UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


Form
10-K


(Mark
one)


R
                  ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended March 31, 2010OR ̈
                  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from _________ to ___________Commission
      file number
000-24968





THE SINGING MACHINE COMPANY,
INC.


(Exact
name of registrant as specified in its charter)





Delaware
            95-3795478(State
      or other jurisdiction of
            (I.R.S.
      Employerincorporation
      or organization)
            Identification
      No.)





6601
LYONS ROAD, BUILDING A-7, COCONUT CREEK, FL 33073


(Address
of principal executive offices)


(954)
596-1000


(Registrant’s telephone number,
including area code)


Securities
registered pursuant to Section 12(b) of the Act: None





(Name
of each exchange on which registered)





Securities
registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value
Per Share





Indicate
by check mark if the registrant is a well-known seasoned issuer as defined in
Rule 405 of the Securities Act.  Yes  ̈     No
R





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes  ̈     No
R





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.  Yes R     No
 ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§
229.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post
such files).Yes  ̈     No
 ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to 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 a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company,” in Rule 12b-2 of the Exchange Act).:





Large
accelerated filer  ̈            Accelerated
filer  ̈          Non-accelerated
filer  ̈      Smaller
reporting company R





Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act) Yes  ̈     No
R





As of
September 30, 2009, the aggregate market value of the issued and outstanding
common stock held by non-affiliates of the registrant, based upon the closing
price of the common stock as quoted on the Over the Counter Bulletin Board of
$0.05 was approximately $681,224.70 (based on 13,624,494 shares outstanding to
non-affiliates). For purposes of the above statement only, all directors,
executive officers and 10% shareholders are assumed to be
affiliates.  This determination of affiliate status is not necessarily
a conclusive determination for any other purpose.





Number of
shares of common stock outstanding as of July 1, 2010 was
37,585,794.


DOCUMENTS INCORPORATED BY
REFERENCE–
None









THE
SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES





INDEX
TO ANNUAL REPORT ON FORM 10-K





FOR
THE FISCAL YEAR ENDED MARCH 31, 2010





PAGEPART
      IItem
      1.
                                                          Business
                                                          3Item
      1A.
                                                          Risk
      Factors
                                                          9Item
      1B.
                                                          Unresolved
      Staff Comments
                                                          15Item
      2.
                                                          Properties
                                                          15Item
      3.
                                                          Legal
      Proceedings
                                                          15Item
      4.
                                                          [Removed
      and Reserved]
                                                          15PART
      IIItem
      5.
                                                          Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                                          16Item
      6.
                                                          Selected
      Financial Data
                                                          17Item
      7.
                                                          Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                          17Item
      7A.
                                                          Quantitative
      and Qualitative Disclosures About Market Risk
                                                          23Item
      8.
                                                          Financial
      Statements and Supplementary Data
                                                          23Item
      9.
                                                          Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                                                          23Item
      9A(T).
                                                          Controls
      and Procedures
                                                          23Item
      9B.
                                                          Other
      Information
                                                          24PART
      IIIItem
      10.
                                                          Directors,
      Executive Officers and Corporate Governance
                                                          25Item
      11.
                                                          Executive
      Compensation
                                                          27Item
      12.
                                                          Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                                          30Item
      13.
                                                          Certain
      Relationships and Related Transactions and Director
      Independence
                                                          32Item
      14.
                                                          Principal
      Accounting Fees and Services
                                                          33PART
      IVItem
      15.
                                                          Exhibits,
      Financial Statement Schedules
                                                          34Signatures
                                                          36


2


DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS





This
Annual Report on Form 10-K (the “Annual Report”) contains ‘‘forward-looking
statements’’ that represent our beliefs, projections and predictions about
future events within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
All statements other than statements of historical fact are ‘‘forward-looking
statements’’, including any projections of earnings, revenue or other financial
items, any statements of the plans, strategies and objectives of management for
future operations, any statements concerning proposed new projects or other
developments, any statements regarding future economic conditions or
performance, any statements of management’s beliefs, goals, strategies,
intentions and objectives, and any statements of assumptions underlying any of
the foregoing. Words such as ‘‘may’’, ‘‘will’’, ‘‘should’’, ‘‘could’’,
‘‘would’’, ‘‘predicts’’, ‘‘potential’’, ‘‘continue’’, ‘‘expects’’,
‘‘anticipates’’, ‘‘future’’, ‘‘intends’’, ‘‘plans’’, ‘‘believes’’, ‘‘estimates’’
and similar expressions, as well as statements in the future tense, identify
forward-looking statements.





These
statements are necessarily subjective and involve known and unknown risks,
uncertainties and other important factors that could cause our actual results,
performance or achievements, or industry results, to differ materially from any
future results, performance or achievements described in or implied by such
statements. Actual results may differ materially from expected results described
in our forward-looking statements, including with respect to correct measurement
and identification of factors affecting our business or the extent of their
likely impact, the accuracy and completeness of the publicly available
information with respect to the factors upon which our business strategy is
based or the success of our business. Furthermore, industry forecasts are likely
to be inaccurate, especially over long periods of time and in relatively new and
rapidly developing industries such as oil and gas. Factors that may cause actual
results, our performance or achievements, or industry results, to differ
materially from those contemplated by such forward-looking statements include
without limitation:





•
            our
      ability to attract and retain
management;


•
            our
      growth strategies;


•
            anticipated
      trends in our business;


•
            our
      future results of operations;


•
            our
      ability to make or integrate
acquisitions;


•
            our
      liquidity and ability to finance our acquisition and development
      activities;


•
            the
      timing, cost and procedure for proposed
  acquisitions;


•
            the
      impact of government regulation;


•
            planned
      capital expenditures (including the amount and nature
      thereof);


•
            our
      financial position, business strategy and other plans and objectives for
      future operations;


•
            competition;


•
            the
      ability of our management team to execute its plans to meet our
      goals;


•
            general
      economic conditions, whether internationally, nationally or in the
      regional and local market areas in which we are doing business, that may
      be less favorable than expected;
and


•
            other
      economic, competitive, governmental, legislative, regulatory, geopolitical
      and technological factors that may negatively impact our businesses,
      operations and pricing.





Forward-looking
statements should not be read as a guarantee of future performance or results,
and will not necessarily be accurate indications of whether, or the times by
which, our performance or results may be achieved. Forward-looking statements
are based on information available at the time those statements are made and
management’s belief as of that time with respect to future events, and are
subject to risks and uncertainties that could cause actual performance or
results to differ materially from those expressed in or suggested by the
forward-looking statements. Important factors that could cause such differences
include, but are not limited to, those factors discussed under the headings
‘‘Risk Factors’’, ‘‘Management’s Discussion and Analysis of Financial Condition
and Results of Operations’’, ‘‘Business’’ and elsewhere in this Annual
Report.





PART
I





ITEM
1. BUSINESS





OVERVIEW





The
Singing Machine Company, Inc., doing business as SMC Global, (“Company,”
“Singing Machine,” “we,” “us,” or, “our”) is engaged in the development,
production, marketing and distribution of consumer karaoke audio equipment,
accessories, music, musical instruments, and licensed youth electronic products.
We contract for the manufacturing of all our electronic equipment products with
factories located in China.  We have also collaborated with a music
download service provider for an expanded library of musical selections. This
collaboration provides the Company with not only an expanded library of music
for sale and distribution; it opens up the Company’s music sales to customers
who purchase our competitors’ karaoke machines as well. Further, the
capabilities of the Company’s new download music distribution system includes
the ability to stream selections from this expanded content library, creating
the opportunity to open new revenue sources through the sale of subscriptions.
The Company is also in the process of expanding its web presence by creating a
hosted cyber-community where customers can upload their individual karaoke
performances to share.


3


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. We believe we are the first company to introduce
the home karaoke products to the United States (“U.S.”). 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. (“SMC”). In July 1994, we formed a former wholly
owned subsidiary in Hong Kong, known as International SMC (HK) Ltd.
("International SMC" or "Hong Kong subsidiary"), to coordinate our engineering,
production, logistics and financial operations in China.  In September
2006, International SMC was sold to See Bright Investments Limited, a
non-related third party. In December 2005, we formed a wholly-owned subsidiary
SMC (Comercial Offshore De Macau) Limitada in Macau, China (“SMC Macau” or
“Macau subsidiary”), to provide sales, financing, shipping, engineering and
sourcing support for Singing Machine and Subsidiaries. Our Macau subsidiary has
been approved to operate its business in Macau as Macau Offshore Company (MOC)
and is exempt for the Macau corporate income tax. In February 2008, we formed a
wholly-owned subsidiary SMC Logistics, Inc. (“SMC-L”), a California corporation,
to manage the U.S. domestic logistics and fulfillment warehouse servicing for
the Company and in April 2008 a wholly-owned subsidiary, SMC Music, Inc.
(“SMC-M”) to contract with third party music providers.





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 and we
emerged from the reorganization proceeding. Since then, we have developed the
karaoke products featuring on-screen lyric, built-in camera and digital key
control functions.





We had
been listed on the NYSE Amex Equities (“AMEX”) (formerly known as the American
Stock Exchange) since March 8, 2001, however on June 22, 2009 we received notice
from AMEX that it had determined that our common stock would be delisted and no
longer traded on the exchange.  Our board of directors decided that it
would not in the best interest of the Company and its shareholders to expend the
financial resources necessary to appeal the decision and continue to be listed
on AMEX.  The Company believes that AMEX’s insistence that the Company
perform a reverse stock split was subjective and did not consider the current
economic turmoil in the global markets. Management also believes performing a
reverse stock split would have significantly harmed the Company and diminished
shareholder’s value. The Company elected not to appeal the decision gained
admission to the Over the Counter Bulleting Board (“OTCBB”) for the following
reasons:





(a)
            Due
      to being listed on AMEX, the Company had incurred substantial annual
      listing fees, additional listing application fees, and professional
      service fees which can approach six figures each
  year;


(b)
            The
      OTCBB requires no annual listing fees or additional listing application
      fees;


(c)
            Management
      believes that performing a reverse stock split as requested by AMEX was
      not in the best interest of the Company or its shareholders;
      and


(d)
            Management
      believes it will have closer, more personal contact with its market makers
      and shareholders on the OTCBB.





On July
6, 2009, the Company’s stock was suspended from trading on AMEX.  The
Company immediately applied for admission to the Over the Counter Bulletin Board
(“OTCBB”) and subsequently began trading on the OTCBB on July 7, 2009 under the
symbol “SMDM.OB”.


Our
principal executive offices are located in Coconut Creek, Florida.





We raised
approximately $6 million in equity investments from investors in Hong Kong from
February 2006 to June 2007. The investors include two major suppliers: koncepts
International Limited (part of the Starlight International Holdings Ltd Group)
and Arts Electronics Co., Ltd.




koncepts
International Limited (“koncepts”) is a major stockholder of the Company, owning
approximately 52% of our shares of common stock outstanding on a fully diluted
basis as of July 1, 2010.  koncepts is an indirect wholly-owned
subsidiary of Starlight International Holdings Limited (“Starlight
International”), a company whose principal activities include designing,
manufacturing and selling electronic products through its various subsidiaries.
Starlight International’s products include television sets, consumer karaoke
audio equipment and DVD products. We do business with a number of entities that
are indirectly wholly-owned or majority owned subsidiaries of Starlight
International, including Starlight Marketing Limited, Cosmo Communications
Corporation (“Cosmo”), Starlite Consumer Electronics (USA), Inc., and Starlight
Marketing Macao Commercial Offshore Limited, among others (Starlight
International and its subsidiaries collectively referred to herein as the
“Starlight Group” or “Starlight”).





GROWTH
STRATEGY





The
overall objective of the Singing Machine is to create an efficient platform for
the development, manufacture, and marketing of home entertainment based consumer
electronics. The Company will also seek new revenue opportunities through
web-based content delivery and the creation of a community based entertainment
platforms. We also intend to leverage our position as an affiliate of the
Starlight Group to capitalize on synergies which exist therein and to exercise
our knowledge of the electronics business to grow revenue. The Company intends
to leverage our valuable customer base and strong relationships with our
factories to achieve our organic and external growth initiatives.





Organic Growth Strategy





We intend
to pursue various initiatives to execute our organic growth strategy which is
designed to enhance our market presence, expand our customer base and be an
industry leader in new product development.  Key elements of our
organic growth strategy include:


4


Business Focus and Public
Perceptions. Historically karaoke has been our core
business.  The Singing Machine brand is widely recognized as a leader
in karaoke and consequently we hold a dominant market share in the business.
While consistently a market leader, the Company has determined that it needs to
diversify and expand its core focus in order to grow its
business.   The Company has therefore refocused its
self-perception and is determined to build on its success by defining ourselves
as a provider of quality in home entertainment – not just home karaoke. Critical
to this strategy is a move to add value to our core business of karaoke machine
sales.  We believe that by bundling our karaoke machine products with
content such as Compact Disc, Electronic Download, Streaming Media, Community
Performance Hosting, and by creating quality, wholesome, home entertainment for
the entire family we will not only sell more products, we will find new sources
of revenue.  Using our existing key relationships with our customers
and factories, and by adding new relationships with key content providers, we
believe we can achieve more top-line growth by utilizing these relationships to
design and distribute a more diversified line of consumer electronics. This
should allow our Company to reduce our dependency on a single karaoke product
and minimize our exposure to the volatility of the karaoke market in
general.





Develop new features for karaoke
equipment. The technology development in the karaoke market has been
stagnant since 2004. We believe that in order to revitalize the karaoke market,
we need to incorporate new technologies.  We are currently developing
new karaoke products which will host a number of unique features which we
believe will diversify us from the rest of the industry.  We are
currently developing a new feature set for our karaoke machines which allow
digital audio and video recording of our customer’s in home karaoke
performance.  Once recorded the customer would then be able to email
or upload the performance to community based websites such as YouTube®, or our
own community website.  We anticipate later versions of this
technology will support WiFi interaction to make the machine an internet
appliance capable of accessing our music store to purchase a subscription of
unlimited downloads for a day, week, or year based on the type of subscription
purchased.  We also plan to introduce performance scoring or rating so
that customers will be able to have in-home competitions with full video
playback to enhance the home entertainment experience.  We have been
working with our supplier, Starlight International, parent of koncepts, as well
as other technology providers who each have strong research and development
skills to bring these new concepts and devices to life.  We believe
the development of new products will not only reinforce our leadership position
in the karaoke market, but will lead to increased sales and other opportunities
which will remake the Company into a purveyor of quality in-home entertainment
instead of simply being a supplier of single sale electronic
devices.





Focus on the key customers.
We believe that we have the most karaoke product offerings than any of our
competitors in the karaoke market. We will continue to provide exclusive
products for our major retailers by meeting their needs or unique specification,
target price, and service support. We will focus on product development for
stores like Wal-Mart and Toys R Us. We believe this is one of the major areas in
which we can substantially increase our revenues. We will involve our major
customers in key marketing strategies to expand our product offerings and repeat
customer business.





Establish the music download
business. Downloading music is one of the fastest growing areas in the
music industry. We believe that the future of karaoke music distribution is
through legal mediums of internet download sites (e.g. iTunes, iPhone, Amazon,
etc). Since karaoke music only accounts for a small percentage of total music
business, retailers usually only offer a limited selection of karaoke products.
Thus, it is difficult for the customers to find karaoke music in retail outlets,
especially for the songs they enjoy. In addition to maintaining a physical CD
distribution business, we launched a music download project during the current
year to capitalize on this new distribution
model.  The  benefits to the Company are multifaceted
including the opportunity to: offer downloadable music which means less physical
inventory for the Company and our retail customers to carry; reduce financial
return risk since a downloaded pieced of karaoke music is not returnable; make
available increased marketing opportunities by offering downloads for those who
sign up and provide their contact information enabling the Company to create
future marketing and advertising campaigns; create an opportunity to sell our
karaoke music to not only our customers but also to owners of our competitors’
machines (new and old); create cross-promotions with our retail-customers by
giving away music downloads to purchasers of karaoke machines as an incentive to
sell more machines.





Exploit Synergies from Within the
Starlight Group. We are always looking to increase profitability or
revenue through synergy recognition. The Company has recognized an opportunity
to offer our existing warehouse and logistics services to the Starlight Group
for a fee. The fee arrangement was negotiated at arm’s length and represents a
significant expense reimbursement opportunity for the Company. Not only does the
Starlight Group get a partner for its domestic U.S. warehousing and logistics,
we get service fees which defray the cost of our own historical warehouse
expense.  We are currently exploring other synergies including
customer representative relationships, customer service functions and accounting
services. These opportunities may lead to new top line revenue growth and
enhanced profitability.





External Growth Strategy





While our
historical growth has been solely organic, we intend to pursue a growth strategy
which contemplates a balanced combination of organic growth and external growth.
Our external growth strategy will be characterized by potential strategic
acquisition of synergistic electronic or technology
companies.  Accordingly, we intend to leverage the skill sets of our
management team and board of directors to actively evaluate potential target
companies and consummate merger and acquisition transactions as an important
component of our business model.


5


Acquisition Environment. Most
of the major retailers in the United States prefer to buy the products from the
factories directly.  This has changed the traditional distribution
model by eliminating the importers and brokers.   In addition,
the cost of products has seen a dramatic increase due to spiraling prices of
petroleum based products, increasing labor costs in key manufacturing regions
such as China, and the currency arbitrage risks with the decline in the value of
the U.S. dollar.  In light of these developments, product costs have
spiked while retail prices have been cut dramatically.  We believe
that the small to medium size companies who primarily depended on a constant
significant profit margin will not be able to compete in this business
environment. At the same time, capital funding is limited in the electronics
market. Public and private equity are generally difficult to access, especially
for those companies with inadequate management resources, unproven management
and a lack of market leadership.  As a member of the Starlight Group,
we have access to product development and engineering resources that our
competitors do not have. We also have access to financing for operations and
product purchases at rates which are not otherwise available to our competitors
however, for fiscal year 2011 we anticipate access to capital funding will be
limited.





Opportunity for the Company.
Based on preliminary discussions with potential targets, we believe that an
acquisition will be attractive to the potential targets because of the
following:





·
            The
      existence of a diversified management team and the seasoned board of
      directors, who have significant experience operating businesses in the
      United States and working with factories in
  China;


·
            What
      we believe to be an efficient business model, which is characterized by a
      rapid product development cycle, low operational costs and high inventory
      turn over;


·
            The
      existence of strong relationships with key factories in China. Two of our
      major stockholders are also major factories in China which provides us
      with lower production costs and vendor financing;
  and


·
            A
      visible exit strategy that offers cash or public traded
      securities.





Acquisition Parameters. We
intend to acquire companies which themselves have a potential for significant
growth or which can add technology to our Company so that we can
grow.  These companies are limited by their resources and management’s
abilities. We will focus on companies that have exhibited historical
profitability or those that can combine with our Company to become profitable.
We look for companies with strong brand name recognition that may bring
additional revenues to our Company.





PRODUCT
LINES





We
currently have three different product lines which consists in total of over 50
different models.  The product lines consist of the
following:





·
            Karaoke Machines that
      incorporate 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, built-in camera, 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.


·
            Musical Instrumentswhich we sell under the “Sound X” TM and “Sound X Kids” TM
      brand.These
      include semi-professional digital drum sets and keyboards along with youth
      musical instruments targeted for children to “tween” age demographics. The
      retail price range is from $19 to
$299.


·
            Youth Electronicsthat
      are audio consumer electronics products targeted to youth and children age
      demographics. These include boom boxes, mp3 players, portable CD players,
      and iPod TM docking stations. The retail price range is from $19 to
      $59.





MARKETING,
SALES





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 product lines are currently sold in
the following stores, among others: Costco, J.C. Penney, Toys R’ Us, Kohl's,
Wal-Mart.com and Best Buy. Our sales strategy includes offering domestic sales
as well as direct import sales made direct to the customer.





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 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 SMC Macau.
Sales made through our subsidiary 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, which pay SMC Macau pursuant to their own international, irrevocable,
transferable letters of credit or on open account.





In fiscal
2010, approximately 17% of sales revenues were from direct sales and 83% of
revenues were domestic sales. Our sales within the U.S. 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 made 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. Our international sales are primarily made by
our in-house sales representatives and our independent
distributors.


