal year ended March 31, 2004.

The court entered an order approving the settlement agreement on July 30, 2004.
The Company has issued the 400,000 shares to the plaintiffs on November 22,
2004. The cost of the 400,000 shares is $240,000 based on the stock closing
price on September 23, 2004. The remaining balance of the accrued expense in the
amount of $222,000 ($462,000 - $240,000) has been recorded as the reduction of
selling, general and administrative expenses for the fiscal year ended March 31,
2005.

SYBERSOUND VS. SINGING MACHINE

On May 12, 2005, Sybersound Records, Inc., d/b/a Party Tyme Karaoke, filed a
suit in Los Angeles Superior Court, seeking more than $200 million in damages
arising from music piracy by numerous karaoke record manufacturers, including
The Singing Machine Company Inc. The lawsuits allege that Sybersound's
competitors (including The Singing Machine Company, Inc.) have failed,
unlawfully, to license competing karaoke records. In addition, Sybersound claims
competitors have underreported sales to publishers, which has, in turn, undercut
Sybersound's pricing. The lawsuits allege, among other things, wrongful
interference with business, unfair trade practices and unfair competition. The
Singing Machine Company, Inc. believes that this legal action is completely
without merit and we are prepared to defend ourselves vigorously in order to be
vindicated. As of June 28, 2005, this case is in the early stages of litigation
and, thus, it is impossible to determine its outcome.

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

We held our Annual Meeting of stockholders on Monday, November 29, 2004 at 9:30
a.m. at the Marriott Town Center Hotel. Our shareholders approved the election
of Bernard Appel, Josef Bauer, Yi Ping Chan and Harvey Judkowitz as directors to
serve until the next Annual Meeting and until their successors shall be elected
and qualified and ratified the appointment of Berkovits, Lago, & Company LLP as
our independent certified public accountants for the fiscal year ending March
31, 2005.



                                       7
<PAGE>

                                     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 2005 and
fiscal 2004. 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
---------------------------------------------- ---------  ---------

2005:

First quarter (April 1 - June 30, 2004)        $   1.30   $   .36
Second quarter (July 1 - September 30, 2004)        .72       .30
Third quarter (October 1 - December 31, 2004)      1.15       .51
Fourth quarter (January 1 - March 31, 2005)        1.05       .61

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




As of June 7, 2005, there were approximately 309 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.

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                  2005              2004            2003            2002*           2001*
                                              ------------     ------------     ------------    ------------    ------------
<S>                                           <C>              <C>              <C>             <C>             <C>
Statement of Operations:
Net Sales                                     $ 38,209,825     $ 70,541,128     $ 95,613,766    $ 62,475,753    $ 34,875,351
Earnings(loss) before income taxes              (3,591,975)     (21,924,919)    $  1,416,584    $  8,184,559    $  4,188,021
Income tax expense (benefit)                  $          0     $    758,505     $    198,772    $  1,895,494    $    494,744
Net earnings (loss)                             (3,591,975)     (22,683,424)    $  1,217,813    $  6,289,065    $  3,696,277
Balance Sheet:
Working capital                                 (3,378,528)      (1,382,939)    $ 15,281,023    $ 14,577,935    $  6,956,879
Current ratio                                         0.65             0.90             1.72            3.82            4.37

Property, plant and equipment, net            $  1,038,843     $    983,980     $  1,096,424    $    574,657    $    263,791
Total assets                                  $  7,668,808     $ 15,417,395     $ 38,935,294    $ 21,403,196    $ 10,509,682
Shareholders' equity                            (1,985,023)    $    216,814     $ 17,685,364    $ 16,225,433    $  8,450,237
Per Share Data:
Earnings (loss) per common share - basic      $      (0.39)    $      (2.65)    $       0.15    $       0.88    $       0.59
Earnings (loss) per common share - diluted    $      (0.39)    $      (2.65)    $       0.14    $       0.79    $       0.50
Cash dividends paid                                      0                0                0               0               0
</TABLE>

* Restated



                                       8
<PAGE>

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

OVERVIEW

Our primary objectives for fiscal 2005 were to continue to drive down the
operating costs and to position the company for a return of profitability. Our
gross profit increased to $9.3 million or 24.3% of total revenues for twelve
months ended March 31, 2005 compared to gross profit of $1.8 million or 2.6% of
total revenues for same period last year. The increase of the profit margin was
primarily due to the development of the new product and better sales planning.
Our fixed operating expenses (compensation and selling, general and
administrative expense) in fiscal 2005 decrease to $7.3 million from $14.9
million, a decrease of $7.6 million or 51% compared to prior year. The decrease
of fixed operating expenses was primarily due to the aggressive cost reduction
initiative implemented by the management team. As a result, our net loss
decreased by $19.1 million to $3.6 million in fiscal 2005 from $22.7 million in
fiscal 2004.

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:

                                               2005         2004        2003
                                             -----------------------------------

Total Revenues                                 100.0%      100.0%     100.0%
Cost of Sales                                   75.8%       97.4%      75.6%
Operating expenses                              28.5%       31.2%      22.7%
Operating (loss) income                         -4.2%      -28.6%       1.7%
Other (expenses), income, net                   -5.2%       -2.5%      -0.2%
(Loss) Income before taxes                      -9.4%      -31.1%       1.5%
Provision (benefit) for income taxes             0.0%        1.1%       0.2%
(Loss) Income                                   -9.4%      -32.2%       1.3%

FISCAL YEAR ENDED MARCH 31, 2005 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2004

                                    NET SALES

Net sales for the fiscal year ended March 31, 2005 decreased to $38.2 million
compared to revenues of $70.5 million in the fiscal year ended March 31, 2004.
The decrease in net sales was a result of both decreases in unit volume as well
as pricing. The decrease in sales is primarily attributed to:

      o     We made a decision not to pursue low margin accounts which tie up
            cash flow but do not provide enough profit margins;

      o     Customers concerned of our financial liquidity;

      o     Customers had high level of inventory on hand from prior year;

      o     Increase of competition in the United States and international
            market.

In fiscal year 2005, 64% of our sales were direct sales, which represent sales
made by International SMC, and 36% were domestic sales, which represents sales
made from our warehouse in the United States.

The sales decrease occurred in all segments of our business. Our total hardware
sales decreased to $35.9 million, in fiscal 2005 compared to total hardware
sales of $67.7 million in fiscal 2004.

Music sales decreased to $2.3 million, or 6% of net sales, in fiscal 2005,
compared to $2.8 million, or 4% of net sales, in fiscal 2004. The decrease in
music sales was a result of increased competition in this category.

                                  GROSS PROFIT

Gross profit for fiscal 2005 was $9.3 million or 24.2% of total revenues
compared to $1.8 million or 2.6% of sales for fiscal 2004. The increase in gross
margin, compared to the prior year, was primarily due to the development of new
products and better sales planning. We developed seven new models in fiscal
2005, which made up $19.0 million in sales or 54% of the hardware sales in
fiscal 2005. Our new products have differentiated us from our competitors and
yield a higher profit margin.

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.



                                       9
<PAGE>

                               OPERATING EXPENSES

Operating expenses for the fiscal year ended March 31, 2005 decreased from $22.0
million to $10.9 million, a decrease of $11.1 million or 50.5% compared to the
same period last year. The decrease in operating expenses consists of a decrease
in variable expenses and fixed expenses. The variable expenses (Advertising,
Commission, Freight and Royalty expenses) were decreased proportionally as
revenues decreased. The fixed expense decrease of $7.6 million was primarily due
to the following factors:

      o     Decreases in compensation expenses in the amount of $2.2 million due
            to business downsizing and staff cuts.

      o     Decreases in professional fees and legal expenses of $2.1 million
            due to the completion of a class action lawsuit and management's
            assumption of additional responsibilities, which were previously
            performed by outside professionals.

      o     Decreased rent expense of $870K due to the early termination of one
            of our warehouses in California and the sublease of the existing
            warehouse space.

      o     Decreases in defective product repair fees of $796K due to our
            testing line in our California warehouse. We have sent fewer real
            defective products to the factory for repair in fiscal 2005.

      o     Decreased product licensing royalty of $1.0 million due to the
            termination of several licensing agreements. Our dependency on other
            brands has decreased in the past.

                          DEPRECIATION AND AMORTIZATION

Our depreciation and amortization expenses were $709,290 for fiscal 2005
compared to $750,359 for fiscal 2004. This decrease in depreciation and
amortization expenses can be attributed to the fact that we produced fewer
models with higher volume per model, which increased the economies of scale for
our product lines.

                               NET OTHER EXPENSES

Net other expenses were $1,971,740 in fiscal 2005 compared to $1,729,620 in
fiscal 2004. Net other expenses increased because our interest expense increased
to $2.1 million in fiscal 2005 compared to $1.7 million in fiscal 2004. Our
interest expense increased because we recorded $1.6 million for the amortization
of the discount on our convertible debentures. The increase in interest expense
was partially offset by other income. We expect interest expense to maintain the
same level for fiscal 2006.

                               INCOME BEFORE TAXES

We had a net loss before taxes of $3,591,975 in fiscal 2005 compared to a net
loss before taxes of $21,924,919 in fiscal 2004. The decreased net loss was the
result of increased profit margins and decreased expenses in every category.

                               INCOME TAX EXPENSE

Significant management judgment is required in developing our provisions for
income taxes, including the determination of foreign tax liabilities, deferred
tax assets and liabilities and any valuation allowances that might be required
against 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 not likely to be realized. On March 31, 2005 and
2004, we had gross deferred tax assets of $10.4 million and $8.2 million,
against which we recorded valuation allowances totaling $10.4 million and $8.2,
respectively.

For the fiscal year ended March 31, 2005, we did not record income tax expenses.
This occurred because the company had taxable losses for both US operations and
Hong Kong operations.

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 decided 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 2005 and
fiscal 2004 due to the subsidiary's taxable loss. Hong Kong income taxes payable
totaled $2.4 million at March 31, 2005 and 2004 and is included in the
accompanying balance sheets as income taxes payable.

We effectively repatriated approximately $0, $2.0 million and $5.6 million from
our foreign operations in 2005, 2004 and 2003, 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 $3.6 million in 2005 compared
to a net loss of $22.7 million in fiscal 2004.



                                       10
<PAGE>

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,



                                       11
<PAGE>

      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.



                                       12
<PAGE>

                               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.

LIQUIDITY AND CAPITAL RESOURCES

On March 31, 2005, we had cash on hand of $0.6 in addition to $0.9 million of
restricted cash and no bank overdrafts compared to cash on hand of $0.4 million
and restricted cash of $0.9 million and a bank overdraft of $0.1 million on
March 31, 2004. The increase of cash on hand was primarily due to increases in
cash provided by operating activities, partially offset by decreases in cash
used in investment activities.