6


As a
percentage of total revenues, our net sales in the aggregate to our five largest
customers during the fiscal years ended March 31, 2010, 2009, and 2008, were
approximately 74%, 61%, and 62%, respectively. In fiscal 2010, the top three
major customers accounted for 58%, 21% and 18% of our net revenues. Although we
have long-established relationships with all of our customers, we do not have
quantity contractual arrangements with any of them.  A decrease in
business or a loss of any of our major customers could have a material adverse
effect on our results of operations and financial condition.





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 which takes place each January in Las Vegas; the American Toy
Fair which occurs each February in New York and the Hong Kong Electronics Show
stages each October in Hong Kong.





We
believe the Singing Machine brand is one of the most widely recognized karaoke
brands in the United States and Europe. While we continue to heavily focus on
our core karaoke business, we are expanding our business into other product
categories. Our strong product procurement team in Hong Kong and China combined
with our experienced sales and service team in North America enables us to
compete not only in the karaoke market but also in other markets, such as
musical instruments, licensed toy products and other consumer electronics
products.





RETURNS





Returns
of electronic hardware and music products by our customers generally occur after
approval involving quality defects, damaged goods or 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.  Recently the increasingly competitive environment and
declining economic conditions has forced the Company to extend more liberal
return authorizations as a marketing tool to extend, prolong or develop deeper
business relationships with key customers. Our total returns represented 12.3%,
9.4%, and 8.6% of our net sales in fiscal 2010, 2009, and 2008,
respectively.





LICENSE
AGREEMENTS





On May
10, 2006, we entered into a two-year license agreement with MGA Entertainment,
Inc. to produce and distribute a variety of karaoke products based on MGA's
BRATZTM franchise, one of the world's leading toy lines and girls' lifestyle
brands, in North America, Europe and Australia. These karaoke products include a
TFT DVD karaoke system, sing-a-long cassette players, deluxe microphones,
electronic keyboards, and an electronic drum.





On
November 21, 2006, we entered into a three-year license agreement with MGA
Entertainment, Inc. to produce and distribute a variety of consumer electronic
products based on MGA's BRATZTM franchise. These consumer electronic products
include boom boxes, clock radios, and portable DVDs. The license agreement
contains a minimum guarantee payment term.








TOTAL
      LICENSE SALES
                    AS
      A PERCENTAGE OF NET SALES
                    FOR
      THE FISCAL YEAR ENDED
                    March
      31,2010
                  
                  
                  2009
                  
                  
                  2008Bratz
                  
                  
                  2.3
                  %
                  
                  
                  6.2
                  %
                  
                  
                  15.0
                  %





Both
licensing agreements expired on December 31, 2009.  As of March 31,
2010 the total amount due to MGA Entertainment, Inc. was
$304,216.  This amount includes $62,216 of additional royalties due in
excess of guaranteed minimum advances on the karaoke products licensing
agreement. In addition the Company owes MGA Entertainment, Inc. $242,000 for
guaranteed minimum advances on the consumer electronic agreement due by December
31, 2008. The amounts due  have not been paid due to litigation
between Mattel Inc. and MGA Entertainment Inc. wherein Mattel has legally
challenged MGA’s trademark rights to the BRATZTM franchise.  Additional
information regarding MGA is referenced in Item 3 Legal Matters.





DISTRIBUTION





We
distribute hardware products to retailers and wholesale distributors through two
methods: shipment of products from inventory held at our warehouse facilities in
California (domestic sales), shipments directly through our Macau 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 North America from consignment inventories maintained at our
distributor warehouse facilities. In the fiscal year ended March 31, 2010,
approximately 83% of our sales were sales from our domestic warehouses
("Domestic Sales") and 17% were sales shipped directly from China ("Direct
Sales").


7


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, which assemble our karaoke machines. During fiscal 2011, we anticipate
that 99% of our karaoke products will be produced by these factories, who have
verbally 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 2011. However, if our primary factory in China was prevented from
manufacturing and delivering our karaoke products, our operation would be
severely disrupted until 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 2011" on page 9). In manufacturing our
karaoke related products, these factories use molds and certain other tooling,
most of which are owned by us. 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)and
private labels.





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.   We depend on limited
suppliers for some key components and the loss of any single supplier may have a
material long-term adverse effect on our business, operations, or financial
condition. To ensure that our high standards of product quality are met and that
factories consistently meet our shipping schedules, we utilize Hong Kong and
China based employees 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, 2010, 2009, and 2008, 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 Memorex, GPX, Emerson and other consumer electronics
companies. 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.  As far as the musical
instrument market, our key competitors include Yamaha, ION, and
others.





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
AND PATENTS





We have
obtained registered trademarks for The Singing Machine name and the logo in the
U.S. and in the European Union. We have also filed trademark applications in
Australia and Hong Kong.  We also filed various trademarks for our
products. In 2003 we also obtained two U.S. design patents for karaoke machines,
patent numbers US D505,960 S and US D524,325 S which expire in
2017.





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, often times 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 $0.15 per song on each CD that is sold. Similarly, the terms of the licenses
vary, but typically range from 2 to 5 years. Our written licenses typically
provide for quarterly royalty payments, although some publishers require
reporting on a semi-annual basis.


8


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
U.S. 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 Consumer Electronics (“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 U.S.
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 U.S. tariff laws, which provides a favorable category of U.S. 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
ending September 30 and December 31. 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 affected by the need to pre-build products before orders
are placed. As of March 31, 2010, we had inventory of $2.8 million (net of
reserves totaling $349,069) compared to inventory of $4.7 million as of March
31, 2009 (net of reserves totaling $745,389).





Our
financing of seasonal working capital during fiscal 2010 was from vendor
related-party financing, factoring of the accounts receivables and accounts
payable credit financing from DBS Bank in Macau.





We
anticipate our affiliate, Starlight International, will provide financing to the
Company through March 31, 2011.





During
Fiscal 2011, we plan on financing our inventory purchases by using credit lines
that have been extended to us by the factories in China and financing provided
by our affiliate, Starlight International.





EMPLOYEES





As of
June 15, 2010 we employed 29 people, of whom 27 are full-time
employees.  Two of our employees are located at SMC Macau’s offices
and the remaining employees are based in the U.S.  Our employees
include one executive officer, 18 engaged in warehousing and administrative
logistics/technical support and 10 in accounting, marketing, sales and
administrative functions.





ITEM
1A.  RISK FACTORS





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.





RISKS
ASSOCIATED WITH OUR BUSINESS





WE
NO LONGER HAVE A FACTORING FACILITY TO FINANCE OUR ACCOUNTS RECEIVABLE. THE
COMPANY MUST RELY ON THE STARLIGHT GROUP FOR BRIDGE LOANS TO FUND OPERATIONS.
THE LOSS OF SUPPORT FROM THE STARLIGHT GROUP MAY IMPACT OUR ABILITY TO FULFILL
CUSTOMER ORDERS AND NEGATIVELY AFFECT OUR REVENUES AND CASH FLOW.





On June
8, 2010, we were notified by DBS Bank (Hong Kong) Limited (“DBS”) that they
intend to withdraw their credit facilities, including our factoring facility on
our accounts payable credit facility. Our factoring company, BB&T, will
continue to receive and process our accounts receivable until all outstanding
short term loans have been repaid to DBS. The Company expects to repay all short
term loans before the end of July 2010. In the interim and until a replacement
credit facility is found, we must rely on the Starlight Group for bridge loans
to fund operations. The loss of support from the Starlight Group may impact our
ability to fulfill customer orders and consequently may hinder daily
operations.


9


WE
HAVE ENTERED INTO AN AGREEMENT WITH OUR AFFILIATES, STARLITE CONSUMER
ELECTRONICS (USA), INC. AND COSMO COMMUNICATIONS CORPORATION, TO MANAGE THEIR
LOGISTICS AND FULFILLMENT SERVICES IN THE UNITED STATES.  IF WE ARE
UNABLE TO PERFORM UNDER THIS AGREEMENT, IT COULD NEGATIVELY IMPACT OUR REVENUES
AND CASH FLOW.





On August
1, 2009 we entered into a services agreement to receive orders, warehouse, and
ship all of the Starlight Group’s U.S. domestic goods. The value of this
contract is approximately $1.0 million per year. If we are unable to perform the
duties under this contract or successfully renew it for fiscal year 2011, it
could negatively impact our revenue and cash flow.





THE
MUSIC INDUSTRY HAS BEEN EXPERIENCING CONTINUING DECLINE OF COMPACT DISC (CD)
SALES. OUR KARAOKE CD SALES COULD DECLINE FURTHER IN THE FUTURE.





Due to
the expansion of the music download business, the sales of Compact Discs (CD)
have been declining in recent years. Our karaoke CD sales have been declining
since year 2004 and may continue to decline in the future. Music revenue
accounts for less than 1% of our total revenues.





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 years ended March 31, 2010 and 2009 were approximately 74% and 61%,
respectively. We do not have long-term contractual arrangements with any of our
customers and they can cancel their orders at any time prior to delivery. A
substantial reduction in or termination of orders from any of our largest
customers would decrease our revenues and cash flow.





WE
ARE RELYING ON OUR AFFILIATE COMPANIES WHICH ARE A PART OF THE STARLIGHT GROUP
TO MANUFACTURE AND PRODUCE A SUBSTNTIAL PORTION OF OUR KARAOKE MACHINES FOR
FISCAL 2011, 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 an agreement with our main supplier in China to produce most of our
karaoke machines for fiscal 2011. If the factory is unable to deliver our
karaoke machines to us, our business will be adversely affected. Because our
cash on hand is minimal, we are relying on revenues received from the sale of
our ordered karaoke machines to provide cash flow for our operations. If we do
not receive cash from these sales, we may not be able to continue our business
operations.





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





In fiscal
2010 and 2009, a number of our customers and distributors returned karaoke
products that they had purchased from us. Our customers returned goods valued at
$2.6 million or 12.3% of our net sales in fiscal 2010. A majority of these
returns resulted from defective manufacturing from one of our main factories.
This factory will repair these returned goods at no cost as the Company
purchased these goods with a defective warranty from the factory. If we are
unable to purchase our goods with defective warranties in the future our
factories will charge customary repair or freight costs which will adversely
reduce our revenues and profitability. 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 the fiscal year ended March 31, 2010, our sales to customers in the United
States decreased because of increased price competition and deteriorating
economic conditions. 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 of approximately $801,599 during fiscal
2010 and $339,343 during fiscal 2009. 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.


10


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, 2010 we had $2.8 million in inventory on
hand. It is important that we sell this inventory during fiscal 2011, so we have
sufficient cash flow for operations.





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





Over the
past year, our gross profit margins have generally decreased due to competition,
increasing costs and deteriorating economic conditions except for fiscal 2005
when we developed several new models, which were in demand and yielded higher
profit margins. We expect that our gross profit margin might stabilize in fiscal
2011 provided that the worldwide economy begins to recover.





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
ending September 30 and the third quarter ending December 31. Sales in our
second and third quarter, combined, accounted for approximately 89.0%, 92.0%,
and 87.0% of net sales in fiscal 2010, 2009, and 2008,
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 Memorex and GPX. 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 2010, 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 2011. 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:





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





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





·
            transition
      our products to new manufacturing process
  technologies;





·
            identify
      emerging technological trends in our target
  markets;





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





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





·
            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.


11


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 City of Industry,
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 and our results of
operations adversely affected.





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 four factories in the People's Republic of China to manufacture the
majority of our karaoke machines. These factories will be producing nearly all
of our karaoke products in fiscal 2011. 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. 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, the Singing Machine (like its competitors) has received
notices from certain music publishers alleging that the full range of necessary
rights in their copyrighted works has not been properly licensed in order to
sell those works as part of products known as “compact discs with graphics”
("CDG"s). CDG's are compact discs which contain the musical recordings of
karaoke songs and graphics which contain the lyrics of the
songs.  Singing Machine has negotiated licenses with the complaining
parties.   As with any alleged copyright violations, unlicensed
users may be subject to damages under the U.S. Copyright Act.  Such
damages and claims could have a negative effect on Singing Machine’s ability to
sell its music products to its customers. This is the reason the Singing Machine
diligently pursues licenses.





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 be sure 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.


12


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 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 July 1, 2010 we are not aware of any customers 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 CENTER IN CALIFORNIA COULD IMPACT
OUR ABILITY TO DELIVER MERCHANDISE TO OUR CUSTOMERS, WHICH COULD ADVERSELY
AFFECT OUR REVENUES AND PROFITABILITY.





A
significant amount of our merchandise is shipped to our customers from our
warehouse located in City of Industry, California. 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 2010, approximately 83.0% of our sales were domestic warehouse sales,
which were made from our warehouse in California. 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 could not 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.





CURRENT
LEVELS OF SECURITIES AND FINANCIAL MARKET VOLATILITY ARE
UNPRECEDENTED.





The
capital and credit markets have been experiencing volatility and disruption for
more than 12 months. In recent months, the volatility and disruption has reached
unprecedented levels. In some cases, the markets have produced downward pressure
on stock prices and credit availability for certain issuers. We believe these
credit market disruptions have likely decreased our ability to access debt and
equity financing. If current levels of market disruption and volatility continue
or worsen, there can be no assurance that we will not experience an adverse
effect, which may be material, on our ability to access capital and on our
business, financial condition and results of operations.




CURRENCY
EXCHANGE RATE RISK





The
majority of our products are currently manufactured in the People’s Republic of
China.  During the fiscal year ended March 31, 2010, the Chinese local
currency had no material effect on the Company as all of our purchases are
denominated in U.S. currency.   However, in the event our
purchases are required to be made in Chinese local currency, the Yuan, we will
be subject to the risks involved in foreign exchange rates.  Although
recently pegged to the U.S. dollar, in the future the value of the Yuan may
depend to a large extent on the Chinese government’s policies and China’s
domestic and international economic and political developments. As a result, our
production costs may increase if we are required to make purchases using the
Yuan instead of the U.S. dollar and the value of the Yuan increases over
time.  Any significant increase in the cost of manufacturing our
products would have a material adverse affect on our business and results of
operations.





INCREASED
RAW MATERIAL/PRODUCTION PRICING





The
fluctuations in the price of oil has and will continue to affect the Company in
connection the sourcing and utilizing petroleum based raw materials and
services.  The cost of trans-oceanic shipping, plastic and the like
are driving up the price our suppliers charge us for finished
goods.  Also, there have been a series of labor related regulations
instituted in China which impact wages and thus the cost of production which may
result in our suppliers demanding higher prices for our finished
goods.  This issue is common to all companies in the same type of
business and if the Company is not able to negotiate lower costs, or reduce
other expenses, or pass on some or all of these price increases to our
customers, our profit margin may be decreased.





RISKS
ASSOCIATED WITH OUR CAPITAL STRUCTURE





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





From
December 1, 2005 through March 31, 2010, our common stock has traded between a
high of $1.57 and a low of $0.03. During this period, we incurred a net loss of
$3.1 million in Fiscal 2010, a net loss of $2.2 million in Fiscal 2009, a net
loss of $1.9 million in fiscal 2006 and 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.  Moving from AMEX to the OTCBB may also cause additional
volatility which may cause our stock price to decline further.


13


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 March 31, 2010, investors held a short position of approximately
27,000 shares of our common stock which represented 0.1% of our public float.
The anticipated downward pressure on our stock price due to actual or
anticipated sales of our stock by some institutions or individuals who engage in
short sales of our common stock could cause our stock price to
decline.  Additionally, if our stock price declines, it may be more
difficult for us to raise capital.





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





As of
March 31, 2010, there were outstanding stock options to purchase an aggregate of
646,710 shares of common stock at exercise prices ranging from $0.03 to $9.00
per share, not all of which are immediately exercisable. The weighted average
exercise price of the outstanding stock options is approximately $0.56 per
share. As of March 31, 2009, there were outstanding and immediately exercisable
options to purchase an aggregate of 1,133,215 shares of common stock. There were
outstanding stock warrants to purchase 1,250,000 shares of common stock at an
exercise price of $.35 per share, all of which are exercisable.





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





As of
July 1, 2010 there were 37,585,794 shares of our common stock outstanding. 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 was filed in October
2003, registering an aggregate of 2,795,465 shares of our common stock. The
market price of our common stock could drop due to the sale of large number of
shares of our common stock, such as the shares sold pursuant to the registration
statements or under Rule 144, or the perception that these sales could
occur.





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





Our
certificate of incorporation, as amended in January 2006, authorizes the
issuance of 100,000,000 shares of common stock.  As of July 1, 2010,
we had 37,585,794 shares of common stock issued and outstanding and an aggregate
of 1,896,710 shares issuable under our outstanding options and warrants. As
such, our Board of Directors has the power, without stockholder approval, to
issue up to 60,517,496 shares of common stock. Any issuance of additional shares
of common stock, whether by us to new shareholders 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
shareholders.





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 shareholders to elect directors and take
other corporate actions. These provisions of our certificate of incorporation
include: authorizing our board of directors to issue additional preferred stock,
limiting the persons who may call special meetings of shareholders, and
establishing advance notice requirements for nominations for election to our
board of directors or for proposing matters that can be acted on by shareholders
at shareholder meetings.





IF
WE FAIL TO MAINTAIN EFFECTIVE INTERNAL CONTROLS OVER FINANCIAL REPORTING, THE
PRICE OF OUR   COMMON STOCK MAY BE ADVERSELY AFFECTED.





Our
internal controls over financial reporting have weaknesses and conditions that
need to be addressed, the disclosure of which may have an adverse impact on the
price of our common stock. We are required to establish and maintain appropriate
internal controls over financial reporting. Failure to establish those controls,
or any failure of those controls once established, could adversely impact our
public disclosures regarding our business, financial condition or results of
operations. In addition, our management’s assessment of internal controls over
financial reporting have identified weaknesses and conditions that need to be
addressed in our internal controls over financial reporting or other matters
that may raise concerns for investors. The material weaknesses were primarily
due to the following: (i) lack of formal procedure to evaluate lower of cost or
market of slow-moving inventory; and (ii) lack of formalized financial closing
procedures which has hindered scheduled closing in a timely manner, resulting in
the Company’s accounting department receiving supplemental information regarding
certain items which require adjustment after the initial closing has taken
place. Any actual or perceived weaknesses and conditions that need to be
addressed in our internal controls over financial reporting, disclosure of our
management’s assessment of our internal controls over financial reporting or
disclosure of our public accounting firm’s attestation to or report on
management’s assessment of the Company’s internal controls over financial
reporting may have an adverse impact on the price of our common
stock.


14


THE
MARKET PRICE OF OUR COMMON STOCK MAY BE ADVERSELY AFFECTED BY SEVERAL
FACTORS.





The
market price of our common stock could fluctuate significantly in response to
various factors and events, including:





◦
            our
      ability to execute our business
plan;


◦
            operating
      results below expectations;


◦
            loss
      of any strategic relationship;


◦
            industry
      developments;


◦
            economic
      and other external factors; and


◦
            period-to-period
      fluctuations in its financial
results.





In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. These market fluctuations may also materially and
adversely affect the market price of our common stock.




WE
HAVE NOT PAID CASH DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY CASH DIVIDENDS
IN THE FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR
STOCK.




We have
never paid cash dividends on our stock and do not anticipate paying cash
dividends on our stock in the foreseeable future. The payment of cash dividends
on our stock will depend on our earnings, financial condition and other business
and economic factors affecting us at such time as the board of directors may
consider relevant. If we do not pay cash dividends, our stock may be less
valuable because a return on your investment will only occur if our stock price
appreciates.





ITEM
1B. UNRESOLVED STAFF COMMENTS





None.





ITEM
2. PROPERTIES





Our
corporate headquarters are located in Coconut Creek, Florida where we lease
approximately 8,000 square feet office and warehouse facility. The lease expires
on May 31, 2011. The annual rental expense is $89,464.





We lease
one warehouse facility in City of Industry, California. The City of Industry
warehouse facility has 90,000 square feet (with an option to acquire an
additional 90,000 square feet) and the lease expires on April 30, 2013. The
annual rental expense is approximately $632,000.





We have a
424 square foot office in Macau.  The lease expires April 30,
2012.  The annual rent expense is $9,846.





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





MGA
ENTERTAINMENT, INC. v. THE SINGING MACHINE COMPANY, INC. (SUPERIOR COURT OF THE
STATE OF CALIFORNIA COUNTY OF LOS ANGELES – CENTRAL, CASE NO.
BC436007)





MGA
Entertainment, Inc. (MGA) filed an action against the Company on April 16, 2010
alleging breach of contract, breach of implied covenant of good faith and fair
dealing, and conversion claims relating to two licensing agreements between the
parties entered into on May 10, 2006 and November 21, 2006. The two licensing
agreements involved the manufacture, distribution and marketing of “Bratz”
branded merchandise.





The
Company has responded to the above captioned case and has removed the case to
federal court, case no. CV 10-03761 DOC (RNBX). Based upon legal opinion from
outside Counsel, the Company believes it has defenses to the claims raised by
MGA. However, at the time of this filing, the case is still in early stages of
litigation and the outcome is unknown. The Company is also contemplating pursuit
of counter-claims against MGA.





ITEM
4. [REMOVED AND RESERVED]


15


PART
II





ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES





Our
common stock traded on the NYSE Amex Equities (“AMEX”) under the symbol "SMD"
however the Company was de-listed from this exchange on July 6, 2009. The
Company has traded on the Over the Counter Bulletin Board (“OTCBB”) under the
symbol “SMDM.OB” since July, 7, 2009. See Note 9 to the Financial Statements for
additional information. Set forth below is the range of high and low sales
prices for our common stock when traded on the AMEX, and the high and low bid
prices for our common stock when traded on the OTCBB during Fiscal 2010 and
Fiscal 2009.





FISCAL PERIOD
                  
                  HIGH
                  
                  
                  LOWFiscal
      2010:First
      quarter  (April 1 - June 30, 2009)
                  
                  $
                  0.14
                  
                  
                  $
                  0.07Second
      quarter  (July 1 - September 30, 2009)
                  
                  
                  0.08
                  
                  
                  
                  0.03Third
      quarter  (October 1 - December 31, 2009)
                  
                  
                  0.19
                  
                  
                  
                  0.03Fourth
      quarter  (January 1 - March 31, 2010)
                  
                  
                  0.05
                  
                  
                  
                  0.03Fiscal
      2009:First
      quarter  (April 1 - June 30, 2008)
                  
                  $
                  0.32
                  
                  
                  $
                  0.20Second
      quarter  (July 1 - September 30, 2008)
                  
                  
                  0.23
                  
                  
                  
                  0.12Third
      quarter  (October 1 - December 31, 2008)
                  
                  
                  0.18
                  
                  
                  
                  0.07Fourth
      quarter  (January 1 - March 31, 2009)
                  
                  
                  0.17
                  
                  
                  
                  0.08





As of
July 1, 2010, based upon information received from our transfer agent, there
were approximately 356 record holders of our outstanding common stock. This
number does not include:





•
            any
      beneficial owners of common stock whose shares are held in the names of
      various dealers, clearing agencies, banks, brokers and other fiduciaries,
      or




•
            broker-dealers
      or other participants who hold or clear shares directly or indirectly
      through the Depository Trust Company, or its nominee, Cede &
      Co.





DIVIDENDS





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.





EQUITY
COMPENSATION PLAN INFORMATION




The
following table summarizes our equity compensation plan information as of March
31, 2010:





WEIGHTED-AVERAGE
                  
                  
                  NUMBER OF SECURITIESNUMBER OF SECURITIES
                  
                  
                  EXERCISE PRICE OF
                  
                  
                  REMAINING AVAILABLE FOR FUTUREISSUANCE UNDER EQUITYTO BE ISSUED UPON
                  
                  
                  OUTSTANDING
                  
                  
                  COMPENSATION PLANSEXERCISE OF OUTSTANDING
                  
                  
                  OPTIONS, WARRANTS
                  
                  
                  (EXCLUDING SECURITIES INPLAN CATEGORY
                  
                  OPTIONS, WARRANTS AND RIGHTS
                  
                  
                  AND RIGHTS
                  
                  
                  COLUMN (A))Equity
      Compensation Plans approved by Security Holders
                  
                  
                  646,710
                  
                  
                  $
                  .56
                  
                  
                  
                  1,213,825Equity
      Compensation Plans Not approved by Security Holders
                  
                  
                  0
                  
                  
                  $
                  0
                  
                  
                  
                  0





RECENT
SALES OF UNREGISTERED SECURITIES





On
September 25, 2009 the Company issued 136,362 shares of common stock to our
Board of Directors at $0.11 per share, pursuant to our annual director
compensation plan.





All of
the above issuances and sales were deemed to be exempt under Rule 506 of
Regulation D and/or Section 4(2) of the Securities Act.  No
advertising or general solicitation was employed in offering the
securities.  The offerings and sales were made to a limited number of
persons, all of whom were accredited investors, business associates of the
Singing Machine or executive officers of the Singing Machine, and transfer was
restricted by the Singing Machine in accordance with the requirement of the
Securities Act.  In addition to representations by the above-reference
persons, we have made independent determinations that all of the
above-referenced persons were accredited or sophisticated investors, and that
they were capable of analyzing the merits and risks of their investment, and
that they understood the speculative nature of their
investment.  Furthermore, all of the above-referenced persons were
provided with access to our Securities and Exchange Commission
filings.


16


PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS




None.





ITEM
6. SELECTED FINANCIAL DATA


The
following selected consolidated financial data should be read in conjunction
with our consolidated financial statements and related notes and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included elsewhere in this Annual Report on Form 10-K. The statements of
operations data for the years ended March 31, 2010, 2009, and 2008 and the
balance sheet data at March 31, 2010 and 2009 are derived from our audited
financial statements which are included elsewhere in this Form
10-K.  The statement of operations data for the year ended March 31,
2007 and 2006 and the balance sheet data at March 31, 2008, 2007 and 2006 are
derived from our audited financial statements which are not included in this
Form 10-K.   The historical results are not necessarily
indicative of results to be expected for future periods.
  2010
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006Statement
      of Operations:Net
      Sales
                    
                    $
                    21,277,370
                    
                    
                    $
                    31,780,709
                    
                    
                    $
                    34,067,871
                    
                    
                    $
                    26,732,144
                    
                    
                    $
                    32,305,560Income
      (loss) before income taxes
                    
                    $
                    (3,050,807
                    )
                    
                    $
                    (2,154,563
                    )
                    
                    $
                    1,712
                    
                    
                    $
                    (1,714,988
                    )
                    
                    $
                    (1,905,250
                    )Income
      tax benefit (expense)
                    
                    $
                    -
                    
                    
                    $
                    (36,652
                    )
                    
                    $
                    -
                    
                    
                    $
                    2,453,576
                    
                    
                    $
                    -Net
      income (loss)
                    
                    $
                    (3,050,807
                    )
                    
                    $
                    (2,191,215
                    )
                    
                    $
                    1,712
                    
                    
                    $
                    738,588
                    
                    
                    $
                    (1,905,250
                    )Balance
      Sheet:Working
      capital
                    
                    $
                    (1,344,634
                    )
                    
                    $
                    1,535,498
                    
                    
                    $
                    3,300,422
                    
                    
                    $
                    2,394,796
                    
                    
                    $
                    (4,274,100
                    )Current
      ratio
                    
                    
                    78
                    %
                    
                    
                    127
                    %
                    
                    
                    204
                    %
                    
                    
                    187
                    %
                    
                    
                    48
                    %Property,
      plant and equipment, net
                    
                    $
                    736,966
                    
                    
                    $
                    886,770
                    
                    
                    $
                    598,280
                    
                    
                    $
                    446,510
                    
                    
                    $
                    513,615Total
      assets
                    
                    $
                    5,689,478
                    
                    
                    $
                    8,325,724
                    
                    
                    $
                    7,236,167
                    
                    
                    $
                    5,657,800
                    
                    
                    $
                    4,524,267Shareholders'
      equity
                    
                    $
                    (447,571
                    )
                    
                    $
                    2,578,897
                    
                    
                    $
                    4,068,064
                    
                    
                    $
                    2,897,359
                    
                    
                    $
                    (3,661,798
                    )Per
      Share Data:Income
      (loss) per common share – basic
                    
                    $
                    (0.08
                    )
                    
                    $
                    (0.07
                    )
                    
                    $
                    0.000
                    
                    
                    $
                    0.04
                    
                    
                    $
                    (0.19
                    )Income
      (loss) per common share – diluted
                    
                    $
                    (0.08
                    )
                    
                    $
                    (0.07
                    )
                    
                    $
                    0.000
                    
                    
                    $
                    0.03
                    
                    
                    $
                    (0.19
                    )Cash
      dividends paid
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0




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





The
following discussion should be read in conjunction with the Financial Statements
and Notes filed herewith. Our fiscal year ends March 31. This document contains
certain forward-looking statements regarding anticipated trends in our financial
condition and results of operations and our business strategy. (See Part I, Item
1A, "Risk Factors "). These forward-looking statements are based largely on our
current expectations and are subject to a number of risks and uncertainties.
Actual results could differ materially from these forward-looking statements.
Important factors to consider in evaluating such forward-looking statements
include (i) changes in external factors or in our internal budgeting process
which might impact trends in our results of operations; (ii) unanticipated
working capital or other cash requirements; (iii) changes in our business
strategy or an inability to execute our strategy due to unanticipated changes in
the industries in which we operate; and (iv) various competitive market factors
that may prevent us from competing successfully in the marketplace.





Statements
included in this Annual Report that do not relate to present or historical
conditions are called “forward-looking statements” within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements involve known
and unknown risks and uncertainties and other factors that could cause actual
results or outcomes to differ materially from those expressed in, or implied by,
the forward-looking statements. Forward-looking statements may include, without
limitation, statements relating to our plans, strategies, objectives,
expectations and intentions. Words such as “believes,” “forecasts,” “intends,”
“possible,” “estimates,” “anticipates,” “expects,” “plans,” “should,” “could,”
“will,” and similar expressions are intended to identify forward-looking
statements. Our ability to predict or project future results or the effect of
events on our operating results is inherently uncertain. Forward-looking
statements should not be read as a guarantee of future performance or results,
and will not necessarily be accurate indications of the times at, or by which,
such performance or results will be achieved.





OVERVIEW





Our
primary objectives for the fiscal year ended March 31, 2010 (“Fiscal 2010”) were
to:





·
            increase
      the revenues by expanding our product lines and customer
    base;


·
            continue
      to drive down the operating costs;


·
            turn
      the operations to profit;


17


·
            obtain
      better financing facilities; and


·
            raise
      additional equity.





We
believe that our efforts to meet our goals in Fiscal 2010 were adversely
affected by the decline in worldwide economic conditions. More specifically, we
experienced continued increase in competitive pricing pressures, lack of
stability and confidence in the retail market, and substantial decrease in
direct import of goods due to significant decreases in both foreign and domestic
business.  During Fiscal 2010, our revenue and gross profit decreased
by 33% and total operating expenses decreased by 13.0%.  We
experienced revenue declines across all of our market segments. The most
significant drop was in our direct import business which decreased 78.7% due to
declining consumer sentiment toward worldwide economic conditions. Foreign sales
decreased by 50.9% due to excess inventories from prior year purchases at our
major European customers.  We reduced our operating expenses however
the decrease was not totally commensurate with the decrease in
sales.





In June
2010, and subsequent to our fiscal year end, the Company was notified by DBS
Bank that our credit and factoring facilities totaling $13.0M were being
withdrawn effective upon receipt of amounts due on both factoring and accounts
payable financing facilities.  The Company is actively pursuing
replacement financing facilities. Our parent company, The Starlight Group, has
committed to providing bridge financing until new facilities have been
found.





Due to
our net loss and reduced shareholders’ equity in Fiscal 2010, we no longer met
the minimum criteria to trade on the NYSE Amex Equities (“AMEX”).  As
a result the Company was de-listed from the AMEX effective July 6,
2009.  The Company began trading on the Over the Counter Bulletin
Board (“OTCBB”) under the symbol “SMDM.OB” beginning July, 7,
2009.





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:


2010
                  
                  
                  2009
                  
                  
                  2008Total
      Revenues
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %Cost
      of Sales
                  
                  
                  81.3
                  %
                  
                  
                  81.3
                  %
                  
                  
                  77.5
                  %Operating
      Expenses
                  
                  
                  32.6
                  %
                  
                  
                  25.1
                  %
                  
                  
                  22.1
                  %Operating
      (Loss) Income
                  
                  
                  -13.9
                  %
                  
                  
                  -6.4
                  %
                  
                  
                  0.5
                  %Other
      (Expenses), Income, net
                  
                  
                  -0.4
                  %
                  
                  
                  -0.4
                  %
                  
                  
                  -0.5
                  %(Loss)
      Income before Taxes
                  
                  
                  -14.3
                  %
                  
                  
                  -6.8
                  %
                  
                  
                  0.1
                  %(Provision)
      Benefit for Income Taxes
                  
                  
                  0.0
                  %
                  
                  
                  -0.1
                  %
                  
                  
                  0.0
                  %Net
      (Loss) Income
                  
                  
                  -14.3
                  %
                  
                  
                  -6.9
                  %
                  
                  
                  0.1
                  %





FISCAL
YEAR ENDED MARCH 31, 2010 COMPARED WITH FISCAL YEAR ENDED MARCH 31,
2009





NET
SALES





Net sales
for Fiscal 2010 were approximately $21.3 million. This represents a decrease of
approximately $10.5 million as compared to approximately $31.8 million in the
fiscal year ended March 31, 2009 (“Fiscal 2009”). The decrease in net sales was
primarily due to a $10.6 million decrease in direct import sales to domestic
customers.   We believe this reduction is primarily due to
continuing concern over the worldwide decline in economic conditions as
“big-box” retail stores were very late in committing to purchases and
dramatically cut their purchases for karaoke equipment.  While the
company did experience a slight increase in domestic shipments from our
California facility of $2.9 million to accommodate late season demand, this
increase was offset by a decrease in sales to foreign customers of $2.8 million
where excess inventory of equipment purchased in the prior fiscal year adversely
influenced sales in this market segment.





We
continue to develop additional features to our karaoke line to maintain and grow
this core product.   In an attempt to regain revenue from the
reduced sales of music CD+G discs we launched a music download program and
improved our internet website.  We are also seeking additional
consumer electronic products that would allow us to take advantage of business
relations with major retailers.





GROSS
PROFIT





Gross
profit for Fiscal 2010 was approximately $4.0 million or 18.7% of total revenues
compared to approximately $5.9 million or 18.7% of sales for Fiscal 2009 (a
decrease of $1.9 million). This decrease was directly related to the decrease in
sales which accounted for all of the decrease in gross profit.





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 the selling
expenses.


18


OPERATING
EXPENSES





Operating
expenses, including depreciation and amortization, for Fiscal 2010 decreased
from approximately $8.0 million to approximately $7.0 million, a decrease of
approximately $1.0 million or 12.5% compared to the same period last
year.  This decrease in operating expenses was primarily due to
management’s continued efforts to reduce general and administrative expenses
commensurate with the decrease in sales volume.  General and
administrative expenses decreased approximately $1.0 million as the company
realized a decrease in logistics operations of $300,000 due to efficiency
improvements and decreased volume, wage reductions of $100,000, decreased stock
transfer fees of $100,000 related to de-listing from AMEX, $100,000 decrease in
spending on travel and entertainment and $400,000 of other expenses that were
cut.  Management continues to look for opportunities to reduce
overhead spending in the future.





DEPRECIATION
AND AMORTIZATION





Our
depreciation and amortization expenses were $439,432 for Fiscal 2010 compared to
$459,354 for Fiscal 2010. The fixed assets mainly consist of the tools and
molds, which are depreciated with three years to 5 years straight-line
method.  During the past year we have invested in approximately
$268,000 in tooling for new karaoke models as well as approximately $23,000 in
warehouse equipment for the logistics operation and office
equipment.  Tools and molds purchased in prior years which were fully
depreciated in Fiscal 2010 are the primary reason for the decrease in
depreciation expense over the prior fiscal year.





NET
OTHER INCOME (EXPENSES)





Net other
expense was $94,979 (interest expense) in Fiscal 2010 compared to net other
expense of $131,755 (interest expense) in Fiscal 2009. The decrease was
primarily due to the decrease of our borrowing cost from our financing
arrangement with DBS Bank.





INCOME
BEFORE TAXES





We had a
loss before taxes of $3,050,807 in Fiscal 2010 compared to income before taxes
of $2,154,563 in Fiscal 2009. The decrease in profit was primarily due to
declining worldwide economic conditions which lead to decreased sales in foreign
and direct import sales.  Despite management’s efforts to reduce
general and administrative expenses, the loss in gross profit from the 33% drop
in worldwide sales exceeded our ability to reduce enough operating expenses to
cover this loss.





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, 2010 and 2009, we had gross
deferred tax assets of approximately $ 4.0 million and approximately $3.1
million, against which we recorded valuation allowances totaling
approximately $ 4.0 million and approximately $3.1 million,
respectively.





For
Fiscal 2010 we did not record a provision for income taxes as the Company
incurred a taxable loss for the period. For Fiscal 2009, the provision for
income taxes increased by $36,652 due to a payment made for alternative minimum
tax. We did not record any additional income tax expense for Fiscal 2009since
the Company had taxable losses for the U.S. operations and the Macau subsidiary
is exempt from income tax according to the Macau Offshore Company (MOC)
regulations.





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 net loss of approximately $3,050,807 in Fiscal
2010 from operations as compared to a net loss of $2,191,215 in Fiscal
2009.





FISCAL
YEAR ENDED MARCH 31, 2009 COMPARED WITH FISCAL YEAR ENDED MARCH 31,
2008





NET
SALES





Net sales
for Fiscal 2009 were approximately $31.8 million. This represents a decrease of
approximately $2.1 million as compared to approximately $34.1 million in the
fiscal year ended March 31, 2008 (“Fiscal 2008”). The decrease in net sales was
primarily due to a $2.4 million decrease in sales for our Bratz licensed
products.   We believe this reduction is primarily due to the
ongoing litigation between Mattel and MGA Entertainment over the alleged
intellectual property infringement of the “Bratz” dolls by MGA Entertainment. We
did experience a slight increase in sales of karaoke products which partially
offset the $2.4 million reduction in revenue from licensed products, however we
missed additional sales opportunities caused by late shipments from vendors and
declining economic conditions which led to increased return and price
concessions.  In addition, the bankruptcy filing of Circuit City
presented an additional lost revenue opportunity of approximately $1.0
million.


19


We
continue to develop additional features to our karaoke line to maintain and grow
this core product.   Music now accounts for less that 1% of total
revenue due to the overall CD sales decline in the entire music
industry.  In an attempt to regain this revenue stream we have
recently launched a music download program on our internet website to supplement
our distribution of CDG discs.





GROSS
PROFIT





Gross
profit for Fiscal 2009 was approximately $5.9 million or 18.7% of total revenues
compared to approximately $7.7 million or 22.5% of sales for Fiscal 2008 (a
decrease of $1.8 million). This decrease was primarily due to the decrease in
sales which accounted for approximately $400,000 of the decrease in gross profit
with the 3.8% decline in gross margin accounting for the remaining
decrease.   Heavily discounted sales of excess Bratz licensed
product contributed approximately 0.6% to the decreased margin.  The
remaining decline was primarily due to competitive pricing pressures and
declining worldwide economic conditions which lead to increased discounts,
markdowns and return concessions to major retailers.





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 the selling
expenses.





OPERATING
EXPENSES





Operating
expenses, including depreciation and amortization, for Fiscal 2009 increased
from approximately $7.5 million to approximately $8.0 million, an increase of
approximately $0.5 million or 5.9% compared to the same period last year. The
increase in operating expenses consists of approximately $0.2 million increase
in selling expenses, which include advertising, commission, freight and royalty
expenses. The increase is primarily due to an increase in freight expense
associated with increased volume of returns from our customers. General and
administrative expenses increased $0.1 million and depreciation expenses
increased approximately $0.2 million accounting for the remaining increase in
operating expenses.