Cash flows provided by operating activities were $1.1 million for the twelve
months ended March 31, 2005. This was the result of better inventory planning
and the selling off of overstocked inventory. Cash provided by operating
activities was primarily attributed to decreases in inventory, receipt of a
federal tax refund and insurance payment, partially offset by decreases of
accounts payable, accrued expenses and customer credit on account.

      o     Accounts payable decreases were the result of management's
            commitment to reduce overdue accounts payable invoices with our
            major supplier in China;

      o     Accrued expenses decreased as a result of a class action settlement
            in the amount of $1.1 million, of which $800,000 was paid by our
            insurance company and $240,000 was paid with 400,000 shares of
            common stock. We also paid approximately $200,000 for music
            royalties and $1.4 million in other expenses.

      o     Customer credit on account decreased because the Company paid off
            some of the customer credit balance or applied the credit balances
            to new orders.

Cash used in investing activities for the twelve months ended March 31, 2005 was
$0.7 million. Cash used in investing activities was for the purchase of tooling
and molds for the production of new karaoke machines for this fiscal year.

Cash flows used by financing activities were $0.1 million for the fiscal year
ended March 31, 2005. This cash outflow was primarily due to cost of paying off
a bank overdraft.

As of March 31, 2005, our working capital was ($3.4) million. Our current
liabilities of $9.6 million include:

      o     Amount due to one factory of $0.7 million - we have worked out the
            payment plan with the factory to pay off the balance by the end of
            this year.

      o     Customer credit on account of $1.7 million - the amount of $0.7
            million is due to one customer, of which $0.5 million credit balance
            was settled by shipments in June 2005, the remaining amount might be
            offset by the products or refund.

      o     Convertible debentures of $2.4 million - The debentures expire in
            February 2006, we might be able to pay off a portion of the
            debenture before or on the maturity date.

      o     Subordinate debt of $0.6 million - The additional $0.2 million was
            converted into common stock in May 2005.

      o     Hong Kong income tax payable of $2.5 million (see Income Tax Expense
            on Page 12 for details) - We do not expect the complete tax payment
            to come due in the short term. Our tax exemption application is
            still pending with the Hong Kong tax authority. Even if the outcome
            is unfavorable, the Company still has the right to appeal, which
            could take more than a year to settle.

      o     Current liabilities resulted from normal course of the business of
            $1.7 million.

As of June 15, 2005, our loan balance with Crestmark Bank was $0.3 million. The
Company can borrow up to the lesser of the $2.5 million or 70% of the eligible
accounts receivable. Per the agreement we are only allowed to factor the sales
originating from the warehouses in the United States. The factor company
determines the eligible receivables based on their own credit standard, and the
accounts' aging. As of June 15, 2005, there was no availability under the
Crestmark facility due to low sales volume during the slow selling season.

Our Hong Kong subsidiary, International SMC, has access to credit facilities at
the 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 $1.5 million. The
balance as of March 31, 2005 and 2004 was $0 and $62,282, respectively. The
interest rate is approximate 4% per annum. As of June 15, 2005, the availability
from these facilities was $0.8 million

As of June 15, 2005, our cash on hand is limited. Our average monthly operating
expenses are approximately $450,000 and we need approximately $1.4 million to
cover our operating expenses during the next three month period. Our primary
expenses are normal operating costs including salaries, lease payments for our
warehouse space in Compton, California and other operating costs.

As of March 31, 2005, our commitments for debt and other contractual
arrangements are summarized as follows:


                                       13
<PAGE>
<TABLE>
<CAPTION>
                                                        Less than                                          Over
                                          Total            1 year     1 - 3 years     3 - 5 years       5 years
                                       ------------------------------------------------------------------------
<S>                                     <C>               <C>           <C>
Property Leases                         2,134,065         808,429       1,325,636              --            --
Equipment Leases                           18,321           3,791           7,581           6,949            --
Subordinated Debt - Related Party         600,000         600,000              --              --            --
Convertible Debentures                  4,000,000       4,000,000                              --            --
Interest payments                         417,000         417,000                              --            --
                                       ------------------------------------------------------------------------

Total                                  $7,169,386      $5,829,220      $1,333,217      $    6,949      $     --
                                       ------------------------------------------------------------------------
</TABLE>

Each of the contractual agreements (except the equipment leases) provide that
all amounts due under that agreement can be accelerated if we default under the
terms of the agreement.

           WORKING CAPITAL REQUIREMENTS DURING THE SHORT AND LONG TERM

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

      o     The collection of accounts receivable;

      o     Sales of existing inventory;

      o     Financial companies willing to makes advances on accounts
            receivable;

      o     Short term insider loans;

      o     The Continued support of factories in China that finance our
            purchases of karaoke machines for fiscal 2006; and

      o     The utilization of credit facilities that are available to
            International SMC to finance all direct shipments.

Our sources of cash for working capital in the long term are the same as our
sources during the short term. If we need additional financing, we intend to
approach different financing companies or insiders. However, we cannot guarantee
that our financing plan will succeed. 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 continue our operations.

During fiscal 2006, we will strive to reduce additional operating costs. 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 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 the shipment, duty, clearance and freight charges
to their locations. These sales in which the customer purchases the goods for
delivery at a specific destination are referred to as "Direct" sales. We will
also help our customers forecast and manage 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.

In the event that we do not sell sufficient products in our second and third
quarters, 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 the profit margin for sales of our karaoke products
will continue to be under price pressure, because of the competitors in the
marketplace. During fiscal 2006, we plan on introducing products other than
karaoke to fulfill our sales seasonality gap.

Except for the foregoing, we do not have any present commitment that is likely
to cause our liquidity to increase or decrease in any material way. In addition,
except for the Company's need for additional capital to finance inventory
purchases, the Company is not aware of any trend, additional demand, event or
uncertainty that will result in, or that is reasonably likely to result in, the
Company'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.



                                       14
<PAGE>

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 86.7%,
87.2% and 85.6% of net sales in fiscal 2005, 2004 and 2003.

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.

We are currently developing the products and considering trading products other
than karaoke category during the slow season to fulfill the revenue shortfall.

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 March 31, 2005 and 2004, we concluded that a
valuation allowance was needed against all of our deferred tax assets, as it was
not likely that the deferred taxes would be realized. At March 31, 2005 and
2004, we had gross deferred tax assets of $10.4 million and $8.2 million,
against which we recorded valuation allowances totaling $10.4 million and $8.2,
respectively.

For the fiscal years ended March 31, 2005 and March 31, 2004, the Company
recorded a tax provision of $0 and $758,505, respectively. We have received the
tax refund 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 and fiscal 2005 due to the subsidiary's net operating losses.

Hong Kong income taxes payable totaled $2.4 million at March 31, 2005 and 2004
and is included in the accompanying balance sheets as income taxes payable.

The Company effectively repatriated approximately $0, $2.0 million and $5.6
million from its foreign operations in 2005, 2004 and 2003, 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.



                                       15
<PAGE>

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.

We make 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 June 7, 2005, our cash on hand is limited. We need approximately $1.3
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 13. As of March 31, 2005, our inventory was valued at $3.1 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 INSOLVENT AND WE MAY GO OUT OF BUSINESS.

As of March 31, 2005, our cash position is limited. We are not able to pay all
of our creditors on a timely basis. We are current on approximately 50% of our
accounts payable, which total $1.5 million as March 31, 2005. We are not current
on our account payable of $0.7 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 FIRMS RAISED SUBSTANTIAL DOUBT
ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN AS OF MARCH 31, 2005.

We received a report dated June 24, 2005 from our independent certified public
accountants covering the consolidated financial statements for our fiscal year
ended March 31, 2005 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 2005 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.

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, 2005, 2004 and 2003 were
approximately 40%, 53% and 67% respectively. In fiscal 2005, three customers
accounted for 9%, 8% and 8% of our net sales. 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 written agreement with a factory in China to produce most
of our karaoke machines for fiscal 2006. We owe this factory approximately $0.7
million as of June 15, 2005 and have worked out a verbal payment plan with it.
See "Liquidity" beginning on page 13. 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.



                                       16
<PAGE>

WE ARE RELYING ON ONE DISTRIBUTOR TO DISTRIBUTE OUR MUSIC PRODUCTS, IF THE
DISTRIBUTION AGREEMENT IS TERMINATED, IT WOULD REDUCE OUR REVENUES AND
PROFITABILITY.

We are relying on Warner Brother Publication to distribute our music products in
fiscal 2005, if the distribution agreement is terminated, our music revenues
might decrease as well as our profitability.

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 2005 and 2004, a number of our customers and distributors returned
karaoke products that they had purchased from us. Our customers returned goods
valued at $3.5 million, or 9% of our net sales in fiscal 2005. Some of the
returns were resulted from the customer's overstock of the products. Although we
were not contractually obligated to accept this return of the products in fiscal
2005 or fiscal 2004, we accepted the return of the 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, 2005, our sales to customers in the
United States decreased because of increased price competition. 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 profit. We gave advertising allowances
in the amount of $0.6 million during fiscal 2005 and $2.3 million during fiscal
2004. 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 China 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 2003 and 2004 and had $5.9 million in inventory as of March
31, 2004. Because of this excess inventory, we had liquidity problems in fiscal
2005 and our revenues, net income and cash flow were adversely affected

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, 2004, we had $5.9 million in
inventory on hand, which impacted our cash flow and liquidity from operations in
fiscal 2005. As of March 31, 2005, our inventory was valued at $3.1 million,
after a $1.7 million reserve had been taken. It is important that we sell this
inventory during fiscal 2006, 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 generally decreased due to the
competition except for fiscal 2005 since we have developed the several new
models, which yield higher profit margin. We expect that our gross profit margin
might decrease under downward pressure in fiscal 2006.

WE MAY BE UNABLE TO SUCCESSFULLY DEFEND OURSELVES IN THE SYBERSOUND LAWSUIT AND
OUR CASH FLOW COULD BE AFFECTED. THE COST TO DEFEND OURSELVES MAY BE SUBSTANTIAL
AND OUR NET PROFITABILITY MAY BE AFFECTED.

We are currently defending ourselves in a lawsuit filed by Sybersound Records,
Inc., d/b/a Party Tyme Karaoke, which seeks damages of more than $200 million.
If we cannot successfully defend ourselves and are forced to pay the judgment
our cash flow could be affected. Alternatively, the cost of successfully
defending ourselves may also be great and may adversely affect our net
profitability.



                                       17
<PAGE>

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 17.6%
and 11.8% of our consolidated net sales from products sold under the MTV license
in fiscal 2005 and 2004, respectively. Our MTV license was terminated on
December 31, 2004, with an extension to sell certain existing inventory by
September 31, 2005. We expect the MTV branded products will be phased out and
replaced with SMC brand products going forward.

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 86.7%, 87.2% and
85.6%of net sales in fiscal 2005, 2004 and 2003, respectively.

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 2005, 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 2006. 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, 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. 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. At the same
time, we need to identify and develop other products which may be different from
karaoke machines.

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 may 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.



                                       18
<PAGE>

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 using nine 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 2006. 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 2004 and 2005. 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.
See " Legal Proceedings."

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.



                                       19
<PAGE>

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 15, 2005, 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 2005, approximately 36% 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, 2004 through June 1, 2005, our common stock has traded between a
high of $1.00 and a low of $0.33. During this period, we have lost senior
executives and Board members, had liquidity problems, and incurred a net loss of
$3.6 million in fiscal 2005. 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 May 15, 2005, investors hold a short position in 205,000
shares of our common stock which represents 2.6% 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, 2005, 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 28.