DEPRECIATION
AND AMORTIZATION





Our
depreciation and amortization expenses were $459,354 for Fiscal 2009 compared to
$311,273 for Fiscal 2008. The fixed assets mainly consist of the tools and
molds, which are depreciated with three years straight-line
method.  During Fiscal 2009 we invested approximately $500,000 in
tooling for new karaoke models as well as approximately $85,000 in warehouse
equipment for the logistics operation as well as an additional $132,000 for a
new business computer system and accessories.  These additions are the
primary reason for the increase in depreciation expense over the prior fiscal
year.





NET
OTHER INCOME (EXPENSES)





Net other
expense was $131,755 in Fiscal 2009 compared to net other expense of $154,672 in
Fiscal 2008. The decrease was primarily due to the decrease of our borrowing
cost from our new factoring arrangement with DBS Bank.





INCOME
BEFORE TAXES





We had a
loss before taxes of $2,154,563 in Fiscal 2009 compared to income before taxes
of $1,712 in Fiscal 2008. The decrease in profit was primarily due to declining
worldwide economic conditions which lead to decreased sales, decreased profit
margins due to competitive pricing pressures and increased selling expenses
associated with freight increases relating to increased returns.





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, 2009 and 2008, we had gross
deferred tax assets of approximately $ 3.1 million and approximately $2.5
million, against which we recorded valuation allowances totaling
approximately $ 3.1 million and approximately $2.5 million,
respectively.





For
Fiscal 2009, the provision for income taxes increased by $36,652 as compared to
Fiscal 2008 due to a payment made for alternative minimum tax. We did not record
any additional income tax expense for Fiscal 2009. This occurred because the
Company had taxable losses for the U.S. operations and the Macau subsidiary is
exempt from income tax according to the Macau Offshore Company (MOC)
regulations.





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 net loss of approximately $2,191,215 in Fiscal
2009 from operations as compared to a net income of $1,712 in Fiscal
2008.


20


LIQUIDITY
AND CAPITAL RESOURCES





On March
31, 2010, we had cash on hand of approximately $900,000 compared to cash on hand
of approximately $1.0 million on March 31, 2009. The decrease of cash on hand
was primarily due to the decrease in inventory of approximately $2.3 million
offset by decreases in accounts payable, accrued expenses and customer deposits
of approximately $2.0 million and $200,000 net payment on factor credit
facilities. The decrease in the inventory was a result of management’s focus on
selling existing inventory on hand and aggressively addressing returned
defective merchandise.





Cash
deficit from operating activities Fiscal 2010 was $758,004. The cash was
generated primarily from increases in trade and related party accounts payable.
We used vendor and related-party financing as well as accounts payable financing
facilities from DBS Bank to offset portions of the cash
requirement.





Cash used
in investing activities for Fiscal 2010 was $286,346. Cash used in investing
activities was primarily for the purchase of tooling and molds.





Cash
provided by financing activities was $952,964 for Fiscal 2010, which was due
primarily to short term borrowings from DBS bank on our accounts payable
financing facility.





As of
March 31, 2010, our working capital deficit was approximately $1.3 million. Our
current liabilities of approximately $6.1million include:





·
            Customer
      credit on account of approximately $742,009 – the amount will be offset by
      future purchases or refunds.


·
            Accounts
      payable of $895,713 of which $311,000 was due to two suppliers in
      China.


·
            Related
      party loan of $3,033,801 due various parties within the Starlight
      Group.


·
            Short
      term borrowings of $1,091,828 due to DBS bank for loans against our
      accounts payable financing
facility.





As of
July 1, 2010, our cash on hand is approximately $100,000. Our average monthly
operating expenses are approximately $350,000 and we need approximately $1.1
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 California and other operating costs.








WORKING
CAPITAL REQUIREMENTS DURING THE SHORT AND LONG TERM





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





1) Equity
investments – The Company is actively seeking equity financing to expand its
business. We expect to raise additional capital as required for fiscal year
ended March 31, 2011 (“Fiscal 2011”).


2) Vendor
financing – Some of our key vendors in China have agreed to manufacture on
behalf of the Company without advanced payments and have extended payment terms
to the Company. The terms with the factories are sufficient to cover the factory
direct sales, which generally account for more than 50% of the total
revenues.


3)
Factoring of accounts receivable - The Company is currently seeking a factoring
facility for its accounts receivable for sales originated in the U.S to replace
the facilities that were in place during Fiscal 2010 and were withdrawn by DBS
bank in June 2010, subsequent to the company’s fiscal year end of March 31,
2010. The Starlight Group, our controlling shareholder, has agreed to provide
short term bridge financing until a new factoring facility is
consummated.


4) Cost
reduction - The Company has reduced significant operating expenses in recent
years with the exception of fiscal 2009. The cost reduction initiatives are part
of our intensive effort to achieve a successful turn-around restructuring. The
Company plans to resume its cost cutting efforts in Fiscal 2011.


5) Bridge
Loan - We may be able to raise additional short term bridge capital from The
Starlight Group, the parent of our major stockholder, koncepts, who is also one
of our suppliers.


6) Reduce
cost of operation – The Company maintains SMC-L as a wholly-owned subsidiary to
operate our California warehouse. For Fiscal 2011, SMC-L will renew an agreement
with the Starlight Group to handle the logistics and fulfillment of Starlight
Groups’ domestic products for a service fee. This arrangement is expected to
significantly offset the Company’s own logistics expenses.





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.





On June
8, 2010, and subsequent to our fiscal year end, the Company was notified by DBS
Bank that our credit and factoring facilities totaling $13.0M were being
withdrawn effective upon receipt of amounts due on both factoring and accounts
payable financing facilities.   The Company is actively pursuing
replacement financing facilities. Our parent company, The Starlight Group, has
committed to provide bridge financing until new facilities have been
found.


21


During
Fiscal 2011, we will strive to reduce additional operating costs. In order to
reduce the need to maintain inventory in our warehouses in California we intend
to continue to ship a significant portion of our total sales directly from SMC
Macau. The goods shipped directly to our customers from ports in China 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. In order to
keep our inventory low, we have been helping our customers forecast and manage
their Singing Machine inventories. This will prevent the overstocking situation
with customers.





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.  The Company
is reliant upon our parent company, Starlight International, to provide bridge
financing for operations until we secure alternate accounts receivable factoring
facilities.  There is no guarantee that we will be able to secure
these facilities in the near future.  Any significant change in
Starlight International’s ability to continue to provide bridge financing may
have a material adverse effect on our ability to meet our financial obligations
and continue our operations.





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 our former Hong Kong
office were paid in Hong Kong dollars.  Operating expenses of the
Macau office are paid in either Hong Kong dollars or Macau currency (MOP) 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.  The
exchange rate of the MOP to the U.S. dollar is MOP $8.01 to U.S. $1.00. We
cannot assure you that the exchange rate between the United States, Macau and
Hong Kong currencies will continue to be fixed or that exchange rate
fluctuations will not have a material adverse effect on our business, financial
condition or results of operations.





SEASONAL
AND QUARTERLY RESULTS





Historically,
our operations have been seasonal, with the highest net sales occurring in the
second and third quarters (reflecting increased orders for equipment and music
merchandise during the Christmas selling months) and to a lesser extent the
first and fourth quarters of the fiscal year. Sales in our fiscal second and
third quarter, combined, accounted for approximately 89.0%, 92.0%, and 87.0% of
net sales in Fiscal 2010, Fiscal 2009, and Fiscal 2008.





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 and considering selling 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.





OFF
BALANCE SHEET ARRANGEMENTS





None.





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 and income tax.





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.


22


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.





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
potential income taxes in the jurisdictions have been made.





OTHER ESTIMATES. 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.





RECENT
ACCOUNTING PRONOUNCEMENTS:




See "Note
2" to the attached financial statements.





ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





We are a
smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are
not required to provide the information required under this item.





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, 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





N/A





ITEM
9A(T). CONTROLS AND PROCEDURES





(a)      Evaluation of
Disclosure Controls and Procedures





As of the
end of the period covered by this Annual Report, we conducted an evaluation as
required by Rule 13a-15(b) and Rule 15d-15(b) of the Exchange Act, under the
supervision and with the participation of our interim Chief Executive Officer
and interim Chief Financial Officer of our disclosure controls and procedures
(as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based
upon this evaluation, our interim Chief Executive Officer and interim Chief
Financial Officer concluded that our disclosure controls and procedures were
effective.





In
designing and evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
evaluating the relationship between the benefit of desired controls and
procedures and the cost of implementing new controls and
procedures.





(b)      Management’s
Annual Report on Internal Control over Financial Reporting





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act. This rule defines internal control over financial reporting as a
process designed by, or under the supervision of Company management to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. GAAP. Management has assessed the effectiveness of our internal control
over financial reporting using the components established in the Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.





A system
of internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A material weakness is any deficiency,
or combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of our
company’s annual or interim financial statements will not be prevented or
detected on a timely basis.





Based
upon this evaluation, our interim Chief Executive Officer and interim Chief
Financial Officer concluded that our internal control over financial reporting
was not effective as of the period covered by this Annual Report, as a result of
material weaknesses.


23


The
material weaknesses were primarily due to the following:





·
            Lack of formalized financial
      closing procedures. The Company and its subsidiaries do not
      currently have adequate formalized financial closing procedures as they
      relate to inventory valuation which would facilitate scheduled closing in
      a timely manner. As a result, the Company was required to make additional
      adjustments to inventory reserves after the initial year-end closing that
      were material to the financial
statements.





(c)       Management’s Plan
for Remediation of Material Weaknesses





In light
of the conclusion that our internal control over financial reporting was not
effective, our management is in the process of implementing a plan intended to
remediate such ineffectiveness and to strengthen our internal controls over
financial reporting through the implementation of certain measures. For Fiscal
2011, management is committed to improve control and oversight relating to
financial controls and will work with our Audit Committee to formulate written
policies and procedures to address deficiencies described above. Management will
address the above material weakness by formalizing a closing procedure which
will include specific processes and formulas for evaluating the adequacy of
inventory reserves for slow-moving items and lower of cost or market value of on
hand inventory prior to the close of each quarter.  Due to the
seasonality of the business, Management is less likely to become aware of
material impairments during the first half of the fiscal year compared to the
second half of the fiscal year when customers have communicated product
commitments to the Company.





(d)       Changes in
Internal Controls





In our
Annual Report for Fiscal 2009, we concluded that our internal control over
financial reporting was not effective and identified two material weaknesses.
Since the filing of our last Annual Report, our financial controller noted that
although a substantial majority of sales reported through our Macau subsidiary
are direct import and payment is tendered via letter of credit or wire transfer
in advance of shipment, there were a few customers that were shipped with credit
terms. Since there were no formal policies and procedures relating to resolving
disputed balances in a timely manner some accounts remained uncollected in
excess of 90 days.  Our controller has now set up more formalized
policies with regards to resolution of all uncollected balances.  As a
result, the Macau subsidiary had no disputed or unresolved collection issues as
of the end of Fiscal 2010.  The controller also noted a lack of formal
closing procedures for financial closings in a timely manner resulting in the
Company’s accounting department receiving supplemental information requiring
adjustment after the initial closing takes place.  The accounting
department has now established closing requirements formalized times which
require the timely submission by all subsidiaries of data to Corporate
Accounting which address monthly, quarterly and annual requirements which would
lead to supplemental information being provided by the Company’s subsidiaries
after initial closing.





There
were no other changes in the Company’s internal controls over financial
reporting during the quarter ended March 31, 2010, that materially affected, or
were reasonably likely to materially affect, the Company’s internal control over
financial reporting, other than the remediation measures described
above.





This
Annual Report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to temporary
rules of the SEC that permit the Company to provide only management’s report in
this Annual Report.





ITEM
9B. OTHER INFORMATION





None.


24


PART
III





ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





The
following table sets forth certain information with respect to our executive
officers, directors and significant employees as of June 15, 2010.





For
Fiscal Year Ended March 31, 2010





Name
                                
                                Age
                                
                                PositionGary
      Atkinson
                                
                                28
                                
                                Interim
      CEO and General CounselBernardo
      Melo
                                
                                33
                                
                                VP
      Global Sales and MarketingLionel
      Marquis
                                
                                57
                                
                                Principal
      Accounting OfficerCarol
      Lau
                                
                                61
                                
                                Interim
      CFO and ChairwomanHarvey
      Judkowitz
                                
                                65
                                
                                DirectorBernard
      Appel
                                
                                78
                                
                                DirectorStewart
      A. Merkin
                                
                                67
                                
                                DirectorPeter
      Hon
                                
                                69
                                
                                DirectorYat
      Tung Lau
                                
                                31
                                
                                Director





Directors
are elected or appointed to serve until the next annual meeting and until their
successors are elected and qualified. Officers are appointed to serve for one
year until the meeting of the Board of Directors following the annual meeting of
stockholders and until their successors have been elected and
qualified.  Any officer elected or appointed by the Board or appointed
by an executive officer or by a committee may be removed by the Board either
with or without cause, and in the case of an officer appointed by an executive
officer or by a committee, by the officer or committee that appointed him or by
the president.




The
following information sets forth the backgrounds and business experience of our
directors and executive officers and has been provided to us by each respective
individual:





Gary Atkinson joined the
Company in January 2008 and served as General Counsel and Corporate Secretary.
For the past two years, Mr. Atkinson has worked closely with all departments
within the Company, including Operations, Finance, Sales, and the China
production side. In November 2009, Mr. Atkinson was appointed as Interim Chief
Executive Officer. Mr. Atkinson is a licensed attorney in the State of Florida
and Georgia. He graduated from the University of Rochester with a Bachelors
Degree in Economics and has been awarded a dual-degree J.D./M.B.A. from Case
Western Reserve University School of Law and Weatherhead School of
Management.





Bernardo Melo has been with
the Company since February 2003 and has served as the Vice President of Global
Sales and Marketing (“VP of Sales”) since 2008.  During his tenure at
the Singing Machine, Mr. Melo has overseen the sales and operations of the music
division as well as managed the customer service department.  Before
taking over the responsibility of VP of Sales, Mr. Melo held dual roles with the
Company managing the operations, licensing and sales of the music division while
concentrating on hardware sales for the Latin America and Canada market as well
as key U.S. accounts such as Toys R’ Us.  Prior to joining the
Company, Mr. Melo held a consulting role for Rewards Network formerly
Idine.  Mr. Melo’s assignment during his tenure was improving their
operational procedures while increasing efficiencies and lowering operating
cost.  Mr. Melo also worked at Coverall North America as Director of
Sales managing a start up initiative for the company covering 15 regional office
and 40 sales reps across North America focusing on franchise
sales.  Overall Mr. Melo has over 10 years of sales, marketing and
management experience.





Lionel Marquis joined the
Company in June 2008 as Controller and Principal Accounting
Officer.  For the past 15 years Mr. Marquis has served as Controller
and or Chief Financial Officer for several manufacturing and distribution
companies in the South Florida area.  Some of these companies include
Computer Products, Inc (Artesyn Technologies Inc),  U S Plastic Lumber
Corporation, Casi-Rusco, (division of Interlogix Inc.), DHF Industries, Inc and
Ingear Fashions, Inc.  Mr. Marquis graduated from Bryant College with
a Bachelors Degree in Business Administration with a major in
accounting.  Mr. Marquis is a Certified Public Accountant in the state
of Florida.





Carol Lau joined the Company’s
board of directors on January 12, 2007 and has served as the Company’s interim
chief financial officer since May 23, 2008. Ms. Lau has been with the Starlight
Group since 1987 and was appointed to the position of President of Starlight
Randix Corporation, a wholly owned subsidiary of the Starlight Group in
1993.  In 2001, she became the Chief Financial Officer of Cosmo
Communications Corporation.   Currently Ms. Lau serves as the
Company’s interim Chief Financial Officer. Prior to joining the Starlight Group,
from 1978 to 1987 Ms. Lau held positions in auditing and financial management
with the Australian Government.  Ms. Lau was a Certified Public
Accountant (CPA) in Australia and is a licensed CPA in
Massachusetts.  She holds a Bachelor of Business degree from the
Curtin University in Australia and a Graduate Diploma in Computer Science from
the Canberra University in Australia.  Ms. Lau joined the Company’s
board on January 12, 2007.


25


Harvey Judkowitz has served as
a director of the Company since March 29, 2004 and is the chairman of the Audit
Committee. He is licensed as a CPA in New York and Florida. From 1988 to the
present date, Mr. Judkowitz has conducted his own CPA practices. He has served
as the Chairman and CEO of UniPro Financial Services, a diversified financial
services company up until the company was sold in September of 2005. He is
currently the President and Chief Operating Officer of Photovoltaic Solar Cells,
Inc., a start-up company.





Bernard S. Appel has served as
a director of the Company 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.





Stewart Merkin has served as a
director of the Company 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





Peter Hon has served as a
director of the Company since January 12, 2007. Mr. Hon has been a non-executive
of the Starlight Group since 1998.  Mr. Hon passed the College of Law
qualifying examination in 1969 in the United Kingdom and began practicing law in
Hong Kong in that year after being admitted to the High Court of Hong
Kong.  He has been the principal of Hon and Co, a law firm in Hong
Kong for the past 37 years.





Yat Tung Lau has served as
director of the Company since January 12, 2007. Mr. Lau joined the Starlight
Group in 2003 as assistant to the Chairman of the Board of Starlight
International and is now head of corporate relations.  He is also
responsible for local sales in China and heads the computer information system
department for the Starlight Group. From 2002 to 2003, he held a marketing
executive position in Storage Technology Corporation. Mr. Lau holds a Bachelor
of Arts degree in business marketing from Indiana University.





BOARD
COMMITTEES





We have
an audit committee, a compensation committee and a nominating
committee.





The audit
committee consists of Messrs. Judkowitz (Chairman), Appel and Merkin. The Board
has determined that Mr. Judkowitz qualifies as an "audit committee financial
expert," as defined under Item 407 of Regulation S-K of the Exchange Act. The
Board has determined that each of Messrs. Judkowitz, Merkin and Appel are
"independent directors" within the meaning of the listing standards of the AMEX
and Rule 10A-3 of the Exchange Act. The audit committee recommends the
engagement of independent auditors to the board, initiates and oversees
investigations into matters relating to audit functions, reviews the plans and
results of audits with our independent auditors, reviews our internal accounting
controls, and approves services to be performed by our independent
auditors.





The
compensation committee consists of Messrs. Judkowitz and Merkin. The
compensation committee considers and authorizes remuneration arrangements for
senior management and grants options under, and administers our employee stock
option plan.





The
nominating committee consists of Messrs. Appel (Chairman), Merkin and Yat Tung
Lau. 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.





Nomination
of Directors





As
provided in our nominating committee charter and our Company’s corporate
governance principles, the Nominating Committee is responsible for identifying
individuals qualified to become directors. The Nominating Committee seeks to
identify director candidates based on input provided by a number of sources,
including (1) the Nominating Committee members, (2) our other directors, (3) our
shareholders, (4) our Chief Executive Officer or Chairman, and (5) third parties
such as professional search firms. In evaluating potential candidates for
director, the Nominating Committee considers the entirety of each candidate’s
credentials.





Qualifications
for consideration as a director nominee may vary according to the particular
areas of expertise being sought as a complement to the existing composition of
the Board of Directors. However, at a minimum, candidates for director must
possess:





•
            high
      personal and professional ethics and
integrity;





•
            the
      ability to exercise sound judgment;





•
            the
      ability to make independent analytical
  inquiries;





•
            a
      willingness and ability to devote adequate time and resources to
      diligently perform Board and committee duties;
  and


26


•
            the
      appropriate and relevant business experience and
  acumen.





In
addition to these minimum qualifications, the Nominating Committee also takes
into account when considering whether to nominate a potential director candidate
the following factors:





•
            whether
      the person possesses specific industry expertise and familiarity with
      general issues affecting our
business;





•
            whether
      the person’s nomination and election would enable the Board to have a
      member that qualifies as an “audit committee financial expert” as such
      term is defined by the Securities and Exchange Commission (the “SEC”) in
      Item 401 of Regulation S-K;





•
            whether
      the person would qualify as an “independent” director under the listing
      standards of the AMEX;





•
            the
      importance of continuity of the existing composition of the Board of
      Directors to provide long term stability and experienced oversight;
      and





•
            the
      importance of diversified Board membership, in terms of both the
      individuals involved and their various experiences and areas of
      expertise.





There
have been no material changes to the procedures by which stockholders may
recommend nominees to the Company’s board of directors as set forth in the
Company’s Proxy Statement on Schedule 14A filed with the SEC on November 18,
2008.





FAMILY
RELATIONSHIPS





There are
no family relationships among any of our officers or other directors, except for
Chairwoman Carol Lau who is the aunt of Director Yat Tung Lau and the mother of
Gary Atkinson, the Company’s CEO and General Counsel.





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, and our principal
accounting officer or controller or other persons performing similar functions.
A copy of the Code of Ethics is posted on the Company’s website at
www.singingmachine.com. 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.





COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT





Section
16(a) of the Exchange Act requires our officers, directors, and persons who own
more than ten percent of a registered class of our equity securities to file
reports of securities ownership and changes in such ownership with the SEC.
Officers, directors, and greater-than-ten-percent stockholders are required by
SEC regulations to furnish us with copies of all Section 16(a) forms that they
file.





Based
solely upon a review of Forms 3, Forms 4, and Forms 5 furnished to us pursuant
to Rule 16a-3 under the Exchange Act, we believe that all such forms required to
be filed pursuant to Section 16(a) of the Exchange Act during the year ended
March 31, 2010 were timely filed, as necessary, by the officers, directors, and
security holders required to file such forms.





ITEM
11. EXECUTIVE COMPENSATION





The
following table provides certain summary information concerning compensation
awarded to, earned by or paid to our Chief Executive Officer and other named
executive officers of our Company (collectively, the “named executive officers”)
for Fiscal 2010.


27


SUMMARY
COMPENSATION TABLE





Name and Principal Position
                            
                            Year
                            
                            Salary
                            
                            
                            Bonus
                            
                            
                            Stock Awards
                            
                            
                            Option Awards
                            
                            
                            Non-Equity
                              Incentive Plan
                              Comp
                            
                            
                            Non-Qualified Deferred
                              Compensation Earnings
                            
                            
                            Other Comp
                            
                            
                            TOTAL COMPGary
      Atkinson (1)Interim
      Chief Executive Officer
                            
                            2010
                            
                            $
                            82,361.73
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            82,361.73Anton
      Handal (2)
                            
                            2010
                            
                            $
                            0.00
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            0.00Former
      Chief Executive Officer
                            
                            2009
                            
                            $
                            0.00
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            11,744.00
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            11,744.00Carol
      Lau
                            
                            2010
                            
                            $
                            0.00
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            0.00Chief
      Financial Officer
                            
                            2009
                            
                            $
                            0.00
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Bernardo
      Melo
                            
                            2010
                            
                            $
                            138,702.68
                            
                            
                            $
                            10,000.00
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            148,702.68VP
      Global Sales & Marketing
                            
                            2009
                            
                            $
                            130,000.00
                            
                            
                            
                            29,515.95
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            3,662.50
                            
                            
                            $
                            163,178.45





(1) Mr.
Atkinson was appointed as Interim Chief Executive Officer on November 1, 2009,
however his salary reported in the above table is for the full Fiscal year
2010.





(2) Mr.
Handal resigned as Chief Financial Officer, effective November 1, 2009. He did
not receive a salary during Fiscal 2010. However he had an option to purchase
warrants held by koncepts International Limited which expired on July 1, 2009.
Upon payment of $5,000, Mr. Handal had the option to purchase 750,000 stock
warrants in the Company with an exercise price of $0.35 per share, exercisable
at any time. Mr. Handal was also awarded 300,000 stock options on October 3,
2008, with an exercise price of $0.14 per share, which were not exercisable
until October 3, 2009.  The fair value of the option award has been
calculated in accordance with FASB ASC 718-20. Those options expired January 31,
2010.





NARRATIVE
DISCLOSURE TO SUMMARY COMPENSATION TABLE





Anton
Handal resigned as Chief Executive Officer of the Company on November 1, 2009.
Gary Atkinson was appointed as Interim Chief Executive Officer effective the
same date. Mr. Atkinson does not have an employment contract with the Company
and has an annual salary of $86,000. Mr. Atkinson’s reported salary amount for
Fiscal 2010, as shown in the table above, is less than his salary due to a
Company-wide temporary 10% pay reduction imposed during Fiscal
2010.





As of
July 1, 2010, the Company did not have any employment contracts with any of its
employees nor separation or consulting agreements with any individuals or
entities.





OPTION
GRANTS IN FISCAL 2010





No grants
of stock option awards were made to our named executive officers during Fiscal
2010.




OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END





The
following table sets forth information with respect to grants of options to
purchase our common stock under our Year 2001 Stock Option Plan to the named
executive officers during Fiscal 2010:





NameandPrincipalPosition
                  
                  Numberof
                    Securities
                    Underlying
                    Unexercised
                    Options(#)
                    Exercisable
                  
                  
                  Numberof
                    Securities
                    Underlying
                    Unexercised
                    Options(#)
                    Unexercisable
                  
                  
                  EquityIncentive
                    PlanAwards:
                    Numberof
                    Securities
                    Underlying
                    Unexercised
                    UnearnedOptions
                    (#)
                  
                  
                  Option
                    Exercise
                    Price($)
                  
                  Option
                    Expiration
                    Date
                  
                  Numberof
                    Sharesor
                    Unitsof
                    StockThat
                    HaveNot
                    Vested(#)
                  
                  
                  Market
                    Valueof
                    Sharesor
                    Unitsof
                    StockThat
                    HaveNot
                    Vested($)
                  
                  
                  Equity
                    IncentivePlan
                    Awards:
                    Numberof
                    Unearned
                    Shares,Unitsor
                    OtherRights
                    ThatHaveNot
                    Vested(#)
                  
                  
                  EquityIncentive
                    PlanAwards:
                    Marketor
                    PayoutValueof
                    Unearned
                    Shares,Unitsor
                    OtherRights
                    ThatHaveNot
                    Vested($)Bernardo
      Melo
                  
                  
                  4,000
                  
                  
                  
                  -
                  
                  
                  
                  N/A
                  
                  
                  
                  1.97
                  
                  12/19/2013
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  N/A6,500
                  
                  
                  
                  -
                  
                  
                  
                  N/A
                  
                  
                  
                  1.54
                  
                  2/6/201420,000
                  
                  
                  
                  -
                  
                  
                  
                  N/A
                  
                  
                  
                  0.6
                  
                  5/8/201530,000
                  
                  
                  
                  -
                  
                  
                  
                  N/A
                  
                  
                  
                  0.33
                  
                  4/9/201160,500
                  
                  
                  
                  -





The
following table sets forth with respect to the named director, compensation
information inclusive of equity awards and payments made in Fiscal 2010. All
option awards were granted from our Year 2001 Stock Option
Plan.


28


DIRECTOR
COMPENSATION




Name
                
                Fees Earned or
                  Paid in Cash
                
                
                Stock Awards (1)
                
                
                Option Awards
                  (2)
                
                
                Non-Equity
                  Incentive Plan
                  Compensation ($)
                
                
                Nonqualified
                  Deferred
                  Compensation
                  Earnings
                
                
                All Other
                  Compensation
                
                
                TotalBernard
      Appel
                
                $
                8,800
                
                
                $
                2,500
                
                
                $
                492
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                11,792Peter
      Hon
                
                $
                400
                
                
                $
                2,500
                
                
                $
                0
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                2,900Harvey
      Judkowitz
                
                $
                8,600
                
                
                $
                2,500
                
                
                $
                492
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                11,592Carol
      Lau
                
                $
                8,800
                
                
                $
                2,500
                
                
                $
                0
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                11,300Yat
      Tung Lau
                
                $
                0
                
                
                $
                2,500
                
                
                $
                0
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                2,500Stewart
      Merkin
                
                $
                8,800
                
                
                $
                2,500
                
                
                $
                492
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                11,792





Refer to
Note 1 “Stock Based Compensation” in the Notes to the Consolidated Financial
Statements included elsewhere in this Annual Report for the relevant assumptions
used to determine the valuation of our option awards.





(1) As of
March 31, 2010 the aggregate number of stock awards held by Messrs. Appel,
Merkin, and Judkowitz is 42,305, 39,958, and 52,305, respectively. The aggregate
stock awards held by Messrs. Hon, Yat Tung Lau and Ms. Lau are
74,311.





(2) As of
March 31, 2010 the aggregate number of Company stock options held by Messrs.
Appel and Judkowitz is 140,000. Mr. Merkin holds 120,000 options and Messrs.
Hon, Yat Tung Lau, and Ms. Lau each hold 40,000 options.





During
Fiscal 2010, our compensation package for our non-employee directors consisted
of grants of stock options, cash payments, stock issuances and reimbursement of
costs and expenses associated with attending our board meetings. Our six
non-employee directors during Fiscal 2010 were Messrs. Appel, Judkowitz, Hon,
Yat Tung Lau and Merkin and Ms. Carol Lau.





During
Fiscal 2010, we have utilized the following compensation policy for our
directors:





·
            An
      initial grant of 20,000 Singing Machine 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.





·
            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.





·
            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 Stockholder Meeting.  The
      actual grant will be made on or before March
31.





·
            An
      annual grant of 20,000 Singing Machine stock options with an exercise
      price determined as the closing price on the day of the Annual Stockholder
      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.





·
            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.





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





·
            Directors
      Peter Lau, Yat Tung Lau and Carol Lau have temporarily agreed to forfeit
      all compensation until financial conditions at the Company
      improve.





YEAR
1994 PLAN





Our 1994
Plan was originally adopted by our Board of Directors in May 1994 and 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 shares 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, 2010, we have 0 options issued and outstanding under the
1994 Plan and all of these options are fully vested as of March 31,
2010.


29


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 with 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, 2010, we have granted 1,079,225 options under the Year 2001
Plan, 586,710 of which are fully vested.





The Year
2001 Plan is administered by our Compensation 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
non-statutory 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, then the
option, as to the excess, will be treated as NSO's.





Options
granted under the Year 2001 Plan are not transferable except by will or
applicable laws of descent and distribution. Except as expressly determined by
the Committee, no option shall be exercisable after thirty (30) days following
an individual's termination of employment with the Company or a subsidiary,
unless such termination of employment occurs by reason of such individual's
disability, retirement or death. The Committee may in its sole discretion,
provide in a grant instrument that upon a change of control (as defined in the
Year 2001 Plan) that all outstanding options 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. We make a
matching contribution of 100% of salary deferral contributions up to 3% of pay,
plus 50% 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, 2010, 2009, 2008 and 2007
totaled approximately $15,749, $10,886, $21,674 and $39,460,
respectively.





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





The
following table sets forth as of July 1, 2010 (the “record date”), certain
information concerning beneficial ownership of our common stock by:





·
            all
      directors of the Singing Machine,


·
            all
      named executive officers of the Singing Machine;
  and


·
            persons
      known to own more than 5% of our common
stock.





Security
ownership is based on 37,585,794 shares of our common stock issued and
outstanding.  In computing the number and percentage of shares
beneficially owned by a person, shares of common stock subject to convertible
securities and options currently convertible or exercisable, or convertible or
exercisable within 60 days of July 1, 2010, are counted as outstanding, but
these shares are not counted as outstanding for computing the percentage
ownership of any other person.


30





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 below, and
subject to applicable property laws, to our knowledge each person has sole
investment and sole voting power over the shares shown as beneficially owned by
them.   Unless otherwise noted, the principal address of each of
the directors and officers listed below is c/o The Singing Machine Company,
Inc., 6601 Lyons Road,, Building A-7, Coconut Creek, FL 33073.





Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters


As
of June 15, 2010





Name and Address of Beneficial Owner
                                
                                Amount and Nature of
                                  Certain Beneficial
                                  Ownership of
                                  Common Stock
                                
                                
                                Percentage of
                                  outstanding
                                  shares of
                                  common stockSecurity Ownership of
      Management:Gary
      Atkinson
                                
                                
                                7,753
                                
                                
                                
                                *Anton
      Handal (1)
                                
                                
                                -
                                
                                
                                
                                *Lionel
      Marquis
                                
                                
                                -
                                
                                
                                
                                *Bernardo
      Melo (2)
                                
                                
                                60,500
                                
                                
                                
                                *Bernard
      Appel (3)
                                
                                
                                162,305
                                
                                
                                
                                *Harvey
      Judkowitz (3)
                                
                                
                                172,305
                                
                                
                                
                                *Carol
      Lau (3)
                                
                                
                                68,857
                                
                                
                                
                                *Yat
      Tung Lau (3)
                                
                                
                                68,857
                                
                                
                                
                                *Peter
      Hon (3)
                                
                                
                                68,857
                                
                                
                                
                                *Stewart Merkin (3)
                                
                                
                                139,958
                                
                                
                                
                                *Officers
      & Directors as a Group (9 persons)
                                
                                
                                749,392
                                
                                
                                
                                2.0
                                %Security Ownership of Certain Beneficial
      Owners:koncepts
      International Ltd. (4)
                                
                                
                                19,932,679
                                
                                
                                
                                51.3
                                %Arts
      Electronics Ltd. (5)
                                
                                
                                3,745,917
                                
                                
                                
                                10.0
                                %Gentle Boss Investments Ltd
    (6)
                                
                                
                                2,100,000
                                
                                
                                
                                5.6
                                %*
      Less than 1%Total
      Shares of Common Stock as of June 15, 2010
                                
                                
                                37,585,794Stock
      Options Exercisable within 60 days of June 15,2010
                                
                                
                                1,836,710Total
                                
                                
                                39,422,504




(1)
Includes stock options to purchase 60,500 shares of common stock, which is
exercisable within 60 days of the record date.


31





(2)
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 the
record date: 120,000 options held by Bernie Appel; 120,000 options held by
Harvey Judkowitz, 100,000 held by Stewart Merkin, and 40,000 held by each of
Carol Lau, Peter Hon, and Yat-Tung Lau.




(3)
Includes a common stock purchase warrant to purchase 1,250,000 shares of common
stock, which is exercisable within 60 days of the record date. The address for
koncepts International Limited is 5/F Shing Dao Industrial Bldg, 232 Aberdeen
Main Road, Aberdeen China.





(4) The
address for Arts Electronics Ltd. is Room 101, Fo Tan Ind CTR 1/F, 26-28 Au Pui
Wan, Fo Tan, Shatin N.T. Hong Kong.





(5) The
address for Gentle Boss Investments Ltd. is Unit 6, 9/F, Tower B, 55 Hoi Yuen
Road, Kwun Tong, Kowloon Hong Kong.





ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE





Approximately
36% of our karaoke products in Fiscal 2010 were produced by factory owned by the
Starlight Group and we anticipate that approximately 40% of our karaoke products
will be manufactured by the Starlight Group in Fiscal 2011. Starlight
International has verbally agreed to manufacture our karaoke products without
requiring prepayment from us and will instead assume the cost of manufacturing
the products until such time as we are paid by the customers who are purchasing
those products from us.




During
Fiscal 2010 we sold approximately $877,000 of product to Cosmo Communications
(“Cosmo”), a related company, at discounted pricing granted to major
distributors. The average gross profit margin on sales to Cosmo yielded 10.6% as
compared to our overall gross profit margin of 18.7%. Cosmo was our primary
distributor of the Company’s product to Canada in Fiscal 2010 and will continue
in this role for Fiscal 2011.








On August
1 2009, our subsidiary SMC-L entered into a service and logistics agreement with
Starlite Consumer Electronics (USA), Inc. (“Starlite USA”), an indirect
wholly-owned subsidiary of Starlight International, and Cosmo to provide
logistics, fulfillment, and warehousing services for Starlite USA and Cosmo’s
domestic sales. For these services, Starlite USA and Cosmo have agreed to pay us
an annual service fee of $1,000,000 payable monthly beginning August 1, 2009.
This agreement generated approximately $667,000 for Fiscal 2010 and is projected
to generate $333,000 in fees for Fiscal 2011. This agreement terminates on July
31, 2010 at which time another annual agreement is expected to be signed for
approximately the same amount.





On August
28, 2008, we executed a three-party banking facility agreement between SMC
Macau, DBS Bank (Hong Kong) Limited and BB&T. The agreement provides for
credit facilities to a maximum of $13.0 million. The credit facility is secured
with corporate guarantees from us as well as a $2.0 million guarantee from
Starlight International, the parent of koncepts, which is the holder of
approximately 50% of our shares of common stock outstanding. This agreement was
effective October 16, 2008 and replaced the previous four-party agreement
between us, Starlight Marketing Limited, an indirect wholly-owned subsidiary of
Starlight International (“Starlight Marketing”), Standard Chartered Bank (Hong
Kong) (“Standard”), Limited and CIT (“Prior Agreement”). Under the Prior
Agreement dated August 3, 2007, we assigned the proceeds from our customers to
Standard, which then advanced the loans to Starlight Marketing, who then sent
the advance to us. Both we and Starlight Marketing guaranteed the repayment of
the advance. The maximum amount for the advance was approximately $4.5 million.
In June 2010, and subsequent to our fiscal year end, the Company was notified by
DBS Bank that our credit and factoring facilities totaling $13.0M were being
withdrawn effective upon receipt of amounts due on both factoring and accounts
payable financing facilities. The Company is actively pursuing replacement
financing facilities. Our parent company, The Starlight Group, has committed to
providing bridge financing until new facilities have been found.




In May
2008, we entered into a services agreement with Cosmo Communications Corporation
(“Cosmo”). Cosmo is approximately 85% owned by Master Light Enterprise Limited,
an indirect wholly-owned subsidiary of Starlight International. The agreement
provides that we will provide management services to Cosmo with respect to the
employment of certain Cosmo sales persons as employees of SMC, including the
payment of such persons’ salaries and benefits. The cost of such employment was
$410,425 for Fiscal 2009. In exchange for these services, Cosmo agreed to pay us
a service fee equal to 2.8% of Cosmo’s “net sales” defined as gross invoice less
returns, charge-backs, promotions and marketing allowances. The agreement was
terminated by both parties on June 1, 2009. Since termination of the agreement,
Cosmo sales employees were terminated and only one Cosmo administration employee
was retained. In lieu of the service fee paid to us in the previous agreement,
Cosmo agreed to reimburse the Company for all salary, benefit and other
administrative expenses incurred by the Cosmo employee retained by Cosmo. For
Fiscal 2010, the cost related to the retained employee and the two sales
employees who were terminated in Fiscal 2010 was $102,952 for which we were
totally reimbursed by Cosmo in cash.





In May
2008, our subsidiary SMC-L entered into a service and logistics agreement with
Starlite Consumer Electronics (USA), Inc. (“Starlite USA”), an indirect
wholly-owned subsidiary of Starlight International, and Cosmo to provide
logistics, fulfillment, and warehousing services for Starlite USA and Cosmo’s
domestic sales. For these services, Starlite USA and Cosmo have agreed to pay us
an annual service fee of $1,137,501, payable monthly beginning July 1, 2008. The
agreement generated approximately $.3M for Fiscal 2010 and $0.8 million in fees
for Fiscal 2009. The agreement was terminated June 30, 2009 and replaced by the
new logistics agreement on August 1, 2010.


32


We
purchase products from Starlight Marketing Macao Commercial Offshore Limited
(“Starlight Macao”), an indirect wholly-owned subsidiary of Starlight
International. The purchases from Starlight Macao for Fiscal 2010 and Fiscal
2009 were $4,716,956 and $10,170,825, respectively. In addition, we also
purchased molds and tooling from Starlight Macao in the amount of $252,900 and
$235,000 in Fiscal 2010 and Fiscal 2009, respectively.




On August
1, 2006, our subsidiary SMC Macao entered into a service agreement with Star
Light Electronics Company Limited, an indirect wholly-owned subsidiary of
Starlight International, to provide shipping and engineering services to us for
a fee of $25,000 per month. This amount increased to $29,000 per month effective
July 1, 2008 however, due to a decrease in services provided to us in Fiscal
2009, the fee was temporarily reduced for a period of time. Effective July 1,
2009 this amount was permanently reduced to $14,000 per month. For Fiscal 2010
and Fiscal 2009, this service charge was $216,000 and $261,000,
respectively.