                   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.



                                       20
<PAGE>

As of June 7, 2005, 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, 2005, there were outstanding stock options to purchase an
aggregate of 1,041,610 shares of common stock at exercise prices ranging from
$.75 to $14.30 per share, not all of which are immediately exercisable. The
weighted average exercise price of the outstanding stock options is
approximately $3.67 per share. As of March 31, 2005, there were outstanding
immediately exercisable option to purchase an aggregate of 775,831 shares of our
common stock. There were outstanding stock warrants to purchase 591,040 shares
of common stock at exercise prices ranging from $1.46 to $4.03 per share, all of
which are exercisable. The weighted average exercise price of the outstanding
stock warrants is approximately $1.91 per share. In addition, we have issued
$4,000,000 of convertible debentures, which are convertible into an aggregate of
2,831,858 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 prior to January 21, 2006,
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 $0.60 PER SHARE, THE
CONVERSION PRICE OF OUR DEBENTURES AT $1.41 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 $0.60 per share as of June
15, 2005, it is possible that we may need to sell additional securities for
capital at a price lower than $0.60 per share. If we sell any securities at a
price lower than $0.60 per share, the conversion price of our debentures
currently set at $1.41 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. 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.

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

As of March 31, 2005, there were 9,769,593 shares of our common stock
outstanding. Of these shares, approximately 960,924 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.



                                       21
<PAGE>

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, 2005, we had 9,769,593 shares of common stock
issued and outstanding and an aggregate of 1,632,650 shares issuable under our
outstanding options and warrants. We also have an obligation to issue up to
2,831,858 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 4,458,108
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, 2005,
we have not used derivative instruments or engaged in hedging activities to
minimize market risk.

INTEREST RATE RISK

As or March 31, 2005, 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 9% effective as of November 8, 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 SUPPLEMENTARY 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

On October 15, 2004, Grant Thornton LLP (the "Former Accountant") resigned as
the auditors for The Singing Machine Company, Inc. (the "Company"). On October
15, 2004, the Company engaged Berkovits, Lago & Company, LLP (the "New
Accountant"), as its independent certified public accountant. The Company's
decision to engaged the New Accountant was approved by its Audit Committee on
October 15, 2004.



                                       22
<PAGE>

The reports of the Former Accountant on the financial statements of the Company
for each of the two most recent fiscal years, did not contain an adverse opinion
or disclaimer of opinion and was not qualified or modified as to uncertainty,
audit scope or accounting principles for the two most recent fiscal years and
all subsequent interim periods, except that the Former Accountant's opinion in
its report on the Company's financial statements expressed substantial doubt
with respect to the Company's ability to continue as a going concern for the
last two fiscal years.

During the Company's two most recent fiscal years and the subsequent interim
period through the date of resignation, there were no reportable events as the
term described in Item 304(a)(1)(v) of Regulation S-K, except for the following:
Management and the Former Accountant, have advised our Audit Committee that
during the course of the audit, they noted deficiencies in internal controls
relating to:

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

-     accounting for consigned inventory and inventory costing.

The Former Accountant 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.

During the Company's two most recent fiscal years and the subsequent interim
period through the date of resignation, there were no disagreements with the
Former Accountant on any matters of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which, if not
resolved to the satisfaction of the Former Accountant 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.

The Company did not consult with the New Accountant 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 the Company's financial
statements, and no written or oral advice was provided by the New Accountant
that was a factor considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issues

ITEM 9A. CONTROLS AND PROCEDURES

(a) As of the end of the period covered by this report, management concluded its
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. As of the end of the fiscal year, our Chief
Executive Officer and our Chief Financial Officer concluded that we maintain
disclosure controls and procedures that are effective in providing reasonable
assurance that information required to be disclosed in our reports under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including our Chief Executive Officer and our Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.

(b) During the evaluation referred to in Item 4(a) above, we have identified no
change in our internal control over financial reporting that occurred during our
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting

ITEM 9B. OTHER INFORMATION

N/A



                                       23
<PAGE>

                                    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, 2005.

Name                  Age     Position
--------------------------------------------------------------------
Yi Ping Chan          41      Interim CEO, Chief Operating Officer,
                                Director, Secretary
Jeff Barocas*         57      Former Chief Financial Officer
Danny Zheng           35      Chief Financial Officer
Josef A. Bauer        66      Chairman
Harvey Judkowitz      60      Director
Bernard Appel         73      Director
Marc D. Goldberg      60      Director
Stewart A. Merkin     62      Director

* Resigned effective March 31, 2005.

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 June 2002. 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. He also worked
as a business development analyst for Allied Signal Inc. (now part of Honeywell
Corp.) doing joint venture and acquisition in Japan and China. He also worked as
an engineer for International Business Machine Corp. in the USA. 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.

Danny Zheng has been part of the Singing Machine management team since April
2004 and has served as financial controller and principal accounting officer.
Danny is a certified public accountant licensed by the state of Delaware. He has
more than 10 years of hands-on controllership experience. He held controller and
VP finance positions with various private and public companies. Previously, he
was also employed by a New York regional CPA firm as tax consultant for 4 years.
Danny was also served as general manager from 1999 to 2002 for PC Ware
International Miami branch, a Taiwan base computer manufacturer. He was
responsible for its distribution, marketing and finance operation in six
countries throughout Latin America. He also served as director of operation for
PC Micro, a joint venture computer manufacturer in Manaus, Brazil from 1999 to
2002. Danny earned a B.S. degree in accounting from Nankai University in China
and is currently obtaining his Master Degree in Accounting from Florida
International University part time.

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.).

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
Intelligent Motor Cars, Inc. and Capital First Corporation.

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.



                                       24
<PAGE>

Marc Goldberg has served as a director since December 1, 2004. He has been
President since 1995 of SuMa Partners, Ltd., a human resources, labor relations
and employee communication consulting firm. In addition to his consulting
practice, he has more than twenty-five years of applied expertise in
organizational effectiveness, change management and performance improvement in
Fortune 500 and emerging companies. Prior to founding SuMa Partners, Mr.
Goldberg was Vice President, Human Resources at Mobile Telecommunication
Technologies. He also served as an organization design consultant for The Mescon
Group, Inc., Vice President, Human Resources at Contel Business
Systems/Executone, Inc., and Manager, Human Resources at GE Integrated
Communication Services. He obtained his J.D. and his Bachelor of Arts in
Sociology from Boston University, and is certified as a Senior Professional in
Human Resources (SPHR) and as a Business Manager(CBM).

Stewart Merkin has served as a director since December 1, 2004. Mr. Merkin,
founding partner of the Law Office of Stewart A. Merkin, has been practicing law
in Miami, Florida since 1974. His core legal practice areas include corporate
and securities law, as well as mergers and acquisitions and international
transactions. He was awarded both J.D. and M.B.A. degrees from Cornell
University, as well as a B.S. from The Wharton School, University of
Pennsylvania. He has been admitted to the Florida and New York State Bar since
1972 and 1973 respectively.

BOARD COMMITTEES

We have an audit committee, an executive compensation/stock option committee and
a nominating committee. As of June 15, 2005, the audit committee consists of
Messrs. Judkowitz (Chairman), Appel and Merkin. 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 Messrs. Judkowitz, Merkin and 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. As of June 15, 2005, the executive compensation/stock
option committee consists of Messrs. Goldberg (Chairman), Judkowitz 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. As of June 15, 2005, the nominating
committee consists of Messrs. Appel (Chairman), Bauer, Merkin and Chan. 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 2005, our compensation package for our non-employee directors
consisted of grants of stock options, cash payment and reimbursement of costs
and expenses associated with attending our Board meetings. Our five non-employee
directors during fiscal 2005 were Messrs. Bauer, Appel, Judkowitz, Goldberg and
Merkin.

During fiscal 2005, we have implemented the following compensation policy for
our directors.

      o     An initial grant of 20,000 SMD stock options with an exercise price
            determined as the closing price on the day of joining the board. The
            options will vest in one year and expire in ten years while they are
            board members or 90 days once they are no longer board members.

      o     An annual cash payment of $7,500 will be made for each completed
            full year of service or prorated for a partial year. The payment
            will be made as of March 31.

      o     An annual stock grant of stock equivalent in value to $2,500 for
            each completed full year of service or prorated for a partial year.
            The stock price at grant will be determined at the closing price on
            the day of the Annual Shareholder Meeting. The actual grant will be
            made on or before March 31.

      o     An annual grant of 20,000 SMD stock options with an exercise price
            determined as the closing price on the day of the Annual Shareholder
            Meeting. If the Annual Meeting is held less than 6 months after the
            board member first joined the board he or she will not receive
            another option grant.

      o     Independent board members will receive a $500 fee for each board
            meeting and annual meeting they attend. Committee meetings and
            telephone board meetings will be compensated with a $200 fee.



                                       25
<PAGE>

      o     All expenses will be reimbursed for attending board, committee and
            annual meetings or when their presence at a location away from home
            is requested.

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, 2005, its
officers, directors and 10% shareholders complied with all Section 16(a) filing.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth certain compensation information for the fiscal
years ended March 31, 2005, 2004 and 2003 with regard to (i) Yi Ping Chan, our
Interim Chief Executive Officer and Chief Operating Officer, from October 17,
2003 through the present date, and each of our other executive officers whose
compensation exceeded $100,000 on an annual basis (the "Named Officers"):

<TABLE>
<CAPTION>
                                                             Summary Compensation Table


                                                        Annual Compensation                       Long Term Compensation
                                            --------------------------------------------------------------------------------------
                                                                                                    Securities
                                                                                 Other Annual       Underlying        All Other
Name of Individual and Principal Position   Year        Salary        Bonus     Compensation(1)   Options / SAR's   Compensation(2)
-----------------------------------------   ----     -------------  ----------  ---------------   ---------------  ----------------
<S>                                         <C>      <C>             <C>          <C>              <C>               <C>
Yi Ping Chan                                2005     $ 246,038             --     $   6,000             --            $   4,560
  Interim CEO & COO                         2004     $ 247,470(15)         --     $   6,000         52,800            $  12,180

Edward Steele                               2005     $ 249,038             --     $   6,500             --            $   6,000
  Former Chief Executive Officer (3)        2004     $ 372,809(15)         --     $   6,000         10,000            $  17,949
                                            2003     $ 382,352             --     $   8,671         30,000            $  17,969

Danny Zheng                                 2005     $  84,884             --            --         12,000            $   3,420
  Chief Executive Officer (4)


Jeffery Barocas                             2005     $ 135,346             --     $   6,000         50,000            $   3,420
  Former Chief Executive Officer (5)


April J. Green                              2004     $ 127,642             --     $   3,600          4,380            $   5,094
  Former Chief Executive Officer (6)        2003     $ 122,200      $  25,000     $   3,900         20,000            $  13,551

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


John Klecha                                 2004     $  41,480             --     $   1,000             --            $ 189,911(9)
  Former Chief Operating Officer (8)        2003     $  30,117             --     $   6,555         24,000            $  13,264

Jack Dromgold                               2004     $ 183,266(15)         --     $   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)


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

(1) The amounts disclosed in this column for fiscal 2005, 2004 and 2003 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.