Review, Approval or Ratification of
Transactions with Related Persons





We
believe that the terms of all of the above transactions are commercially
reasonable and no less favorable to us than we could have obtained from an
unaffiliated third party on an arm’s length basis. Our policy requires that all
related parties recuse themselves from negotiating and voting on behalf of our
company in connection with related party transactions. While we do not maintain
a written policy with respect to related party transactions, our board of
directors routinely reviews potential transactions with those parties we have
identified as related parties prior to the consummation of the transaction. Each
transaction is reviewed to determine that a related party transaction is entered
into by us with the related party on an “arms length” basis, or pursuant to
normal competitive negotiation. We also generally require that all related
parties recuse themselves from negotiating and voting on behalf of the Company
in connection with related party transactions.




CORPORATE
GOVERNANCE




Board
Determination of Independence





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.





ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES





The
following is a summary of the fees billed to the Singing Machine by Mallah
Furman, Certified Public Accountants for professional services rendered for
Fiscal 2010 and Fiscal 2009:




Fee Category
                  
                  Fiscal 2010
                  
                  
                  Fiscal 2009Audit
      Fees
                  
                  $
                  132,147
                  
                  
                  $
                  134,950Tax
      Fees
                  
                  
                  15,000
                  
                  
                  
                  11,000All
      Other Fees
                  
                  
                  1,000
                  
                  
                  
                  1,954Total
      Fees
                  
                  $
                  148,147
                  
                  
                  $
                  147,904





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 Mallah Furman, Certified Public Accountants
(formerly Berkovits & Co, 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.





Out of
the total Fiscal 2010 and Fiscal 2009 audit and other fees, $127,890 and
$134,950 were billed by Mallah Furman, Certified Public Accountants
respectively.





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.




33




PART
IV




ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES




(a) 1.
The following financial statements for The Singing Machine Company, Inc. and
Subsidiaries are filed as a part of this report:





Consolidated
Balance Sheets— March 31, 2010 and 2009





Consolidated
Statements of Operations—Years ended March 31, 2010, 2009 and 2008.





Consolidated
Statements of Shareholders' (deficit) Equity—Years ended March 31, 2010, 2009
and 2008.





Consolidated
Statements of Cash Flows—Years ended March 31, 2010, 2009 and 2008.





2. Notes
to Consolidated Financial Statements





Schedules
are omitted because of the absence of conditions under which they are required
or because the information is included in the financial statements or notes
thereto.





(b)
Exhibits.





Exhibit No.
            Description





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




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




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




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




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




10.1
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).




10.2 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).




10.3
Securities Purchase Agreement dated February 21, 2007, by and between The
Singing Machine Company, Inc. and koncepts International Limited. (incorporated
by reference to the Singing Machine’s Current Report on Form 8-K filed with the
SEC on February 27, 2007)





10.4
Registration Rights Agreement dated February 21, 2007, by and between The
Singing Machine Company, Inc. and koncepts International Limited.(incorporated by
reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC
on February 27, 2007)





10.5 One
Year Stock Purchase Warrant of The Singing Machine Company, Inc. dated February
21, 2007. (incorporated by reference to the Singing Machine’s Current Report on
Form 8-K filed with the SEC on February 27, 2007)





10.6
Three Year Stock Purchase Warrant of The Singing Machine Company, Inc. dated
February 21, 2007. (incorporated by reference to the Singing Machine’s Current
Report on Form 8-K filed with the SEC on February 27, 2007)


34





10.7 Four
Year Stock Purchase Warrant of The Singing Machine Company, Inc. dated February
21, 2007. (incorporated by reference to the Singing Machine’s Current Report on
Form 8-K filed with the SEC on February 27, 2007)





10.8
Bridge Loan Agreement dated March 8, 2007, by and between The Singing Machine
Company, Inc. and Ever Solid Limited. (incorporated by reference to the Singing
Machine’s Current Report on Form 8-K filed with the SEC on March 14,
2007)





10.9
Collateral Security Agreement dated March 8, 2007, by and between The Singing
Machine Company, Inc. and Ever Solid Limited. (incorporated by reference to the
Singing Machine’s Current Report on Form 8-K filed with the SEC on March 14,
2007)





10.10
Bridge Note of The Singing Machine Company, Inc. dated March 8, 2007.
(incorporated by reference to the Singing Machine’s Current Report on Form 8-K
filed with the SEC on March 14, 2007)





10.11
Amendment to lease for executive offices dated April 3, 2008 by and between The
Singing Machine Company, Inc. and Lyons Corporate Park, LLLP. (incorporated by
reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC
on June 29, 2009)




10.12
Lease for City of Industry, CA warehouse by and between The Singing Machine
Company, Inc. and Sun-Yin USA, Inc. (incorporated by reference to the Singing
Machine’s Annual Report on Form 10-K filed with the SEC on June 29,
2009)





10.13
Cosmo employee management agreement dated May 23, 2008 by and among The Singing
Machine Company, Inc. and Cosmo Communications Corporation. (incorporated by
reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC
on June 29, 2009)





10.14
Logistics Agreement dated May 23, 2008 by and among The Singing Machine Company,
Inc. and Starlite Consumer Electronics (USA), Inc., Cosmo Communications Corp.
(incorporated by reference to the Singing Machine’s Annual Report on Form 10-K
filed with the SEC on June 29, 2009)





10.15 DBS
Banking Facility Agreement dated August 28, 2008 by and among The Singing
Machine Company, Inc. and SMC (Comercial Offshore De Macau) Limitada.
(incorporated by reference to the Singing Machine’s Annual Report on Form 10-K
filed with the SEC on June 29, 2009)





10.16
BB&T Factoring and Security Agreement dated September 19, 2008 by and among
The Singing Machine Company, Inc. and Branch Banking and Trust Company.
(incorporated by reference to the Singing Machine’s Annual Report on Form 10-K
filed with the SEC on June 29, 2009)





10.17
Assignment of Factoring Proceeds and Intercreditor Agreement dated September 19,
2008 by and among The Singing Machine Company, Inc., SMC (Comercial Offshore De
Macau) Limitada, Branch Banking and Trust Company, and DBS Bank (Hong Kong)
Limited. (incorporated by reference to the Singing Machine’s Annual Report on
Form 10-K filed with the SEC on June 29, 2009)





10.18
Hang Seng Bank Banking Facility dated February 12, 2008 by and among SMC
(Comercial Offshore De Macau) Limitada and Hang Seng Bank. (incorporated by
reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC
on June 29, 2009)





10.19
Licensing Agreement dated May 10, 2006 by and among The Singing Machine Company,
Inc. and MGA Entertainment, Inc. (incorporated by reference to the Singing
Machine’s Annual Report on Form 10-K/A filed with the SEC on July 7,
2009)





10.20
Licensing Agreement dated November 21, 2006 by and among The Singing Machine
Company, Inc. and MGA Entertainment, Inc. (incorporated by reference to the
Singing Machine’s Annual Report on Form 10-K filed with the SEC on July 7,
2009)





31.1
Certification of Gary Atkinson, Interim Chief Executive Officer, pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.*





31.2
Certification of Carol Lau, Chief Financial Officer, pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended.*





32.1
Certifying Statement of the Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act.*





32.2
Certifying Statement of the Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act.*





* Filed
herewith


+
Compensatory plan or arrangement.


35


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.




Date: 
      July 14, 2010
                    By:
                    /s/ Gary AtkinsonGary
      AtkinsonInterim
      Chief Executive
Officer





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





SIGNATURE
                                      
                                      CAPACITY
                                      
                                      DATE/s/
      Gary Atkinson
                                      
                                      Interim
      Chief Executive Officer
                                      
                                      July
      14, 2010Gary
      Atkinson/s/
      Carol Lau
                                      
                                      Chief
      Financial Officer
                                      
                                      July
      14, 2010Carol
      LauBERNARD
      APPEL
                                      
                                      Director
                                      
                                      July
      14, 2010Bernard
      AppelHARVEY
      JUDKOWITZ
                                      
                                      Director
                                      
                                      July
      14, 2010Harvey
      JudkowitzSTEWART
      MERKIN
                                      
                                      Director
                                      
                                      July
      14, 2010Stewart
      MerkinYAT
      TUNG LAU
                                      
                                      Director
                                      
                                      July
      14, 2010Yat
      Tung LauPETER
      HON
                                      
                                      Director
                                      
                                      July
      14, 2010Peter
      Hon


36





THE
SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES




FINANCIAL
STATEMENTS





INDEX
TO FINANCIAL STATEMENTS




Reports
      of Independent Registered Public Accounting Firm
              F-2Consolidated
      Balance Sheets
              F-3Consolidated
      Statements of Operations
              F-4Consolidated
      Statements of Cash Flows
              F-5Consolidated
      Statements of Shareholders' Equity (Deficit)
              F-6Notes
      to Consolidated Financial Statements
              F-7




F-1


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Shareholders of


The
Singing Machine Company, Inc. and Subsidiaries




We have
audited the accompanying consolidated balance sheets of The Singing Machine
Company, Inc. and Subsidiaries (the “Company”) as of March 31, 2010 and 2009,
and the related consolidated statements of operations, shareholders’ equity, and
cash flows for each of the years in the three year period ended March 31, 2010.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.





We
conducted our audits 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 is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits 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
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 financial position of the Company as of March 31,
2010 and 2009, and the results of its operations and its cash flows for each of
the years in the three year period ended March 31, 2010, in conformity with
accounting principles generally accepted in the United States of
America.




We have
also audited Schedule II of the Company for the years ended March 31, 2010,
2009, 2008. 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.




/s/
Mallah Furman




Fort
Lauderdale, Florida


June 23,
2010




F-2





THE
SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





March 31, 2010
                                        
                                        
                                        March 31, 2009AssetsCurrent
      AssetsCash
                                        
                                        $
                                        865,777
                                        
                                        
                                        $
                                        957,163Accounts
      receivable, net of allowances of $185,407 and $261,980,
      respectively
                                        
                                        
                                        983,791
                                        
                                        
                                        
                                        972,345Due
      from factor
                                        
                                        
                                        14,987
                                        
                                        
                                        
                                        73,854Inventories,net
                                        
                                        
                                        2,804,848
                                        
                                        
                                        
                                        4,729,667Prepaid
      expenses and other current assets
                                        
                                        
                                        118,465
                                        
                                        
                                        
                                        526,563Total
      Current Assets
                                        
                                        
                                        4,787,868
                                        
                                        
                                        
                                        7,259,592Property and
      Equipment,net
                                        
                                        
                                        736,966
                                        
                                        
                                        
                                        886,770Other
      Non-Current Assets
                                        
                                        
                                        164,644
                                        
                                        
                                        
                                        179,362Total
      Assets
                                        
                                        $
                                        5,689,478
                                        
                                        
                                        $
                                        8,325,724Liabilities and Shareholders' (Deficit)
      EquityCurrent
      LiabilitiesAccounts
      payable
                                        
                                        $
                                        895,713
                                        
                                        
                                        $
                                        2,588,769Due
      to related parties - net
                                        
                                        
                                        3,033,801
                                        
                                        
                                        
                                        1,498,391Accrued
      expenses
                                        
                                        
                                        227,257
                                        
                                        
                                        
                                        422,260Short-term
      loan - bank
                                        
                                        
                                        1,091,828
                                        
                                        
                                        
                                        -Current
      portion of long-term financing obligation
                                        
                                        
                                        18,186
                                        
                                        
                                        
                                        18,186Customer
      credits on account
                                        
                                        
                                        742,009
                                        
                                        
                                        
                                        908,449Deferred
      gross profit on estimated returns
                                        
                                        
                                        123,708
                                        
                                        
                                        
                                        288,039Total
      Current Liabilities
                                        
                                        
                                        6,132,502
                                        
                                        
                                        
                                        5,724,094Long-term
      financing obligation, less current portion
                                        
                                        
                                        4,547
                                        
                                        
                                        
                                        22,733Total
      Liabilities
                                        
                                        
                                        6,137,049
                                        
                                        
                                        
                                        5,746,827Shareholders'
      (Deficit) EquityPreferred
      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;  100,000,000 shares
      authorized; 37,585,794 and 37,449,432 shares issued and
      outstanding
                                        
                                        
                                        375,857
                                        
                                        
                                        
                                        374,494Additional
      paid-in capital
                                        
                                        
                                        19,098,726
                                        
                                        
                                        
                                        19,075,750Accumulated
      deficit
                                        
                                        
                                        (19,922,154
                                        )
                                        
                                        
                                        (16,871,347
                                        )Total
      Shareholders' (Deficit) Equity
                                        
                                        
                                        (447,571
                                        )
                                        
                                        
                                        2,578,897Total
      Liabilities and Shareholders' (Deficit) Equity
                                        
                                        $
                                        5,689,478
                                        
                                        
                                        $
                                        8,325,724





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


F-3





THE SINGING MACHINE COMPANY, INC. AND
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS





For the Years EndedMarch 31, 2010
                                              
                                              
                                              March 31, 2009
                                              
                                              
                                              March 30, 2008Net
      Sales
                                              
                                              $
                                              21,277,370
                                              
                                              
                                              $
                                              31,780,709
                                              
                                              
                                              $
                                              34,067,871Cost
      of Goods Sold
                                              
                                              
                                              17,291,011
                                              
                                              
                                              
                                              25,836,586
                                              
                                              
                                              
                                              26,389,070Gross
      Profit
                                              
                                              
                                              3,986,359
                                              
                                              
                                              
                                              5,944,123
                                              
                                              
                                              
                                              7,678,801Operating
      ExpensesSelling
      expenses
                                              
                                              
                                              3,114,552
                                              
                                              
                                              
                                              3,160,950
                                              
                                              
                                              
                                              2,931,416General
      and administrative expenses
                                              
                                              
                                              3,388,203
                                              
                                              
                                              
                                              4,346,627
                                              
                                              
                                              
                                              4,279,728Depreciation
      and amortization
                                              
                                              
                                              439,432
                                              
                                              
                                              
                                              459,354
                                              
                                              
                                              
                                              311,273Total
      Operating Expenses
                                              
                                              
                                              6,942,187
                                              
                                              
                                              
                                              7,966,931
                                              
                                              
                                              
                                              7,522,417(Loss)
      Income from Operations
                                              
                                              
                                              (2,955,828
                                              )
                                              
                                              
                                              (2,022,808
                                              )
                                              
                                              
                                              156,384Other
      ExpensesLoss
      on sale of subsidiary and other assets
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (27,654
                                              )Interest
      expense
                                              
                                              
                                              (94,979
                                              )
                                              
                                              
                                              (131,755
                                              )
                                              
                                              
                                              (127,018
                                              )Net
      Other Expenses
                                              
                                              
                                              (94,979
                                              )
                                              
                                              
                                              (131,755
                                              )
                                              
                                              
                                              (154,672
                                              )(Loss)
      Income before provision for income taxes
                                              
                                              
                                              (3,050,807
                                              )
                                              
                                              
                                              (2,154,563
                                              )
                                              
                                              
                                              1,712Provision
      for  income taxes
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (36,652
                                              )
                                              
                                              
                                              -Net
      (Loss) Income
                                              
                                              $
                                              (3,050,807
                                              )
                                              
                                              $
                                              (2,191,215
                                              )
                                              
                                              $
                                              1,712(Loss)
      Income per Common ShareBasic
                                              
                                              $
                                              (0.081
                                              )
                                              
                                              $
                                              (0.067
                                              )
                                              
                                              $
                                              0.000Diluted
                                              
                                              $
                                              (0.081
                                              )
                                              
                                              $
                                              (0.067
                                              )
                                              
                                              $
                                              0.000Weighted Average Common and
      Common Equivalent
      Shares:Basic
                                              
                                              
                                              37,519,668
                                              
                                              
                                              
                                              32,712,191
                                              
                                              
                                              
                                              29,925,952Diluted
                                              
                                              
                                              37,519,668
                                              
                                              
                                              
                                              32,712,191
                                              
                                              
                                              
                                              30,910,424





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


F-4


THE SINGING MACHINE COMPANY, INC. AND
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS





For the Years EndedMarch 31, 2010
                                                                      
                                                                      
                                                                      March 31, 2009
                                                                      
                                                                      
                                                                      March 31, 2008Cash
      flows from operating activitiesNet
      (Loss) Income
                                                                      
                                                                      $
                                                                      (3,050,807
                                                                      )
                                                                      
                                                                      $
                                                                      (2,191,215
                                                                      )
                                                                      
                                                                      $
                                                                      1,712Adjustments
      to reconcile (net loss) net income to net cash and cash equivalents used
      in operating activities:Depreciation
      and amortization
                                                                      
                                                                      
                                                                      439,432
                                                                      
                                                                      
                                                                      
                                                                      459,354
                                                                      
                                                                      
                                                                      
                                                                      311,273Change
      in inventory reserve
                                                                      
                                                                      
                                                                      (396,319
                                                                      )
                                                                      
                                                                      
                                                                      247,404
                                                                      
                                                                      
                                                                      
                                                                      131,154Change
      in allowance for bad debts
                                                                      
                                                                      
                                                                      (76,573
                                                                      )
                                                                      
                                                                      
                                                                      141,081
                                                                      
                                                                      
                                                                      
                                                                      17,284Stock
      compensation
                                                                      
                                                                      
                                                                      24,339
                                                                      
                                                                      
                                                                      
                                                                      32,826
                                                                      
                                                                      
                                                                      
                                                                      38,112Deferred
      gross profit on estimated sales returns
                                                                      
                                                                      
                                                                      (164,331
                                                                      )
                                                                      
                                                                      
                                                                      70,227
                                                                      
                                                                      
                                                                      
                                                                      4,094Changes
      in assets and liabilities:(Increase)
      Decrease in:Accounts
      receivable
                                                                      
                                                                      
                                                                      244,671
                                                                      
                                                                      
                                                                      
                                                                      49,182
                                                                      
                                                                      
                                                                      
                                                                      (924,634
                                                                      )Inventories
                                                                      
                                                                      
                                                                      2,321,139
                                                                      
                                                                      
                                                                      
                                                                      (1,462,087
                                                                      )
                                                                      
                                                                      
                                                                      (1,366,055
                                                                      )Prepaid
      expenses and other current assets
                                                                      
                                                                      
                                                                      408,098
                                                                      
                                                                      
                                                                      
                                                                      (114,011
                                                                      )
                                                                      
                                                                      
                                                                      109,339Other
      non-current assets
                                                                      
                                                                      
                                                                      14,718
                                                                      
                                                                      
                                                                      
                                                                      (10,000
                                                                      )
                                                                      
                                                                      
                                                                      (113,308
                                                                      )Increase
      (Decrease) in:Accounts
      payable
                                                                      
                                                                      
                                                                      (1,693,056
                                                                      )
                                                                      
                                                                      
                                                                      1,670,341
                                                                      
                                                                      
                                                                      
                                                                      441,906Accounts
      payable - related party
                                                                      
                                                                      
                                                                      1,535,410
                                                                      
                                                                      
                                                                      
                                                                      1,992,407
                                                                      
                                                                      
                                                                      
                                                                      -Accrued
      expenses
                                                                      
                                                                      
                                                                      (195,003
                                                                      )
                                                                      
                                                                      
                                                                      12,845
                                                                      
                                                                      
                                                                      
                                                                      (215,579
                                                                      )Customer
      credits on account
                                                                      
                                                                      
                                                                      (166,440
                                                                      )
                                                                      
                                                                      
                                                                      129,456
                                                                      
                                                                      
                                                                      
                                                                      184,824Net
      cash (used in) provided by operating activities
                                                                      
                                                                      
                                                                      (754,722
                                                                      )
                                                                      
                                                                      
                                                                      1,027,810
                                                                      
                                                                      
                                                                      
                                                                      (1,379,878
                                                                      )Cash
      flows from investing activitiesPurchase
      of property and equipment
                                                                      
                                                                      
                                                                      (291,276
                                                                      )
                                                                      
                                                                      
                                                                      (747,844
                                                                      )
                                                                      
                                                                      
                                                                      (490,697
                                                                      )Proceeds
      from disposal of property and equipment
                                                                      
                                                                      
                                                                      1,648
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      27,654Net
      cash used in investing activities
                                                                      
                                                                      
                                                                      (289,628
                                                                      )
                                                                      
                                                                      
                                                                      (747,844
                                                                      )
                                                                      
                                                                      
                                                                      (463,043
                                                                      )Cash
      flows from financing activitiesBorrowings
      from (retention by) factor, net
                                                                      
                                                                      
                                                                      58,867
                                                                      
                                                                      
                                                                      
                                                                      57,597
                                                                      
                                                                      
                                                                      
                                                                      (21,460
                                                                      )Proceeds
      from issuance of stock
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      630,881Net
      proceeds from short-term bank obligation
                                                                      
                                                                      
                                                                      1,091,828
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -(Payments)
      proceeds persuant to factoring facility
                                                                      
                                                                      
                                                                      (179,545
                                                                      )
                                                                      
                                                                      
                                                                      799,113
                                                                      
                                                                      
                                                                      
                                                                      -Net
      (payments on) proceeds from long-term financing obligation
                                                                      
                                                                      
                                                                      (18,186
                                                                      )
                                                                      
                                                                      
                                                                      40,919
                                                                      
                                                                      
                                                                      
                                                                      -Net
      (payments to) advances from related parties
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      (668,248
                                                                      )
                                                                      
                                                                      
                                                                      492,416Net
      cash provided by financing activities
                                                                      
                                                                      
                                                                      952,964
                                                                      
                                                                      
                                                                      
                                                                      229,381
                                                                      
                                                                      
                                                                      
                                                                      1,101,837Change
      in cash and cash equivalents
                                                                      
                                                                      
                                                                      (91,386
                                                                      )
                                                                      
                                                                      
                                                                      509,347
                                                                      
                                                                      
                                                                      
                                                                      (741,084
                                                                      )Cash
      and cash equivalents at beginning of period
                                                                      
                                                                      
                                                                      957,163
                                                                      
                                                                      
                                                                      
                                                                      447,816
                                                                      
                                                                      
                                                                      
                                                                      1,188,900Cash
      and cash equivalents at end of period
                                                                      
                                                                      $
                                                                      865,777
                                                                      
                                                                      
                                                                      $
                                                                      957,163
                                                                      
                                                                      
                                                                      $
                                                                      447,816Supplemental
      Disclosures of Cash Flow Information:Cash
      paid for Interest
                                                                      
                                                                      $
                                                                      94,979
                                                                      
                                                                      
                                                                      $
                                                                      136,826
                                                                      
                                                                      
                                                                      $
                                                                      78,898Cash
      (refunded) paid for Income Taxes
                                                                      
                                                                      $
                                                                      (23,520
                                                                      )
                                                                      
                                                                      $
                                                                      60,322
                                                                      
                                                                      
                                                                      $
                                                                      -Non-Cash
      Financing Activities:Conversion
      of trade payable to equity
                                                                      
                                                                      $
                                                                      -
                                                                      
                                                                      
                                                                      $
                                                                      669,222
                                                                      
                                                                      
                                                                      $
                                                                      500,000





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


F-5





THE
SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ (DEFICIT) EQUITY





Preferred Stock
                                      
                                      
                                      Common Stock
                                      
                                      
                                      Additional Paid
                                      
                                      
                                      AccumulatedShares
                                      
                                      
                                      Amount
                                      
                                      
                                      Shares
                                      
                                      
                                      Amount
                                      
                                      
                                      in Capital
                                      
                                      
                                      Deficit
                                      
                                      
                                      TotalBalance
      at March 31, 2007
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      
                                      27,286,199
                                      
                                      
                                      $
                                      272,862
                                      
                                      
                                      $
                                      17,306,342
                                      
                                      
                                      $
                                      (14,681,844
                                      )
                                      
                                      $
                                      2,897,360Net
      Income
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,712
                                      
                                      
                                      
                                      1,712Employee
      compensation-stock option
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      24,010
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      24,010Exercise
      of employee stock options
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      147,515
                                      
                                      
                                      
                                      1,475
                                      
                                      
                                      
                                      46,905
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      48,380Director
      Fees
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      15,162
                                      
                                      
                                      
                                      152
                                      
                                      
                                      
                                      13,950
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      14,102Issuances
      of common stock
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      4,309,524
                                      
                                      
                                      
                                      43,095
                                      
                                      
                                      
                                      1,039,405
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,082,500Balance
      at March 31, 2008
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      31,758,400
                                      
                                      
                                      
                                      317,584
                                      
                                      
                                      
                                      18,430,612
                                      
                                      
                                      
                                      (14,680,132
                                      )
                                      
                                      
                                      4,068,064Net
      Loss
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (2,191,215
                                      )
                                      
                                      
                                      (2,191,215
                                      )Employee
      compensation-stock option
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      17,825
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      17,825Director
      Fees
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      33,336
                                      
                                      
                                      
                                      333
                                      
                                      
                                      
                                      14,668
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      15,001Issuances
      of common stock
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      5,657,696
                                      
                                      
                                      
                                      56,577
                                      
                                      
                                      
                                      612,645
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      669,222Balance
      at March 31, 2009
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      37,449,432
                                      
                                      
                                      
                                      374,494
                                      
                                      
                                      
                                      19,075,750
                                      
                                      
                                      
                                      (16,871,347
                                      )
                                      
                                      
                                      2,578,897Net
      Loss
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (3,050,807
                                      )
                                      
                                      
                                      (3,050,807
                                      )Employee
      compensation-stock option
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      9,339
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      9,339Director
      Fees
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      136,362
                                      
                                      
                                      
                                      1,363
                                      
                                      
                                      
                                      13,637
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      15,000Balance
      at March 31, 2010
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      
                                      37,585,794
                                      
                                      
                                      $
                                      375,857
                                      
                                      
                                      $
                                      19,098,726
                                      
                                      
                                      $
                                      (19,922,154
                                      )
                                      
                                      $
                                      (447,571
                                      )





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


F-6





THE
SINGING MACHINE COMPANY, INC AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS





NOTE
1 - BASIS OF PRESENTATION





OVERVIEW





The
Singing Machine Company, Inc., a Delaware corporation (the "Company," “SMC”,
"The Singing Machine", “we” or “us”), and wholly-owned subsidiaries SMC
(Comercial Offshore De Macau) Limitada (“Macau Subsidiary”), SMC Logistics, Inc.
(“SMC-L”), SMC-Music, Inc.(“SMC-M”), and Singing Machine Holdings Ltd. (a B.V.I.
company) are primarily engaged in the development, marketing, and sale of
consumer karaoke audio equipment, accessories, musical instruments and musical
recordings. The products are sold directly to distributors and retail
customers.




koncepts
is a major stockholder of the Company, owning approximately 52% of our shares of
common stock outstanding.  koncepts is an indirect wholly-owned
subsidiary of Starlight International Holdings Limited (“Starlight
International”), a company whose principal activities include designing,
manufacturing and selling electronic products through its various subsidiaries.
Starlight International’s products include television sets, consumer karaoke
audio equipment and DVD products. We do business with a number of entities that
are indirectly wholly-owned or majority owned subsidiaries of Starlight
International, including Starlight Marketing Limited, Cosmo Communications
Corporation (“Cosmo”), Starlite Consumer Electronics (USA), Inc., and Starlight
Marketing Macao Commercial Offshore Limited, among others (Starlight
International and its subsidiaries collectively referred to herein as the
“Starlight Group” or “Starlight”).




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.





NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





ACCOUNTING
STANDARDS CODIFICATION


In June
2009, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Codification (“ASC”) Subtopic 105-10, Generally Accepted Accounting
Principles ("FASB ASC 105-10").  This Standard establishes an integrated
source of existing authoritative accounting principles to be applied by all
non-governmental entities and is effective for interim ad annual periods ending
after September 15, 2009.  The adoption of FASB ASC 105-10 by the Company
did not have a material impact on our financial statements and only resulted in
modifications in accounting reference in our footnotes and
disclosures.





PRINCIPLES
OF CONSOLIDATION


The
accompanying consolidated financial statements include the accounts of the
Company, its Macau Subsidiary, SMC-L, SMC-M and The Singing Machine Holdings
Ltd.  All inter-company accounts and transactions have been eliminated
in consolidation for all periods presented.





USE OF ESTIMATES


The
Singing Machine makes estimates and assumptions in the ordinary course of
business relating to sales returns and allowances, warranty reserves, inventory
reserves and reserves for promotional incentives that affect the reported
amounts of assets and liabilities and of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. 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.





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% allowance for customers in bankruptcy and other allowances 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.





ACCOUNTS
RECEIVABLE FACTORING


The
Company’s factoring facility only finances non-recourse accounts
receivable.  Such receivables are considered to have been sold in
accordance with Financial Accounting Standard Board (“FASB”), Accounting
Standard Codification (“ASC”) 860-30 Transfers and Servicing Secured Borrowing
and Collateral.  Accordingly, advances received pursuant to the
factoring facility have been netted against the accounts receivable on the
accompanying Consolidated Balance Sheets.





FOREIGN
CURRENCY TRANSLATION


The
functional currency of the Macau Subsidiary is the Hong Kong dollar. The
financial statements of the subsidiaries 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 and translations were not material
during the periods presented.


F-7





CONCENTRATION
OF CREDIT RISK





The
Company maintains cash balances in foreign financial institutions. The insured
amounts at foreign financial institutions at March 31, 2010 and March 31, 2009
are $734,908 and $666,643, respectively.  At times the Company
maintains cash in United States bank accounts that are in excess of the Federal
Deposit Insurance Corporation (“FDIC”) insured amounts of up to
$250,000.





INVENTORY


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





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 actual and estimated
future returns, discounts and volume rebates. The total returns represent 12.4%,
9.4%, and 8.6% of the gross sales for the twelve months ended March 31, 2010,
2009, and 2008, respectively.





STOCK
BASED COMPENSATION


The
Company began to apply the provisions of FASB ASC 718-20, Compensation – Stock
Compensation Awards Classified as Equity, starting on January 1,
2006.  ASC 718-20 requires all share-based payments to employees
including grants of employee stock options, be measured at fair value and
expensed in the consolidated statement of operations over the service period
(generally the vesting period). Upon adoption, the Company transitioned to ASC
718-20 using the modified prospective application, whereby compensation cost is
only recognized in the consolidated statements of operations beginning with the
first period that ASC 718-20 is effective and thereafter, with prior periods'
stock-based compensation still presented on a pro forma basis. Under the
modified prospective approach, the provisions of ASC 718-20 are to be applied to
new employee awards and to employee awards modified, repurchased, or cancelled
after the required effective date. Additionally, compensation cost for the
portion of employee awards for which the requisite service has not been rendered
that are outstanding as of the required effective date shall be recognized as
the requisite service is rendered on or after the required effective date. The
compensation cost for that portion of employee awards shall be based on the
grant-date fair value of those awards as calculated for either recognition or
pro-forma disclosures under ASC 718-20. The Company continues to use the
Black-Scholes option valuation model to value stock options. As a result of the
adoption of the provisions of ASC 718-20, for the years ended March 31, 2010,
2009 and 2008, the stock option expense was $9,340, $17,825 and $24,010,
respectively.  Employee stock option compensation expense in fiscal
years 2010, 2009 and 2008 includes the estimated fair value of options granted,
amortized on a straight-line basis over the requisite service period for the
entire portion of the award.





The fair
value of each option grant was estimated on the date of the grant using the
Black-Scholes option-pricing model with the assumptions outlined below. The
expected volatility is based upon historical volatility of our stock and other
contributing factors. The expected term is based upon observation of actual time
elapsed between date of grant and exercise of options for all employees.
Previously such assumptions were determined based on historical
data.





·
            For
      the year ended March 31, 2010: expected dividend yield 0%, risk-free
      interest rate of 0.41%, volatility 268.4% and expected term of three
      years.





·
            For
      the year ended March 31, 2009: expected dividend yield 0%, risk-free
      interest rate of 0.57% to 1.41%, volatility 70.22% and 80.07% and expected
      term of three years.





·
            For
      the year ended March 31, 2008: expected dividend yield 0%, risk-free
      interest rate of 3.3%, volatility of 67.41% and expected term of three
      years.





ADVERTISING


Costs
incurred for producing and publishing advertising of the Company, are charged to
operations as incurred. The Company has entered into cooperative advertising
agreements with its major customers that specifically indicated that the
customer has to spend the cooperative advertising fund upon the occurrence of
mutually agreed events. The percentage of the cooperative advertising allowance
ranges from 2% to 8% of the purchase. The customers have to advertise the
Company's products in the customer's catalog, local newspaper and other
advertising media. The customer must submit the proof of the performance (such
as a copy of the advertising showing the Company’s products) to the Company to
request for the allowance. The customer 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, 2010, 2009 and 2008
was $944,072, $475,167 and $470,671, 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 and administrative
expenses in the consolidated statements of operations. For the years ended March
31, 2010, 2009 and 2008, these amounts totaled $45,146, $51,634 and $22,491,
respectively.


F-8





FAIR
VALUE OF FINANCIAL INSTRUMENTS


We have
adopted FASB ASC 825, Financial Instruments, which 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, due from factors, accounts payable, customer credits on
account, accrued expenses and loans payable to related parties approximates fair
value due to the relatively short period to maturity for these
instruments.





RECLASSIFICATIONS


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





INCOME TAXES


The
Company follows the provisions in FASB ASC 740 "Accounting for Income Taxes."
Under the asset and liability method of ASC 740, 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 ASC 740, 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.





The
Company also follows the provisions in FASB ASC 740, Accounting for Uncertainty
in Income Taxes.  ASC 740 defines a recognition threshold and
measurement attribute for financial statement recognition and measurements of
tax positions taken or expected to be taken in a tax return.  As of
March 31, 2010 this position did not result in any adjustment to the Company’s
provision for income taxes.





As of
March 31, 2010 and March 31, 2009, The Singing Machine had gross deferred tax
assets of approximately $4.1 million and $3.1 million, respectively, against
which the Company recorded valuation allowances totaling approximately $4.1
million and $3.1 million, respectively.





As of
March 31, 2010 the Company is subject to U.S. Federal income tax examinations
for the tax years ended March 31, 2007 through March 31, 2009.





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
FASB ASC 360-10-05, "Accounting for the Impairment or Disposal of Long-Lived
Assets."





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.





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, 2010 and March 31, 2009 were $865,777
and $957,163, respectively.





SHIPPING
AND HANDLING COSTS


Shipping
and handling costs are classified as a component of selling expenses and those
billed to customers are recorded as a reduction of expense in the statement of
operations.





RECENT
ACCOUNTING PRONOUNCEMENTS


Beginning
with the quarter ended June 30, 2009 we adopted the provisions of FASB ASC 855,
Subsequent Events (“ASC 855”). The purpose of ASC 855 is to establish a general
standard of accounting for the disclosure of events that occur after the balance
sheet date but before financial statements are issued or are available to be
issued.  The statement outlines the following:




·
            The
      period after the balance sheet date during which management of a reporting
      entity should evaluate events or transactions that may occur for potential
      recognition or disclosure in the financial
  statements




·
            The
      circumstances under which an entity should recognize events or
      transactions occurring after the balance sheet date in its financial
      statements




·
            The
      disclosures that an entity should make about events or transactions that
      occurred after the balance sheet
date.




F-9


The adoption of ASC855 did nothaveanyimpact onour consolidated
financial statements.





NOTE
3 - INVENTORIES





Inventories
are comprised of the following components:





March31,
                  
                  
                  March31,2010
                  
                  
                  2009Finished
    Goods
                  
                  $
                  3,153,917
                  
                  
                  $
                  5,475,056Less: Inventory
      Reserve
                  
                  
                  (349,069
                  )
                  
                  
                  (745,389
                  )Total
      Inventories
                  
                  $
                  2,804,848
                  
                  
                  $
                  4,729,667





Inventory
consigned to a distribution center at March 31, 2010 and March 31, 2009 was
$353,557 and $352,214, respectively.





NOTE
4 - ACCOUNTS RECEIVABLE FACTORING AGREEMENT





On June
8, 2010 and subsequent to our fiscal year end, the Company was notified by DBS
Bank that our credit and factoring facilities totaling $13.0M were being
withdrawn effective upon receipt of amounts due on both factoring and accounts
payable financing facilities. As of the financial statement date of issue, the
Company had an outstanding balance of approximately $232,224 in short term
borrowings against the accounts payable financing facility and $0 amount due
under the accounts receivable factoring facility.  Our parent company,
The Starlight Group, has committed to provide bridge financing until the Company
secures a new financing facility.





The
factoring facility was established on August 28, 2008, pursuant to a three-party
Banking Facility agreement between the Company’s wholly owned subsidiary SMC
(Commercial Offshore De Macau) Limitada (“Borrower”), DBS Bank (Hong Kong)
Limited (“Lender”) and Branch Banking and Trust Company (“BB&T” or
“Factor”).   The agreement was comprised of three facilities
including a maximum of $7.0 million on 80% of qualified accounts receivable, a
maximum letter of credit facility of $4.0 million for accounts payable financing
and a maximum of $2.0 million for the negotiation of export bills under letter
of credit.





Under the
factor agreement, the Factor assumed credit risk on approved accounts (factor
risk accounts).  For non-approved accounts, the Company assumed the
credit risk (client risk accounts).  The factoring fees were .675% of
the gross invoice for both client risk (recourse) and factor risk (non-recourse)
accounts. As of March 31, 2010 there was a total of $1,462,525 of open accounts
receivable assigned to the Factor.  The Company assumed credit risk
(recourse) in the amount of $83,276.  Credit risk on the remaining
factor assigned receivables in the amount of $1,379,249 was assumed by the
Factor (non-recourse). As of March 31, 2010 and 2009 there were outstanding
amounts due from BB&T of $14,987 and $73,854 respectively.  These
amounts represent excess of customer payments received by BB&T that had yet
to be transferred to DBS bank.  As of March 31, 2010 and 2009 the
outstanding amount under the factoring facility with DBS Bank was $619,567 and
$799,112 respectively. This amount represents advances made by the Bank on
non-recourse receivables and have been offset against accounts receivable in the
accompanying consolidated balance sheet.





NOTE 5 - PROPERTY AND EQUIPMENT





A summary
of property and equipment is as follows:





USEFUL
                        
                        
                        MARCH31,
                        
                        
                        MARCH31,LIFE
                        
                        
                        2010
                        
                        
                        2009Computer and office
      equipment
                        
                        5 years
                        
                        
                        $
                        660,948
                        
                        
                        $
                        652,235Furniture and
      fixtures
                        
                        5-7 years
                        
                        
                        
                        217,875
                        
                        
                        
                        220,315Leasehold
      improvement
                        
                        *
                        
                        
                        
                        151,503
                        
                        
                        
                        153,993Warehouse
      equipment
                        
                        7 years
                        
                        
                        
                        101,521
                        
                        
                        
                        86,599Molds and
      tooling
                        
                        3-5 years
                        
                        
                        
                        1,820,106
                        
                        
                        
                        1,552,4652,951,953
                        
                        
                        
                        2,665,607Less: Accumulated depreciation and
      amortization
                        
                        
                        
                        
                        
                        
                        (2,214,987
                        )
                        
                        
                        (1,778,837
                        )$
                        736,966
                        
                        
                        $
                        886,770


F-10


* Shorter
of remaining term of lease or useful life


Depreciation
and amortization for fiscal years ended 2010, 2009, and 2008 was $439,432,
$459,354, and $311,273, respectively.





NOTE
6 – DUE TO RELATED PARTIES, NET





As of
March 31, 2010 the Company had $3,033,801 due to related parties consisting
primarily of trade payables for karaoke hardware to Starlight Marketing Macao
Commercial Offshore Ltd in the amount of $2,441,055, trade payables for consumer
electronic product of $440,608 due to Cosmo, and $431,653 due to Starlight
R&D, LTD for tooling and tooling modifications. These amounts were
offset by net trade receivables of $279,515 from other Starlight Group
affiliates.





As of
March 31, 2009 the Company had $1,498,391 due to related parties consisting
primarily of trade payables for karaoke hardware to Starlight Marketing Macao
Commercial Offshore Ltd in the amount of $1,580,601, offset by net accounts
receivable of $61,060 from other Starlight Group affiliates and trade
receivables of $21,150 from Cosmo.


.


NOTE
7 - 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.