                                       26
<PAGE>

(3) 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.

(4) Mr. Danny Zheng joined our company on April 19, 2004 as financial controller
and became our Chief Financial Officer on April 5, 2005.

(5) Mr. Jeffery Barocas joined our company on April 1, 2004 as Chief Financial
Officer and resigned on April 1, 2005.

(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.

(15) 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.

OPTION GRANTS IN FISCAL 2005

The following table sets forth information concerning all options granted to our
officers and directors during the year ended March 31, 2005. No stock
appreciation rights ("SAR's") were granted.

<TABLE>
<CAPTION>
                                            TOTAL OPTIONS
                            SHARES            GRANTED TO         EXERCISE                          POTENTIAL REALIZABLE VALUE AT
                          UNDERLYING         EMPLOYEES IN       PRICE PER        EXPIRATION         ASSUMED ANNUAL RATES OF STOCK
                       OPTIONS GRANTED(1)     FISCAL YEAR          SHARE            DATE         PRICE APPRECIATION FOR OPTION TERM

                                                                                                   5% (2)               10% (2)
<S>                         <C>                  <C>             <C>           <C>                <C>                 <C>
Yi Ping Chan                    --                  --                 --                --            --                   --
Edward Steele                   --                  --                 --                --            --                   --
Danny Zheng                 12,000               4.55%           $   1.05           4/26/14         7,924               20,081
Jeffrey Barocas             50,000              18.94%           $   1.17      Cancelled(3)            --                   --
Harvey Judkowitz            20,000               7.58%           $   1.20           3/29/14        15,093               38,250
Harvey Judkowitz            20,000               7.58%           $   0.75          11/29/14         9,433               23,906
Bernard Appel               20,000               7.58%           $   0.75          11/29/14         9,433               23,906
Josef A. Bauer              20,000               7.58%           $   0.75          11/29/14         9,433               23,906
Marc D. Goldberg            20,000               7.58%           $   0.77           12/1/14         9,685               24,544
Stewart A. Merkin           20,000               7.58%           $   0.77           12/1/14         9,685               24,544
</TABLE>


(1) All of these options were granted under a Year 2001 Stock Option Plan. The
Options granted to Mr. Judkowitz, Mr. Bauer, Mr. Goldberg, Mr. Merkin and Mr.
Appel vest in one year, on November 29, 2005 (except Mr.Goldberg's and Mr.
Merkin will fully vest on December 1, 2005). Mr. Zheng's options vest in five
equal installments beginning on April 26, 2005.



                                       27
<PAGE>

(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. Barocas received a grant of 50,000 options on April 5, 2004. These
options will expire on June 30, 2005 ninety days after Mr. Barocas resigned from
our company.

AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED MARCH 31, 2005 AND OPTION
VALUES

The following table sets forth information as to the exercise of stock options
during the fiscal year ended March 31, 2005 by our officers listed in our
Summary Compensation Table and the fiscal year-end value of unexercised options.

<TABLE>
<CAPTION>
                                                                      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
--------------------------   -----------------   -------------  ----------------------   --------------------------
<S>                                 <C>                <C>           <C>                            <C>
Yi Ping Chan                        --                 --            117,600/85,200                 0/0
Danny Zheng                         --                 --              2,400/12,000                 0/0
</TABLE>


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 interim CEO and 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.

SEPARATION AND CONSULTING AGREEMENTS

Mr. Barocas resigned as our Chief Financial Officer effective March 31, 2005. In
connection with his resignation, we entered into a separation and release
agreement with Mr. Barocas. Under this agreement, we agreed to provide Mr.
Barocas with a severance payment equal to $50,157, which consisted of (i) salary
payment in the amount of $13,846, (ii) auto allowance in the amount of $554,
(iii) a COBRA reimbursement payment equal to $1,142, (iv) payment for accrued
vacation time equal to $5,769 and (v) severance payments in the amount of
$28,846.15. In exchange, Mr. Barocas agreed to release the Singing Machine from
any liability in connection with the termination of his employment.

 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.

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.

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.



                                       28
<PAGE>

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.

<TABLE>
<CAPTION>
                                                                          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))
---------------------------------------  ----------------------------  --------------------   -------------------------------
<S>                                               <C>                          <C>                        <C>
Equity Compensation Plans approved by             1,041,610                    $3.67                      1,251,440
   Security Holders

Equity Compensation Plans Not                             0                        0                            0
   approved by Security Holders
</TABLE>

YEAR 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, 2005, we have 343,050 options issued and outstanding under the 1994
Plan and all of these options are fully vested as of March 31, 2005.

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, 2005, we have granted 698,560 options
under the Year 2001 Plan, 432,781 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.



                                       29
<PAGE>

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, 2005, 2004 and 2003 totaled approximately $30,025, $55,402 and
$61,466, 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 2005, we had employment agreement with one executive officer. The
base salary 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 2005 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.

Jeffrey Barocas who has served as our Chief Financial officer from April 1, 2004
and resigned on April 1, 2005.

Danny Zheng who has served as our Financial Controller from April 19, 2004 to
April 3, 2005 and served as our Chief Financial Officer from April 4, 2005
through the present date.

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 2005, we did not award any cash
bonuses to any of our executive officers because our financial performance was
weak.

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 2005, we granted an aggregate of 62,000 options to our senior
executive officers. All options grants in fiscal 2005 were made under our Year
2001 Stock Option Plan. See "Executive Compensation -Option Grants in Last
Fiscal Year" on pages 27 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.



                                       30
<PAGE>

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

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 2005 because our
financial performance did not justify cash bonuses to any of our employees. Even
though we have cut the cost significantly, we had a net operating loss of $ 3.6
million in fiscal 2005.

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.

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, 2000
through March 31, 2005. The graph assumes the investment of $100 on March 31,
2000 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.

<TABLE>
<CAPTION>
                                               2000        2001        2002       2003        2004       2005
                                            --------------------------------------------------------------------
<S>                                           <C>         <C>         <C>         <C>         <C>        <C>
The Singing Machine Company                   100.00      113.78      379.02      166.88      27.73      18.01
Dow Jones Consumer Electronics  Index         100.00       60.08       49.74       31.76      50.00      57.01
AMEX Market Index                             100.00       84.36       83.67       79.91      70.98      76.50
</TABLE>


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The following table sets forth as of June 15, 2005, 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;

We had 10,,047,371 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.


                                       31
<PAGE>


<TABLE>
<CAPTION>
                                                     SHARES OF         PERCENT OF
                                                   COMMON STOCK(1)    COMMON STOCK(1)
                                                   ----------------   -------------
<S>                                                   <C>                <C>
Yi Ping Chan

Interim CEO and Chief Operating Officer                 160,957             *

Danny Zheng

Chief Financial Officer                                   2,400             *

Joseph Bauer

Chairman                                              1,226,983(2)       11.53%

Edward Steele

Former CEO                                              937,510(3)        8.81%

Bernard Appel

Director                                                 20,000             *

Harvey Judkowitz

Director                                                 20,000             *

Marc Goldberg

Director                                                      0             *

Stewart Merkin

Director                                                      0             *

Wellington Management Company, LLP                      934,000           8.78%

Target Capital                                          755,600           7.10%


All Directors and Executive Officers as a Group       1,430,340          13.44%
</TABLE>


*Less than 1%.

(1) Includes as to the person indicated the following outstanding stock options
to purchase shares of the Company's Common Stock issued under the 1994 and 2001
Stock Option Plans , which will be vested and exercisable within 60 days of June
30, 2005: 117,600 options held by Yi Ping Chan; 2,400 options held by Danny
Zheng; 77,580 options held by Joseph Bauer; 354,500 options held by Edward
Steele; 20,000 options held by Bernard Appel; 20,000 options held by Harvey
Judkowitz; 237,580 options held by the executive officers and directors as a
group.

(2) Includes 126,913 shares held individually by Mr. Bauer, 323,216 held by Mr.
Bauer's wife, 74,374 held jointly by Mr. Bauer and his wife, 369,400 shares held
by Mr. Bauer's pension account, 255,500 shares held in Mr. Bauer's Family LTD
Partnership and 77,580 issuable upon the exercise of stock options that can be
exercisable within 60 days of June 30, 3005.

(3) Includes 163,200 held by Mr. Steele individually, 419,810 held by Mr.
Steele's wife.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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.

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.



                                       32
<PAGE>

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 March 31, 2005,
all interest was accrued, and the unpaid amount totaled approximately $14,250.
These loans were originally scheduled to be repaid by October 31, 2003 and are
now due on demand. These loans were subordinated to Milberg's factoring
agreement, which we terminated effective as of July 14, 2004 and subsequently
subordinated to Crestmark Bank. On January 20, 2005, Messrs. Bauer, Chan and Ms.
LaRoche had converted 50% of their loan and accrued interest in the amount of
$409,500 into common stock at $0.72/share for total of 563,274 shares. On May
18, 2005, Mr. Moore had converted 100% of his loan in the amount of $200,000
into common stock at $0.72/share for total of 277,778 shares.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The following is a summary of the fees billed to the Singing Machine by
Berkovits, Lago & Co, LLP and Grant Thornton, LLP for professional services
rendered for the fiscal years ended March 31, 2005 and 2004:

                                     Fiscal        Fiscal
                Fee Category          2005          2004
                                    --------      --------

                Audit Fees          $289,790      $217,632
                Tax Fees              33,543       103,958
                All Other Fees        12,938         5,041
                                    --------      --------
                Total Fees          $336,271      $326,631
                                    ========      ========

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 were provided by Berkovits, Lago & Co, LLP and Grant Thornton LLP
in connection with statutory and regulatory filings or engagements.

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.

Out of the total 2005 audit and other fees, $86,219 were billed by Berkovits,
Lago and Co., LLP.

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

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).



                                       33
<PAGE>

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).



                                       34
<PAGE>

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


                                       35
<PAGE>

                                   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: June 28, 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.

<TABLE>
<CAPTION>
            SIGNATURE                                   CAPACITY                        DATE
----------------------------------         ------------------------------------    -----------------
<S>                                        <C>                                     <C>
/s/ YI PING CHAN                           Chief Executive Officer                 June 28, 2005
----------------------------------
Yi Ping Chan

/s/ Danny Zheng                            Chief Financial Officer (Principal      June 28, 2005
----------------------------------         Financial and Accounting Officer)
Danny Zheng

/s/ JOSEF A. BAUER                         Director                                June 28, 2005
----------------------------------
Josef A. Bauer

/s/ BERNARD APPEL                          Director                                June 28, 2005
----------------------------------
Bernard Appel

/s/ HARVEY JUDKOWITZ                       Director                                June 28, 2005
----------------------------------
Harvey Judkowitz

/s/ MARC GOLDBERG                          Director                                June 28, 2005
----------------------------------
Marc Goldberg
</TABLE>


                                       36
<PAGE>


                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY

                        CONSOLIDATED FINANCIAL STATEMENTS

                                 MARCH 31, 2005

                          INDEX TO FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firms                    F-2
Consolidated Balance Sheets                                                  F-4
Consolidated Statements of Operations                                        F-5
Consolidated Statements of Cash Flows                                        F-6
Consolidated Statements of Stockholders' Equity (Deficit)                    F-7
Notes to Consolidated Financial Statements                                   F-8


<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the consolidated balance sheet of The Singing Machine Company,
Inc. and subsidiary (the "Company") as of March 31, 2005, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 financial
statements are free of material misstatement. The Company has determined that it
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we do not express such an opinion. 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
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 consolidated financial position of The
Singing Machine Company, Inc. as of March 31, 2005, and the consolidated results
of operations and cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States.

We have also audited Schedule II of The Singing Machine Company, Inc. and
subsidiary for the year ended March 31, 2005. 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 consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's inability to obtain outside long term
financing, increasing stockholders' deficit and recurring losses from operations
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans are 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/ Berkovits, Lago & Company, LLP

Fort Lauderdale, Florida
June 24, 2005


                                    F-2



<PAGE>

                     REPORT OF FORMER 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
the related consolidated statements of operations, shareholders' equity and cash
flows for the years ended March 31, 2004 and 2003. 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. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also 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 consolidated 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 the
consolidated results of their operations and their consolidated cash flows for
the years ended March 31, 2004 and 2003, 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 two years 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 consolidated 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.

Miami, Florida

June 16, 2004 (except for the last
  paragraph of Note 7, as to which the
  date is July 14, 2004 and the fifth
  paragraph of Note 3, as to which the
  date is September 20, 2004)


                                      F-3
<PAGE>
                       THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY

                                 CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                            March 31         March 31
                                                                              2005             2004
                                                                          ------------     ------------
<S>                                                                       <C>              <C>
                                     Assets

Current Assets

     Cash and cash equivalents                                            $    617,054     $    356,342
     Restricted Cash                                                           870,795          874,283
     Accounts Receivable, less allowances of $117,806 and $98,009,
        respectively                                                         1,150,842        3,806,166
     Due from manufacturer                                                          --           95,580
     Due from factor                                                            34,372               --
     Inventories                                                             3,094,937        5,923,267
     Prepaid expenses and other current assets                                 507,304          783,492
     Insurance receivable                                                           --          800,000
     Refundable tax                                                                 --        1,178,512
                                                                          ------------     ------------
          Total Current Assets                                               6,275,304       13,817,642
Property and Equipment, at cost less accumulated depreciation
     of $3,579,882 and $2,870,592, respectively                              1,038,843          983,980
Other Non-Current Assets                                                       354,661          615,773
                                                                          ------------     ------------
          Total Assets                                                    $  7,668,808     $ 15,417,395
                                                                          ============     ============
                 Liabilities and Shareholders' Equity (Deficit)

Current Liabilities

     Bank overdraft                                                       $         --     $     62,282
     Accounts payable                                                        1,466,571        4,651,675
     Accrued expenses                                                          693,776        3,481,905
     Customer credits on account                                             1,659,324        2,111,484
     Deferred Gross profit on estimated returns                                396,231               --
     Convertible debentures, net of unamortized discount of $1,615,647
       and $2,554,511, respectively                                          2,384,353        1,445,489
     Subordinated debt-related parties                                         600,000        1,000,000
     Income tax payable                                                      2,453,576        2,447,746
                                                                          ------------     ------------
          Total Current Liabilities                                          9,653,831       15,200,581

Shareholders'  Equity (Deficit)

     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;
        9,769,593 and 8,752,318 shares issued and outstanding                   97,696           87,523
     Additional paid-in capital                                             11,432,463       10,052,498
     Accumulated deficit                                                   (13,515,182)      (9,923,207)
                                                                          ------------     ------------
          Total Shareholders' Equity (Deficit)                              (1,985,023)         216,814
                                                                          ------------     ------------
          Total Liabilities and Shareholders'  Equity (Deficit)           $  7,668,808     $ 15,417,395
                                                                          ============     ============
</TABLE>

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


                                      F-4
<PAGE>

                     The Singing Machine Company, Inc. and Subsidiary

                          CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                       For Years Ended
                                                        ------------------------------------------------
                                                        March 31, 2005   March 31, 2004   March 31, 2003
                                                        --------------   --------------   --------------
<S>                                                      <C>              <C>              <C>
Net Sales                                                $ 38,209,825     $ 70,541,128     $ 95,613,766

Cost of Goods Sold                                         28,945,283       68,722,578       72,329,035
                                                         ------------     ------------     ------------
Gross Profit                                                9,264,542        1,818,550       23,284,731

Operating Expenses

      Advertising                                             597,821        2,340,439        5,032,367
      Commissions                                             947,945        1,024,883          997,529
      Compensation                                          2,854,142        5,048,831        4,095,176
      Freight and Handling                                    991,866        1,423,082        2,112,435
      Royalty expense                                       1,008,553        2,294,727        2,257,653
      Selling, general and administrative expenses          4,484,450        9,881,887        7,175,341
                                                         ------------     ------------     ------------
Total Operating Expenses                                   10,884,777       22,013,849       21,670,501
                                                         ------------     ------------     ------------
(Loss) Income from Operations                              (1,620,235)     (20,195,299)       1,614,230

Other Income (Expenses)

      Other income                                            204,267           22,116          196,537
      Interest expense                                       (549,506)        (993,885)        (394,183)
      Interest expense - Amortization of discount
           on convertible debentures                       (1,626,501)        (757,851)              --
                                                         ------------     ------------     ------------

Net Other Expenses                                         (1,971,740)      (1,729,620)        (197,646)
                                                         ------------     ------------     ------------

Loss (Income) Before Income Tax Provision                  (3,591,975)     (21,924,919)       1,416,584

Provision for Income Taxes                                         --          758,505          198,772
                                                         ------------     ------------     ------------

Net (Loss) Income                                        $ (3,591,975)    $(22,683,424)    $  1,217,812
                                                         ============     ============     ============

Income (Loss) Income per common share:

      Basic                                              $      (0.39)    $      (2.65)    $       0.15
      Diluted                                            $      (0.39)    $      (2.65)    $       0.14

Weighted Average Common and Common Equivalent Shares:

      Basic                                                 9,112,278        8,566,116        8,114,330
      Diluted                                               9,112,278        8,566,116        8,931,385
</TABLE>

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


                                      F-5
<PAGE>

               The Singing Machine Company, Inc. and Subsidiary

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                             For Years Ended
                                                                              ------------------------------------------------
                                                                              March 31, 2005   March 31, 2004   March 31, 2003
                                                                              --------------   --------------   --------------
<S>                                                                            <C>              <C>              <C>
Cash flows from operating activities

      Net (Loss) Income                                                        $ (3,591,975)    $(22,683,424)    $  1,217,812
      Adjustments to reconcile net (loss) income to net cash
        provided by (used in)operating activities
           Depreciation and amortization                                            709,291          750,359          622,298
           Impairment of tooling                                                         --          628,405               --
           Change in inventory reserve                                           (4,912,717)       3,446,518        3,715,357
           Change in allowance for bad debts                                         19,797         (159,676)         393,737
           Amortization of discount/deferred fees on convertible debentures         938,864          909,891               --
           Other stock compensation                                                 701,638          632,451               --
           Stock in exchange for payoff accrued consulting fee                       52,500               --               --
           Stock a partial payment for class action lawsuit                         236,000               --               --
           Change in deferred taxes                                                      --        1,925,612       (1,734,194)
           Deferred gross profit on estimated sales returns                         396,231               --               --
      Changes in assets and liabilities:

           Accounts Receivable                                                    2,635,527        2,116,454       (2,626,074)
           Insurance receivable                                                     800,000         (800,000)              --
           Due from manufacturer                                                     95,580          996,291         (603,573)
           Inventories                                                            7,741,047       15,824,562      (19,635,351)
           Prepaid expenses and other assets                                        276,188          666,013       (1,020,895)
           Other non-current assets                                                 261,112        1,204,630         (426,494)
           Accounts payable                                                      (3,185,104)      (2,901,332)       5,706,769
           Accrued expenses                                                      (2,788,129)       2,038,499          153,809
           Customer credits on account                                             (452,160)       1,178,482          933,002
           Current income taxes                                                   1,184,341       (2,551,811)       1,779,117
                                                                               ------------     ------------     ------------
               Net cash provided by (used in) operating activities                1,118,031        3,221,924      (11,524,680)
                                                                               ------------     ------------     ------------
Cash flows from investing activities

      Purchase of property and equipment                                           (764,153)      (1,266,321)      (1,144,064)
      Change in Restricted cash                                                       3,488          (35,872)        (324,727)
                                                                               ------------     ------------     ------------
               Net cash used in investing activities                               (760,665)      (1,302,193)      (1,468,791)
                                                                               ------------     ------------     ------------
Cash flows from financing activities

      Borrowing from revolving credit facilities                                         --       28,863,712       47,825,725
      Repayment to revolving credit facilities                                           --      (35,646,536)     (41,042,901)
      Borrowing from factoring, net                                                 (34,372)              --               --
      Bank Overdraft                                                                (62,282)        (254,364)         316,645
      Proceeds from issuance of convertible debt                                         --        4,000,000               --
      Payment of financing fees related to convertible debt                              --         (255,000)              --
      Proceeds from related party loan                                              240,000          600,000          400,000
      Payments of related party loan                                               (240,000)              --               --
      Proceeds from exercise of stock options and warrants                               --          860,535          242,119
                                                                               ------------     ------------     ------------
               Net cash used in financing activities                                (96,654)      (1,831,653)       7,741,588
                                                                               ------------     ------------     ------------
Change in cash and cash equivalents                                                 260,712           88,078       (5,251,883)
Cash and cash equivalents at beginning of period                                    356,342          268,264        5,520,147
                                                                               ------------     ------------     ------------
Cash and cash equivalents at end of period                                     $    617,054     $    356,342     $    268,264
                                                                               ============     ============     ============

Supplemental Disclosures of Cash Flow Information:

Cash paid for year ended March 31

      Interest                                                                 $    557,339     $    943,018     $    406,126
                                                                               ============     ============     ============
      Taxes                                                                    $     50,000     $  1,388,804     $    153,849
                                                                               ============     ============     ============

Non-Cash Financing Activities:

      Discounts for warrants issued in connection with the
           beneficial conversion feature of convertible debentures             $    687,638     $  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     $         --
                                                                               ============     ============     ============
      Insider loan and interest paid off with stock                            $    409,500     $         --     $         --
                                                                               ============     ============     ============
</TABLE>

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


                                      F-6
<PAGE>

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

<TABLE>
<CAPTION>

                                                        Preferred Stock                    Common Stock
                                                  ------------------------------   ---------------------------
                                                     Shares          Amount           Shares         Amount
                                                  ------------      ------------   ------------   ------------
<S>                                               <C>               <C>               <C>         <C>
Balance at March 31, 2002, restated                         --                --      8,020,027         80,200

Net earnings                                                --                --             --             --
Exercise of warrants                                        --                --         52,500            525
Exercise of employee stock options                          --                --         99,151            992
                                                  ------------      ------------   ------------   ------------
Balance at March 31, 2003                                   --                --      8,171,678         81,717

Net loss                                                    --                --             --             --
Exercise of employee stock options                          --                --        448,498          4,485
 Warrants issued in connection with
   convertible debenture amendment                          --                --             --             --
Financing fees paid with warrants                           --                --             --             --
Warrants issued in connection with
  and beneficial conversion feature
  of convertible debentures                                 --                --             --             --
Issuance of common stock                                    --                --        132,142          1,321
                                                  ------------      ------------   ------------   ------------
Balance at March 31, 2004                                   --                --      8,752,318   $     87,523

Net loss                                                    --                --             --             --
Adjustment for 3 to 2 rev. split fraction share             --                --          4,001             40
Stock Compensation                                          --                --        450,000          4,500
Convertible debentures price reset                          --                --             --             --
Insider Loan conversion                                     --                --        563,274          5,633
                                                  ------------      ------------   ------------   ------------
Balance at March 31, 2005                                   --                --      9,769,593   $     97,696
                                                  ============      ============   ============   ============

<CAPTION>

                                                  Additional
                                                    Paid in       Accumulated
                                                    Capital         Deficit          Total
                                                  ------------    ------------    ------------
<S>                                               <C>             <C>             <C>
Balance at March 31, 2002, restated               $  4,602,828      11,542,405      16,225,433

Net earnings                                                --       1,217,812       1,217,812
Exercise of warrants                                    47,600              --          48,125
Exercise of employee stock options                     193,002              --         193,994
                                                  ------------    ------------    ------------
Balance at March 31, 2003                            4,843,430      12,760,217      17,685,364

Net loss                                                    --     (22,683,424)    (22,683,424)
Exercise of employee stock options                   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                               520,454              --         521,775
                                                  ------------    ------------    ------------
Balance at March 31, 2004                           10,052,498      (9,923,207)        216,814

Net loss                                                    --      (3,591,975)     (3,591,975)
Adjustment for 3 to 2 rev. split fraction share            (40)             --              --
Stock Compensation                                     288,500              --         293,000
Convertible debentures price reset                     687,638              --         687,638
Insider Loan conversion                                403,867              --         409,500
                                                  ------------    ------------    ------------
Balance at March 31, 2005                         $ 11,432,463    $(13,515,182)   $ (1,985,023)
                                                  ============    ============    ============
</TABLE>

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


                                      F-7
<PAGE>

                 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, page 22.

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

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.

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.

The Company follows Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("SFAS No. 109"). Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributed to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax base. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. If
it is more likely than not that some portion of a deferred tax asset will not be
realized, a valuation allowance is recognized.

As of March 31, 2005 and 2004, The Singing Machine had gross deferred tax assets
of $10.4 million and $8.2 million, against which the Company recorded valuation
allowances totaling $10.4 million and $8.2, respectively.

For the fiscal years ended March 31, 2005 and March 31, 2004, the Company
recorded a tax provision of $0 and $758,505, respectively. 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 and fiscal 2005 due to the subsidiary's net operating losses.

Hong Kong income taxes payable totaled $2.4 million at March 31, 2005 and 2004
and is included in the accompanying balance sheets as income taxes payable.

The Company effectively repatriated approximately $0, $2.0 million and $5.6
million from its foreign operations in 2005, 2004 and 2003, 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.

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.


                                      F-8
<PAGE>

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, 2005, 2004 and 2003 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 and cash
equivalent balances at March 31, 2005 and March 31, 2004 were $617,054 and
$356,342, respectively. Cash balances at March 31, 2005 and 2004 include
approximately $379,000 and $140,000, respectively, held in foreign banks by the
Hong Kong Subsidiary.

INVENTORIES

Inventories are comprised of electronic Karaoke equipment, accessories, and
compact discs and are stated at the lower of cost or market, as determined using
the first in, first out method.

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 March 31, 2004, the Company recorded an impairment charge
totaling $442,989 on certain tooling. The 2004 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 and 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 years ended March 31, 2005, 2004
and 2003 was $3.6 million, $6.7 million and $9.9 million, respectively. The
total returns represents 9.3%, 9.4% and 10.4% of the net sales for fiscal year
ended March 31, 2005, 2004 and 2003, respectively.

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:


                                      F-9
<PAGE>

<TABLE>
<CAPTION>
                                                                                          For years ended
                                                                      -------------------------------------------------------
                                                                      March 31, 2005       March 31, 2004      March 31, 2003
                                                                      --------------       --------------       -------------
<S>                                                                    <C>                 <C>                  <C>
Net income (Loss), as reported                                         $  (3,591,975)      $  (22,683,424)      $   1,217,812
Less: Total stock-based employee compensation
expense determined under fair value based method

                                                                       $    (497,902)      $     (723,058)      $  (1,740,624)

Net loss, pro forma                                                    $  (4,089,877)      $  (23,406,482)      $    (522,812)

Net income (loss) per share - basic                 As reported        $       (0.39)      $        (2.65)      $        0.15
                                                    Pro forma          $       (0.45)      $        (2.73)      $       (0.06)

Net income (loss) per share - diluted               As reported        $       (0.39)      $        (2.65)      $        0.14
                                                    Pro forma          $       (0.45)      $        (2.73)      $       (0.06)

</TABLE>

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 2005: expected dividend yield 0%, risk- free interest rate of 4%,
volatility between 110% and 199% and expected term of three to five years.

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.

ADVERTISING

Costs incurred for producing and communicating advertising of the Company, are
charged to operations as incurred. The Company had entered into cooperative
advertising agreements with its major clients that specifically indicated that
the client has to spend the cooperative advertising fund on 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 newspaper and other advertising media. The client
must submit the proof of the performance (such as a copy of the advertising
showing the Registrant's 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, 2005, 2004 and 2003 was $597,821, $2,340,439 and
$5,032,367, 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, 2005, 2004 and 2003, these amounts totaled $239,242,
$302,144 and $674,925, respectively.

EARNINGS PER SHARE

In accordance with SFAS N0. 128, "Earnings Per Share", basic (loss) earnings per
share are computed by dividing the net (loss) earnings for one year by the
weighted average number of shares outstanding. Diluted earings per share is
computed by dividing net earnings for one year by the weighted average number of
common shares outstanding including the effect of common stock equivalents.

For fiscal 2005, 2004 and 2003, 4,674,338 2,657,532 and 90,000 common stock
equivalents were not included in the computation of diluted earnings per share
as their effect would have been antidilutive for fiscal years ended March 31,
2005, 2004 and 2003.

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.


                                      F-10
<PAGE>

RECLASSIFICATIONS

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

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4" (SFAS 151), effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. This Statement
amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material (spoilage).
Paragraph 5 of ARB No. 43, Chapter 4, previously stated that "...under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight, and re-handling costs may be so abnormal as to require treatment as
current period charges...." SFAS 151 requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of "so
abnormal..." In addition, SFAS 151 requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. The Company adopted SFAS 151 as of January 1, 2005. The
effect of the adoption of SFAS 151 was not material.

In December 2004, FASB issued Statement of Financial Accounting Standards No.
153, "Exchanges of Non monetary Assets - an amendment of APB Opinion No. 29"
(SFAS 153), effective for non monetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. This Statement amends Accounting
Principles Board (APB) Opinion No. 29 to eliminate the exception for non
monetary exchanges of similar productive assets and replaces it with a general
exception for exchanges of non monetary assets that do not have commercial
substance. A non-monetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the
exchange. The Company adopted SFAS 153 as of January 1, 2005. The effect of the
adoption of SFAS 153 was not material.

In December 2004, FASB issued Statement of Financial Accounting Standards No.
123 (revised 2004), "Share-Based Payment" (SFAS 123 (revised 2004), effective as
of the beginning of the first interim or annual reporting period that begins
after June 15, 2005. This Statement is a revision of FASB Statement No. 123,
"Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related implementation
guidance. SFAS 123 (revised 2004) eliminates the alternative to use APB Opinion
No. 25's intrinsic value method of accounting that was provided in Statement 123
as originally issued. Under APB Opinion No. 25, issuing stock options to
employees generally resulted in recognition of no compensation cost. SFAS 123
(revised 2004) requires entities to recognize the cost of employee services
received in exchange for awards of equity instruments based on the grant-date
fair value of those awards (with limited exceptions). Recognition of that
compensation cost helps users of financial statements to better understand the
economic transactions affecting an entity and to make better resource allocation
decisions. The Company will adopt SFAS 123 (revised 2004) for the fiscal quarter
beginning July 1, 2005. The effect of the adoption of SFAS 123 (revised 2004) is
not expected to be material.

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 experienced recurring losses, has an accumulated deficit and
negative working capital. Our unencumbered assets are limited. We are not able
to meet some short term obligations. These factors, among others, raise
substantial doubt that the Company may be unable to continue operations as a
going concern.

Subsequent to March 31, 2005, we plan to finance our operations as follows:

1) Vendor financing - The Company's key vendors in China have agreed to
manufacture on behalf of the Company, without advanced payments. We have
substantially improved our payment status with vendors this year. We are current
with our suppliers except one factory in China, which has agreed to a
payment plan.

2) Borrowing against credit facility - We have an aggregate of $1.5 million in
credit facilities with two banks in Hong Kong. We would be able to borrow from
the credit facilities to finance some operational needs. The availability of
these facilities as of March 31, 2005 was $0.8 million.

3) Factoring of accounts receivable - The Company would factor its accounts
receivable for sales originated in the United States.

4) Debt to equity conversion - On January 5, 2005, the debt holders converted
insiders' loans in the amount of $400,000 plus interest into 563,274 shares of
the Company's common stock. On May 18, 2005, an additional $200,000 insider loan
was converted into 277,778 shares of the Company's common stock.

5) Insider Loan - The Company received $200,000 loan from an insider on June 27,
2005. We might be able to raise additional short term loan from insider if
needed.

6) Cost reduction - The Company has reduced significant operating expenses in
this fiscal year. The cost reduction initiatives are part of our intensive
effort to achieve a successful turn-around restructuring. The Company plans to
continue its cost cutting efforts in the fiscal 2006.


                                      F-11
<PAGE>

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

NOTE 3 - RESTATEMENT OF FINANCIAL STATEMENTS FOR THE FISCAL YEARS 2004 AND 2003

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:

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

<TABLE>
<CAPTION>
                                                                              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)
<S>                                              <C>           <C>           <C>           <C>           <C>           <C>

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
                                                 ============  ============  ============  ============  ============  ============
</TABLE>


<TABLE>
<CAPTION>
                                                                      FOR YEARS ENDED
                                                 -------------------------------------------------------
                                                   03/31/03      03/31/03       03/31/04      03/31/04
                                                   --------      --------       --------      --------
                                                  AS REPORTED   AS AMENDED    AS REPORTED    AS AMENDED
                                                  -----------   ----------    -----------    ----------
<S>                                              <C>           <C>           <C>           <C>
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)  (11,524,680)    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)   (1,831,653)
                                                 ------------  ------------  ------------  ------------
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  $  1,388,804  $  1,388,804
                                                 ============  ============  ============  ============
</TABLE>


                                      F-12
<PAGE>

NOTE 4 - INVENTORIES

Inventories are comprised of the following components:

                                              MARCH 31,     MARCH 31,
                                                 2005        2004
                                             -----------  -----------
             Finished Goods                  $ 4,717,455  $12,383,063
             Inventory in Transit                 45,912      121,350
               Less: Inventory Reserve        (1,668,430)  (6,581,146)
                                             -----------  -----------

             Total Inventories               $ 3,094,937  $ 5,923,267
                                             ===========  ===========

Inventory consigned to customers at March 31, 2005 and March 31, 2004 was
$151,824 and $300,914, respectively.

NOTE 5 - ACCOUNTS RECEIVABLE FACTORING AGREEMENT

On August 4, 2004, the Company started to factor its accounts receivables
through Crestmark Bank, Detroit, Michigan. The agreement allows the Company, at
the discretion of Crestmark, to factor its outstanding receivables, with
recourse, up to a maximum of the lesser of $2.5 million or 70% of eligible
accounts receivable. The Company pays 1% of gross receivables in fees with a
$9,000 minimum maintenance fee per month. The average balance of the line will
be subject to interest payable on a monthly basis at prime plus 2% (8% at March
31, 2005). The agreement contains a liquidated damage fee of $162,000 payable
for early termination by the Company.

Crestmark Bank also received a security interest in all of the Company's
accounts receivables and inventory in the United States. The Company's debenture
holders and insider loan holders have subordinated their debt to the Crestmark
Bank debt.

As of March 31, 2005, the outstanding amount due from Crestmark bank for
factoring was $34,372, which was the excess of customer payments received by the
Crestmark Bank over advances made to us.

NOTE 6 - 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 $0, $72,879
and $449,411 for the years ended March 31, 2005, 2004 and 2003. 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.
However, the Company believes that collection of the amount due from
manufacturer in the amount of $210,148 is not likely due to a significant
decrease of purchase volume from this factory. Therefore, the Company has
written off this amount in fiscal 2005. The balance due from manufacturer as of
March 31, 2005 and 2004 was $0 and $95,580, respectively.

NOTE 7 - PROPERTY AND EQUIPMENT

A summary of property and equipment is as follows:

                                   USEFUL     MARCH 31,      MARCH 31,
                                    LIFE        2005          2004
                                 ---------   ----------    ----------
Computer and office equipment      5 years   $  507,953    $  465,810

Furniture and fixtures           5-7 years      351,510       381,164

Leasehold improvement                    *      103,776       103,776

Molds and tooling                  3 years    3,624,260     2,903,822
                                            -----------    ----------
                                              4,587,499     3,854,572

Less: Accumulated depreciation               (3,548,656)   (2,870,592)
                                            -----------    ----------
                                            $ 1,038,843    $  983,980
                                            ===========    ==========

* Shorter of remaining term of lease or useful life


                                      F-13
<PAGE>

NOTE 8 - 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
$870,795 and $874,283 at March 31, 2005 and 2004, respectively. This amount is
shown as restricted cash in the accompanying balance sheets. The restricted cash
is not covered by deposit insurance.

NOTE 9 - 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

      o     A Company credit card

These facilities are secured by a corporate guarantee from the U.S. Company,
restricted cash on deposit with the lenders and require that the International
SMC maintain a minimum tangible net worth of approximately $2 million.
International SMC was in compliance with minimum tangible net worth as of March
31, 2005. The maximum available credit under the facilities is $1.5 million. The
interest rate is approximately 5%. At March 31, 2005 and March 31, 2004. There
were no borrowings against the facilities, however, there was a $676,076 letter
of credit issued under these facilities. Total availability under these
facilities is $823,924 at March 31, 2005.

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. Bauer a total of $202,109, including $2,109 in
interest.

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, an officer and two directors of our Company advanced
$1 million to our Company pursuant to written loan agreements. The officer is Yi
Ping Chan and the directors were Josef A. Bauer and Howard Moore. Mr. Moore
resigned from our Board, effective as of October 17, 2003. Additionally, Maureen
LaRoche, a business associate of Mr. Bauer, participated in the financing. The
loans are subordinated to the factoring company and accrued interest at 9.5% per
annum. These loans were originally scheduled to be repaid by October 31, 2003,
but were extended past March 31, 2005. All interest was accrued, and the unpaid
amount totaled approximately $14,250. A portion of the loans and the accrued
interest in the amount of $409,500 has been converted into 563,274 shares of
common stock at $0.72 per share on January 5, 2005. In addition, another portion
of the loans in the amount of $200,000 has been converted into 277,778 shares of
common stock on May 18, 2005.

On June 27, 2005, the Company received a $200,000 loan from Andrew Shapiro, a
relative of Mr. Bauer. The interest rate on the loan is 12% per annum and is due
on November 30, 2005 or such later date as mutually agreed between the parties.

NOTE 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.


                                      F-14
<PAGE>

NOTE 11 - CONVERTIBLE DEBENTURES WITH WARRANTS

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 the 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. The Form S-1
registration statement was effective on January 21, 2005.

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
debenture 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.

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 of stock is $1.41 [3.85-
(3.85-0.60) X 75%] while the conversion price of warrant is $1.46. As of July
30, 2004, the number of shares issuable upon conversion of debenture is
2,831,858. The amount of $687,638 was recorded as additional discounts of the
debentures and will be amortized for the remaining life of the debentures. Total
amortization for March 31, 2005 is $1,626,501 and the unamortized discount is
$1,615,647 as of March 31, 2005.

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 $243,264 and $512,486 as of March 31, 2005
and March 31, 2004.


                                      F-15
<PAGE>

NOTE 12 - 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. The
court set a hearing on July 30, 2004 before Judge Zlock to consider final
approval of the settlement. At the hearing, Judge Zlock signed the order giving
final approval to the settlement.

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 to its
plantiffs. The 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 shares to the plaintiffs on November 22, 2004
and $800,000 was placed in escrow for the benefit of the plaintiffs.

SYBERSOUND On May 12, 2005, Sybersound Records, Inc., d/b/a Party Tyme Karaoke,
filed a suit in Los Angeles Superior Court, seeking more than $200 million in
damages arising from music piracy by numerous karaoke record manufacturers,
including The Singing Machine Company Inc. The lawsuits allege that Sybersound's
competitors (including The Singing Machine Company, Inc.) have failed,
unlawfully, to license competing karaoke records. In addition, Sybersound claims
competitors have underreported sales to publishers, which has, in turn, undercut
Sybersound's pricing. The lawsuits allege, among other things, wrongful
interference with business, unfair trade practices and unfair competition. The
Singing Machine Company, Inc. believes that this legal action is completely
without merit and we are prepared to defend ourselves vigorously in order to be
vindicated. As of June 28, 2005, this case is in the early stages of litigation
and, thus, it is impossible to determine its outcome.

LEASES

The Company has entered into various operating lease agreements for office and
warehouse facilities in Coconut Creek, Florida, Compton, California, and
Kowloon, Hong Kong. The leases expire at varying dates. Rent expense for fiscal
2005, 2004 and 2003 was $673,148, $1,542,041 and $901,251, 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, 2005 are as follows:

                                  Property            Equipment
                                    Lease               Lease
                                -----------          ----------
Year ending March 31:

                     2006       $   808,429          $  3,791
                     2007           659,881             3,791
                     2008           658,351             3,791
                     2009             7,404             3,791
                     2010                 0             3,159
                                ------------         ---------
                                $ 2,134,065          $ 18,323
                                ============         =========


                                      F-16
<PAGE>

EMPLOYMENT AGREEMENTS

The Company has an employment contract with one key officer as of March 31,
2005. The agreement provides for base salaries, with annual cost of living
adjustments and travel allowances and expires 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 employee would be entitled to a lump sum payment in the
aggregate of $250,000.

MERCHANDISE 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, expired on August 31, 2004,
however MTV chose to extend the agreement until December 31, 2004. The minimum
guarantee was $300,000, which has been paid in full as of March, 31, 2005. The
agreement was terminated on December 31, 2004. MTV has extended the selling off
period for one existing MTV licensed product to September 30, 2005. The company
has prepaid the royalty in the amount of $30,705 for the entire MTV licensed
inventory in April, 2005, which will be record as royalty expense for fiscal
2006. We also have a licensing agreement with MTV for an European country ended
October 31, 2005 with an option to extend until October 31, 2006.

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, which has been paid in full
as of March 31, 2005. The Universal Music Entertainment license originally
expires on March 31, 2006 and does not contain any automatic renewal provisions.
However, the agreement was extended to December 31, 2006 without any additional
minimum guarantee payments.

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 originally
expires on January 1, 2006 and does not contain any automatic renewal
provisions. In October 2004., we have signed a termination agreement to cease
the license by December 31, 2004. We are obligated to pay minimum royalty
payments in the amount of $200,000, which has been paid in full as of November
20, 2004.

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
originally expires on December 31, 2004. The company has extended the agreement
to December 31, 2005. Over the term of the license agreement, we are obligated
to make guaranteed minimum royalty payments in the amount of $450,000, which has
been paid in full as of March 31, 2005.

NOTE 13 - STOCKHOLDERS' EQUITY

COMMON STOCK ISSUANCES

During the fiscal year ended March 31, 2005, the Company issued 1,017,275 shares
of its common stock.

On January 5, 2005, the Company has authorized the issuance of 563,274 shares of
common stock for the conversion of $400,000 insider loan and $9,500 interest
payment. The conversion rate is $0.72 per share, which is based on the 5 days
average stock closing price prior to December 20, 2004.

On September 23, 2004 the Company issued 400,000 shares of common stock to the
plaintiffs in lieu of the class action lawsuit settlement. (See Note-12 "Legal
Matters")

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 provided.

On April 1, 2004, the Company adjusted common stock by 4,001 shares due to prior
year 3 to 2 stock split fractional shares.


                                      F-17
<PAGE>

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.

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.
The following table presents a reconciliation of basic (loss) earnings per share
and diluted earnings per share:

<TABLE>
<CAPTION>
                                                            FISCAL YEARS ENDED MARCH 31
                                                   -------------------------------------------
                                                       2005            2004            2003
                                                   ------------    ------------   ------------
<S>                                                <C>            <C>             <C>
Net (loss) earnings                                $ (3,591,975)  $(22,683,424)   $  1,217,812
(Loss) earnings available to common shareholders   $ (3,591,975)  $(22,683,424)   $  1,217,812
Weighted average shares outstanding - basic           9,112,278      8,566,116       8,114,330
(Loss) earnings per share - basic                  $      (0.39)  $      (2.65)   $       0.15

Effect of dilutive securities:

  Stock options/Warrants                                     --              --        817,055

  Convertible debentures                                     --              --             --

Weighted average shares outstanding - diluted         9,112,278      8,566,116       8,931,385
Earnings per share - diluted                       $      (0.39)  $      (2.65)   $       0.14
</TABLE>

For fiscal 2005, 2004 and 2003, 4,674,338, 2,657,532 and 90,000 common stock
equivalents were not included in the computation of diluted earnings per share
as their effect would have been antidilutive for fiscal years ended March 31,
2005, 2004 and 2003.

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, 2005, 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 grant in any fiscal year. As of March 31, 2005,
the Company had granted 698,560 options under the Year 2001 Plan, leaving
1,251,440 options available to be granted. As of March 31, 2005, the Company had
343,050 options issued and outstanding under its 1994 Plan.

The exercise price of employee common stock option issuances in 2005, 2004 and
2003 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 the 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:


                                      F-18
<PAGE>

<TABLE>
<CAPTION>
                                                   Fiscal 2005                 Fiscal 2004                 Fiscal 2003
                                             ------------------------    ------------------------    ------------------------
                                                             Weighted                     Weighted                   Weighted
                                                             Average                      Average                    Average
                                             Number of       Exercise    Number of        Exercise   Number of       Exercise
                                              Options          Price      Options          Price      Options         Price
                                             ---------       --------    ---------       --------    ---------       --------
<S>                                          <C>             <C>         <C>             <C>         <C>             <C>
Stock Options:

Balance at beginning of period               1,027,530       $   3.95    1,543,250       $   4.43    1,094,475       $   2.11

Granted                                        261,890       $   0.85      423,980       $   2.66      597,000       $   7.88

Exercised                                           --       $   0.00     (448,500)      $   1.91     (143,725)      $   1.63

Forfeited                                     (247,810)      $   1.76     (491,200)      $   6.75       (4,500)      $   2.04

Balance at end of period                     1,041,610       $   3.67    1,027,530       $   3.95    1,543,250       $   4.43

Options exercisable at end of period           775,831       $   3.58      630,168       $   4.48      976,250       $   2.45
Weighted average fair value of options
  granted during the period                                  $   0.78                    $   2.65                    $   8.19
</TABLE>




The following table summarizes information about employee stock options
outstanding at March 31, 2005 :

<TABLE>
<CAPTION>
                                                  Weighted Average
        Range of       Number Outstanding at   Remaining Contractural   Weighted Average   Number Exercisable at   Weighted Average
     Exercise Price        March 31, 2005                Life             Exercise Price      March 31, 2005        Exercise Price

<S>                          <C>                          <C>                   <C>               <C>                     <C>
     $0.75 - $1.97           365,060                      8.80                  $1.42             209,381                 $1.17
         $2.04               328,050                      0.75                  $2.04             328,050                 $2.04
      $4.03 -$7.26           215,000                      7.48                  $5.66             149,000                 $5.62
       $9 -$14.3             133,500                      6.59                 $10.66              89,400                $11.48
                       ---------------------                                               ---------------------
                            1,041,610                                                             775,831
                       =====================                                               =====================
</TABLE>

STOCK WARRANTS

As of March 31, 2005, 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 14 - INCOME TAXES

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 2005, 2004 and 2003:

                     2005             2004              2003
                  -----------      -----------       -----------
Current:
U.S. Federal      $        --      $(1,071,709)      $   663,816
Foreign                    --               --         1,230,650
State                      --          (95,398)           38,500
Deferred                   --        1,925,612        (1,734,194)
                  -----------      -----------       -----------
                  $        --      $   758,505       $   198,772
                  ===========      ===========       ===========


                                      F-19
<PAGE>

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

                       2005              2004               2003
                   ------------       ------------       ------------
United States      $ (2,943,847)      $(21,362,610)      $ (5,952,129)
Foreign                (648,128)          (562,309)         7,368,713
                   ------------       ------------       ------------
                   $ (3,591,975)      $(21,924,919)      $  1,416,584
                   ============       ============       ============



The actual tax expense differs from the "expected" tax expense for the years
ended March 31, 2005, 2004 and 2003 (computed by applying the U.S. Federal
Corporate tax rate of 34 percent to income before taxes) as follows:

<TABLE>
<CAPTION>
                                                              2005               2004              2003
                                                           -----------       -----------       -----------
<S>                                                        <C>               <C>               <C>
Expected tax expense (benefit)                             $(1,221,272)      $(7,454,472)      $   481,880
State income taxes, net of Federal income tax benefit         (195,293)         (426,796)          (43,204)
Permanent differences                                            5,561             5,830            69,114
Deemed Dividend                                                     --           410,513         1,011,628
Change in valuation allowance                                1,370,786         8,160,924                --
Tax rate differential on foreign earnings                      106,941            92,781        (1,326,368)
Other                                                          (66,724)          (30,274)            5,723
                                                           -----------       -----------       -----------
Actual tax expense                                         $        --       $   758,506       $   198,772
                                                           ===========       ===========       ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                            2005               2004              2003
                                                        ------------       ------------       ------------
<S>                                                     <C>                <C>                <C>
Deferred tax assets:
    Federal net operating loss carryforward             $  5,874,969       $  2,425,186       $         --
    State net operating loss carryforward                    697,710            502,417            171,019
    Hong Kong net operating loss carryforward                211,826             98,404                 --
    AMT credit carryforward                                   70,090             70,090                 --
    Inventory differences                                    600,628          2,309,488          1,491,021
    Hong Kong foreign tax credit                           2,447,746          2,447,746                 --
    Allowance for doubtful accounts                           40,054             33,323            137,958
    Reserve for sales returns                                336,188            161,726            110,303
    Charitable contributions                                  59,364             58,037                 --
    Amortization of reorganization intangible                 68,981             68,981             28,076
                                                        ------------       ------------       ------------
         Total deferred tax assets                        10,407,557          8,175,397          1,938,377
Deferred tax liability:

    Depreciation                                             (14,473)           (14,473)           (12,765)
                                                        ------------       ------------       ------------
         Total deferred tax liability                        (14,473)           (14,473)           (12,765)
Net deferred tax assets before valuation allowance        10,393,084          8,160,924          1,925,612
Valuation allowance                                      (10,393,084)        (8,160,924)                --
                                                        ------------       ------------       ------------
         Net deferred tax assets                        $         --       $         --       $  1,925,612
                                                        ============       ============       ============
</TABLE>

At March 31, 2005, the Company has federal tax net operating loss carryforwards
in the amount of approximately $17,000,000 which expire beginning in year 2019.
In addition, state tax net operating loss carryforwards in the amount of
approximately $9,800,000 expire beginning in 2009.


                                      F-20
<PAGE>

NOTE 15 - 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:

                           FOR THE FISCAL YEARS ENDED
                                    March 31,

                      2005             2004             2003
                   -----------      -----------      -----------

North America      $28,227,140      $43,044,496      $77,696,780
Europe               9,531,632       25,783,789       15,714,846
Others                 451,053        1,712,843        2,202,140
                   -----------      -----------      -----------
                   $38,209,825      $70,541,128      $95,613,766
                   ===========      ===========      ===========


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

NOTE 16 - 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, 2005,
2004 and 2003 totaled $30,027, $55,402 and $61,466, respectively. The amounts
are included as a component of compensation expense in the accompanying
statements of operations. The Company does not provide any post employment
benefits to retirees.

NOTE 17 - 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, 2005, 31% of accounts receivable were due
from three customers: two from the U.S. and one from an International Customer.
Accounts receivable from two customers that individually owed over 10% of
accounts receivable at March 31, 2005 and 2004 was 12%, 10% and 31%, 24%.
Accounts receivable from three customers that individually owed over 10% of
accounts receivable at March 31, 2005 and 2004 was 12%, 10%, 10% and 31%, 24%
and 10%. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral.

Revenues derived from five customers in 2005, 2004 and 2003 were 40%, 54% and
67% of total revenues, respectively. Revenues derived from top three customers
in 2005, 2004 and 2003 as percentage of the total revenue were 9%, 8% and 8% in
2005, 20%, 12% and 10% in 2004 and 21%, 17% and 15% in 2003.

Net sales derived from the Hong Kong Subsidiary aggregated $26.9 million in
2005, $43.1 million in 2004 and $49.3 million in 2003.

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 2005, 2004 and 2003, manufacturers in the People's Republic
of China ("China") accounted for approximately 96%, 96% and 94%, respectively of
the Company's total product purchases, including all of the Company's hardware
purchases.

The Company is primary relying on one factoring company in the United State and
two commercial banks in Hong Kong. The loss of any of these facilities might
have an adverse effect on its business.


                                      F-21
<PAGE>

NOTE 18 - 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
2005, 2004 and 2003 are set forth in the following table:

<TABLE>
<CAPTION>
                                                                                  Basic              Diluted
                                                                                 Earnings            Earnings
                                                           Net Earnings           (Loss)              (Loss)
                          Sales         Gross Profit          (Loss)             Per Share          Per Share
                        --------          --------           --------           -----------        -----------
2005                  (In thousands)    (In thousands)     (In thousands)

<S>                     <C>               <C>                <C>                <C>                <C>
First quarter           $  3,857          $    770           $ (1,520)          $     (0.17)       $     (0.17)
Second quarter            18,753             4,260                722                  0.08               0.06
Third quarter             14,368             4,923                493                  0.05               0.05
Fourth quarter             1,232              (688)            (3,287)                (0.35)             (0.33)
                        --------          --------           --------           -----------        -----------
Total                   $ 38,210          $  9,265           $ (3,592)          $     (0.39)             (0.39)
                        ========          ========           ========           ===========        ===========

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
                        ========          ========           ========           ===========        ===========

</TABLE>


                                SUPPLEMENTAL DATA
                                   SCHEDULE II


<TABLE>
<CAPTION>
                                               Balance at        Charged to    Reduction to        Credited to        Balance at
                                               Beginning of      Costs and       Allowance          Costs and           End of
                Description                      Period           Expenses     for Write off        Expenses            Period
                -----------                    -----------      -----------    -------------       -----------       -----------
<S>                                            <C>              <C>              <C>               <C>               <C>
Year ended March 31, 2005
Reserves deducted from assets to which
they apply:

             Allowance for doubtful            $    98,009      $    42,101      $    (7,954)      $   (14,351)      $   117,806
             accounts
             Deferred tax valuation            $ 8,160,924      $ 2,232,160      $        --       $        --       $10,393,084
             allowance
             Inventory reserve                 $ 7,161,875      $   273,611      $  (191,942)      $(5,575,115)      $ 1,668,430


Year ended March 31, 2004 Reserves
deducted from assets to which they apply:

             Allowance for doubtful            $   405,759      $    70,788      $  (148,074)      $  (230,464)      $    98,009
             accounts
             Deferred tax valuation            $        --      $ 8,160,924      $        --       $        --       $ 8,160,924
             allowance
             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            $    12,022      $   412,055      $        --       $   (18,318)      $   405,759
             accounts
             Deferred tax valuation            $        --      $        --      $        --       $        --       $        --
             allowance
             Inventory reserve                 $        --      $ 3,715,357      $        --       $        --       $ 3,715,357
</TABLE>


                                      F-22