NOTE
8 – FINANCING





As of
March 31, 2010 and March 31, 2009 the Company owed DBS Bank $1,091,828 and $0
respectively pursuant to an accounts payable financing facility. The proceeds
were used to pay China manufacturing vendors. The accounts payable facility
loans are secured with corporate guarantees from the Company as well as a
guarantee from Starlight and bear interest at 1.75%. The amounts are due to DBS
Bank as follows:





Amount
                        
                        DueDate
                        
                        InterestRate$         290,629
                        
                        28-Apr-10
                        
                        
                        1.75
                        %$         102,181
                        
                        4-May-10
                        
                        
                        1.75
                        %$         232,224
                        
                        10-May-10
                        
                        
                        1.75
                        %$           25,914
                        
                        13-May-10
                        
                        
                        1.75
                        %$           74,131
                        
                        13-May-10
                        
                        
                        1.75
                        %$           37,908
                        
                        9-Jun-10
                        
                        
                        1.75
                        %$         232,224
                        
                        24-Jun-10
                        
                        
                        1.75
                        %$           96,617
                        
                        27-May-10
                        
                        
                        1.75
                        %$      1,091,828





This
accounts payable financing facility is pursuant to a three-party Banking
Facility agreement between the Macau Subsidiary (“Borrower”), DBS Bank (Hong
Kong) Limited (“Lender”) and BB&T (“Factor”) executed on August 28,2008. The
agreement provided for credit facilities to a maximum of $13.0 million
consisting of the following:





·
            Maximum
      of $7.0 million on 80% of qualified accounts
  receivable.


·
            Maximum
      letter of credit facility of $4.0 million for accounts payable
      financing.


·
            Maximum
      $2.0 million negotiation of export bills under letter of
      credit.





Interest
on letter of credit facilities and discounting charges on accounts receivable
advances will be charged at a rate of 1.5% per annum over LIBOR (London
Interbank Offered Rate).  The credit facility is secured with
corporate guarantees from the Company as well as a $2.0 million guarantee from
Starlight International Holdings Limited, a related party. This agreement
replaced a previous four-party agreement between the Company, Starlight
Marketing Limited (a related party), Standard Chartered Bank (Hong Kong),
Limited and CIT.





On June
8, 2010 and subsequent to our fiscal year end, the Company was notified by DBS
Bank that our credit and factoring facilities totaling $13.0M were being
withdrawn effective upon receipt of amounts due on both factoring and accounts
payable financing facilities. As of issuing date of the financial statements,
the Company was not delinquent on any payments for amounts due on this
facility.  Our parent company, The Starlight Group, has committed to
providing bridge financing as the Company seeks replacement
financing.


F-11


NOTE
9 - COMMITMENTS AND CONTINGENCIES





LEGAL
MATTERS





MGA
ENTERTAINMENT, INC. v. THE SINGING MACHINE COMPANY, INC. (SUPERIOR COURT OF THE
STATE OF CALIFORNIA COUNTY OF LOS ANGELES – CENTRAL, CASE NO.
BC436007)





On May
10, 2006, we entered into a two-year license agreement with MGA Entertainment,
Inc. to produce and distribute a variety of karaoke products based on MGA's
BRATZTM franchise. These karaoke products include a TFT DVD karaoke system,
sing-a-long cassette players, deluxe microphones, electronic keyboards and an
electronic drum.  The license agreement contains a minimum guarantee
payment term.  This licensing agreement expired on December 31,
2009.





On
November 21, 2006 we also entered into a three-year license agreement with MGA
Entertainment, Inc. to produce and distribute a variety of consumer electronic
products based on MGA's BRATZTM franchise. These consumer electronic products
include boom boxes, clock radios and portable DVDs. The license agreement
contains a minimum guarantee payment term.  This licensing agreement
expired on December 31, 2009.





As of
March 31, 2010 the total amount due to MGA Entertainment, Inc. was
$304,216.  This amount includes:  $62,216 of additional
royalties due in excess of guaranteed minimum advances on the karaoke products
licensing agreement and $242,000 for guaranteed minimum advances on the consumer
electronic agreement. These amounts have not been included in the consolidated
financial statements since it would be considered a “gross-up” of the balance
sheet.  The amounts due have not been paid due to litigation between
Mattel Inc. and MGA Entertainment Inc. wherein Mattel has legally challenged
MGA’s trademark rights to the BRATZTM franchise. On July 17, 2008 Mattel was
awarded a jury verdict in the Central District of California.





MGA
Entertainment, Inc. (MGA) filed an action against the Company on April 16, 2010
alleging breach of contract, breach of implied covenant of good faith and fair
dealing, and conversion claims relating to the above two licensing
agreements.




The
Company has responded to the above captioned case and has removed the case to
federal court, case no. CV 10-03761 DOC (RNBX). Based upon legal opinion from
outside Counsel, the Company believes it has defenses to the claims raised by
MGA. However, at the time of this filing, the case is still in early stages of
litigation and the outcome is unknown. The Company is also contemplating pursuit
of counter-claims against MGA.





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





INCOME
TAXES





In a
letter dated July 21, 2008 the Internal Revenue Service (IRS) notified
International SMC (HK) Limited (“ISMC (HK)”), a former foreign subsidiary, of an
unpaid tax balance on Income Tax Return of a Foreign Corporation (Form 1120-F)
for the period ending March 31, 2003. According to the notice ISMC (HK) has an
unpaid balance due in the amount of $241,639 that includes an interest
assessment of $74,125.  ISMC (HK) was sold in its entirety by the
Company on September 25, 2006 to a British Virgin Islands company
(“Purchaser”).  The sale and purchase agreement with the Purchaser of
ISMC (HK) specifies that the Purchaser would ultimately be responsible for any
liabilities, including tax matters.  On June 3, 2009 the IRS filed a
federal tax lien in the amount of approximately $170,000 against ISMC (HK) under
ISMC (HK)’s federal Tax ID. Management sought independent legal counsel to
assess the potential liability, if any, on the Company.  In a
memorandum from independent counsel, the conclusion based on the facts presented
was that the IRS would not prevail against the Company for collection of the
ISMC (HK) income tax liability based on:





·
            The
      Internal Revenue Service’s asserted position that the Company is not the
      taxpayer.


·
            The
      1120- F tax liability was recorded under the taxpayer identification
      number belonging to ISMC and not the Company’s taxpayer identification
      number


·
            The
      IRS would be barred from recovery since it failed to assess or issue a
      notice of levy within the three year statute of
  limitations





Based on
the conclusion reached in the legal memorandum, management does not believe that
the Company will have any further liability with regards to this
issue.





LEASES





The
Company has entered into various operating lease agreements for office and
warehouse facilities in Coconut Creek, Florida, City of Industry, California and
Macau. The leases expire at varying dates. Rent expense for the years ended
March 31, 2010, 2009 and 2008 was $864,523, $961,226and $201,270,
respectively.


F-12


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





Future
minimum lease payments under property and equipment leases with terms exceeding
one year as of March 31, 2010 are as follows:





Property Leases
                    
                    
                    Equipment LeasesFor period
      ending2011
                    
                    $
                    732,616
                    
                    
                    $
                    5,7172012
                    
                    
                    675,460
                    
                    
                    
                    -2013
                    
                    
                    671,044
                    
                    
                    
                    -2014
                    
                    
                    57,384
                    
                    
                    
                    -2015 and
    beyond
                    
                    
                    -
                    
                    
                    
                    -$
                    2,136,504
                    
                    
                    $
                    5,717





The above
property lease payments are gross payments which are not net of supplemental
sublease fees we receive.  During fiscal years 2010, 2009 and 2008 the
Company received fees of approximately $45,000, $45,000 and $543,000
respectively, for sublease of warehouse space and warehousing services provided
to affiliated entities out of its California warehouse.





Such fees
have been offset against rent expense in the consolidated statements of
operations.





NOTE
10 - SHAREHOLDERS’ EQUITY





COMMON
STOCK ISSUANCES





During
the years ended March 31, 2010, 2009, and 2008, the Company issued the following
common stock shares:





2010:





On
September 25, 2009 the Company issued 136,362 shares of its common stock to our
Board of Directors at $.11 per share, pursuant to our annual director
compensation plan.





2009:





During
the fiscal year ended March 31, 2009 the Company issued 5,691,032 shares of its
common stock.





On March
25, 2009, the Company issued 2,267,220 shares of common stock to Arts
Electronics, Ltd for $226,722 ($0.10 per share) to offset a trade
payable.





On March
25, 2009, the Company issued 2,450,000 shares of common stock to koncepts
International Limited for $245,000 ($0.10 per share) to offset a trade
payable.





On
October 9, 2008 the Company issued 33,336 shares of common stock to our Board of
Directors at $0.45 per share, pursuant to our annual director compensation
plan.





On April
1, 2008 the Company issued 940,476 shares of common stock to Starlight
Industrial Holdings, Ltd. for $197,500 ($.21 per share) to offset a trade
payable.





2008:





During
the year ended March 31, 2008, the Company issued 162,677 shares of common stock
to various employees, as well as directors, at prices ranging from $.32 per
share to $.93 per share pursuant to employee stock option
agreements.





On March
12, 2008, the Company issued 952,381 shares of common stock to Arts Electronics
for $200,000 ($0.21 per share) as payment for a trade payable.





On
September 28, 2007, the Company issued 857,143 shares of common stock to koncept
International Limited, a subsidiary of Starlight for $300,000 ($.35 per share)
as payment for certain payables owed by the Company to Starlight Marketing
Macao.





On April
16, 2007, 2,500,000 warrants at $0.233 were exercised by koncept International
Limited, a subsidiary of Starlight, and the Company received a total of
$582,500.


F-13


EARNINGS
PER SHARE





In
accordance with FASB ASC 210, "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.





For the years ended March 31, 2010, 2009 and
2008, common stock equivalents to purchase 1,836,710, 3,209,965 and 2,544,824
shares of stock, respectively, were not included in the computation of diluted
earnings per share because the exercise prices were greater than the average
market price of the Company’s common stock for the period.





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, 2010, 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, 2010, the Company had
870,775 options available to be granted under the 2001 Plan. As of March 31,
2010, the Company had 343,050 options available to be granted under the 1994
Plan.





The
Company adopted ASC 713-10 for the reporting periods ending after June 15, 2005
and thereafter has recognized the fair value of the stock option as part of the
selling, general and administration expense. Accordingly, no compensation cost
has been recognized for options issued under the Plan in periods prior to June
15, 2005. A summary of stock option activity for each of the years presented is
summarized below.





Fiscal2010
                                    
                                    
                                    Fiscal2009
                                    
                                    
                                    Fiscal2008NumberofOptions
                                    
                                    
                                    Weighted
                                      Average
                                      ExercisePrice
                                    
                                    
                                    Numberof
                                      Options
                                    
                                    
                                    Weighted
                                      Average
                                      Exercise
                                      Price
                                    
                                    
                                    Numberof
                                      Options
                                    
                                    
                                    Weighted
                                      Average
                                      ExercisePriceStock
    Options:Balance at beginning of
      period
                                    
                                    
                                    1,133,215
                                    
                                    
                                    $
                                    0.64
                                    
                                    
                                    
                                    1,247,815
                                    
                                    
                                    $
                                    1.25
                                    
                                    
                                    
                                    1,382,890
                                    
                                    
                                    $
                                    1.26Granted
                                    
                                    
                                    60,000
                                    
                                    
                                    $
                                    0.11
                                    
                                    
                                    
                                    420,000
                                    
                                    
                                    $
                                    0.13
                                    
                                    
                                    
                                    120,000
                                    
                                    
                                    $
                                    0.45Exercised
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (147,515
                                    )
                                    
                                    $
                                    0.33Forfeited
                                    
                                    
                                    (546,505
                                    )
                                    
                                    $
                                    0.53
                                    
                                    
                                    
                                    (534,600
                                    )
                                    
                                    $
                                    1.90
                                    
                                    
                                    
                                    (107,560
                                    )
                                    
                                    $
                                    1.27Balance at end of
      period
                                    
                                    
                                    646,710
                                    
                                    
                                    $
                                    0.56
                                    
                                    
                                    
                                    1,133,215
                                    
                                    
                                    $
                                    0.58
                                    
                                    
                                    
                                    1,247,815
                                    
                                    
                                    $
                                    1.25Options exercisable at end of
      period
                                    
                                    
                                    586,710
                                    
                                    
                                    $
                                    0.62
                                    
                                    
                                    
                                    709,965
                                    
                                    
                                    $
                                    0.83
                                    
                                    
                                    
                                    1,029,296
                                    
                                    
                                    $
                                    1.44





The
following table summarizes information about employee stock options outstanding
at March 31, 2010:





RangeofExercisePrice
                          
                          NumberOutstandingatMarch
                            31,2010
                          
                          
                          WeightedAverageRemaining
                            ContracturalLife
                          
                          
                          WeightedAverage
                            ExercisePrice
                          
                          
                          NumberExercisableatMarch
                            31,2010
                          
                          
                          WeightedAverage
                            ExercisePrice$.03 -
      $.77
                          
                          
                          589,000
                          
                          
                          
                          6.87
                          
                          
                          $
                          0.41
                          
                          
                          
                          529,000
                          
                          
                          $
                          0.45$.93 -
      $9.00
                          
                          
                          57,710
                          
                          
                          
                          4.02
                          
                          
                          $
                          2.11
                          
                          
                          
                          57,710
                          
                          
                          $
                          2.11646,710
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          586,710





Prior to
April 1, 2005, in accordance with ASC 713-10, for options issued to employees,
the Company applied the intrinsic value method.





STOCK
WARRANTS





As of
March 31, 2010, the Company had a total of 1,250,000 stock purchase warrants
outstanding. The exercise price of these warrants is $0.35 with an expiration
date of July 26, 2010.





NOTE 11 - INCOME TAXES





The
Company files separate tax returns in the United States and in Macau. The Macau
Subsidiary has received approval from the Macau government to operate its
business as a Macau Offshore Company (MOC), and is exempt from the Macau income
tax. For the fiscal years ended March 31, 2010, 2009 and 2008, the Macau
Subsidiary recorded no tax provision. 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.


F-14


Due to
the change of control of the Company, the net operating loss carry over is
subject to the IRS Section 382 limitation.  As of March 31, 2010, 2009
and 2008, The Singing Machine had net deferred tax assets of approximately $4.1
million, $3.1 million, and $2.5 million, respectively, against which the Company
recorded valuation allowances totaling approximately $4.1million, $3.1 million, and
$2.5 million, respectively.





The
income tax expense (benefit) for federal, foreign, and state income taxes in the
consolidated statement of operations consisted of the following components for
2010, 2009, and 2008:





2010
                  
                  
                  2009
                  
                  
                  2008Current:U.S.
Federal
                  
                  $
                  (999,213
                  )
                  
                  $
                  (878,241
                  )
                  
                  $
                  9,181State
                  
                  
                  (96,851
                  )
                  
                  
                  (77,918
                  )
                  
                  
                  944Deferred
                  
                  
                  1,096,064
                  
                  
                  
                  992,811
                  
                  
                  
                  (10,125
                  )$
                  -
                  
                  
                  $
                  36,652
                  
                  
                  $
                  -





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





2010
                        
                        
                        2009
                        
                        
                        2008United
    States
                        
                        $
                        (2,938,861
                        )
                        
                        $
                        (2,583,061
                        )
                        
                        $
                        27,002Foreign
                        
                        
                        (111,226
                        )
                        
                        
                        428,498
                        
                        
                        
                        (25,290
                        )$
                        (3,050,087
                        )
                        
                        $
                        (2,154,563
                        )
                        
                        $
                        1,712





The
actual tax expense differs from the "expected" tax expense for the years ended
March 31, 2010, 2009, and 2008 (computed by applying the U.S. Federal Corporate
tax rate of 34 percent to income before taxes) as follows:





2010
                    
                    
                    2009
                    
                    
                    2008Expected tax (benefit)
      expense
                    
                    $
                    (1,037,030
                    )
                    
                    $
                    (732,551
                    )
                    
                    $
                    582State income taxes, net of Federal
      income tax benefit
                    
                    
                    (96,852
                    )
                    
                    
                    (77,919
                    )
                    
                    
                    943Permanent
      differences
                    
                    
                    3,430
                    
                    
                    
                    6,447
                    
                    
                    
                    5,829Change in valuation
      allowance
                    
                    
                    983,094
                    
                    
                    
                    652,738
                    
                    
                    
                    (194,062
                    )Tax rate differential on foreign
      earnings
                    
                    
                    37,817
                    
                    
                    
                    (145,689
                    )
                    
                    
                    8,600Other
                    
                    
                    109,541
                    
                    
                    
                    333,627
                    
                    
                    
                    178,108Actual tax (benefit)
      expense
                    
                    
                    -
                    
                    
                    $
                    36,652
                    
                    
                    $
                    -


F-15


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




2010
                  
                  
                  2009
                  
                  
                  2008Deferred tax
      assets:Federal net operating loss
      carryforward
                  
                  
                  2,822,902
                  
                  
                  
                  1,616,816
                  
                  
                  $
                  1,490,139State net operating loss
      carryforward
                  
                  
                  606,284
                  
                  
                  
                  509,378
                  
                  
                  
                  518,077AMT credit
      carryforward
                  
                  
                  70,090
                  
                  
                  
                  70,090
                  
                  
                  
                  70,090Inventory
      differences
                  
                  
                  263,103
                  
                  
                  
                  445,109
                  
                  
                  
                  169,382Allowance for doubtful
      accounts
                  
                  
                  63,038
                  
                  
                  
                  89,073
                  
                  
                  
                  41,105Reserve for sales
      returns
                  
                  
                  42,061
                  
                  
                  
                  97,933
                  
                  
                  
                  74,056Charitable
      contributions
                  
                  
                  60,700
                  
                  
                  
                  60,700
                  
                  
                  
                  60,700Accrued
      Vacation
                  
                  
                  12,385
                  
                  
                  
                  12,568
                  
                  
                  
                  -Depreciation and
      amortization
                  
                  
                  149,478
                  
                  
                  
                  197,614
                  
                  
                  
                  -Amortization of reorganization
      intangible
                  
                  
                  22,993
                  
                  
                  
                  30,658
                  
                  
                  
                  53,652Total deferred tax
      assets
                  
                  
                  4,113,034
                  
                  
                  
                  3,129,940
                  
                  
                  
                  2,477,201Net deferred tax assets before
      valuation allowance
                  
                  
                  4,113,034
                  
                  
                  
                  3,129,940
                  
                  
                  
                  2,477,201Valuation
      allowance
                  
                  
                  (4,113,034
                  )
                  
                  
                  (3,129,940
                  )
                  
                  
                  (2,477,201
                  )Net deferred tax
      assets
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -





At March
31, 2010, the Company has federal tax net operating loss carry forwards in the
amount of approximately $8.3 million, which expire beginning in the year
2023.  In addition, state tax net operating loss carry forwards in the
amount of approximately $6.4 million expire beginning in 2013. The Company is no
longer subject to income tax examinations for fiscal years before
2007.





NOTE
12 - SEGMENT INFORMATION





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





FOR THE FISCAL YEARS
      ENDEDMarch 31,2010
                        
                        
                        2009
                        
                        
                        2008North
    America
                        
                        $
                        18,512,225
                        
                        
                        $
                        26,154,402
                        
                        
                        $
                        27,085,841Europe
                        
                        
                        2,740,842
                        
                        
                        
                        4,813,309
                        
                        
                        
                        6,314,126Others
                        
                        
                        24,303
                        
                        
                        
                        812,998
                        
                        
                        
                        667,904$
                        21,277,370
                        
                        
                        $
                        31,780,709
                        
                        
                        $
                        34,067,871





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





NOTE
13 - EMPLOYEE BENEFIT PLANS





The
Company has a 401(k) plan for its employees to which the Company makes
contributions at rates dependent on the level of each employee's contributions.
Contributions made by the Company are limited to the maximum allowable for
federal income tax purposes. The amounts charged to operations for contributions
to this plan and administrative costs during the years ended March 31, 2010,
2009, and 2008 totaled $15,749, $17,825 and $21,674, respectively. The amounts
are included as a component of general and administrative expense in the
accompanying Consolidated Statements of Operations. The Company does not provide
any post employment benefits to retirees.





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





The
Company derives a majority of its revenues from retailers of products in the
United States. 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, 2010, 57% of accounts receivable were due
from two customers in North America. Accounts receivable from customers that
individually owed over 10% of total accounts receivable was 42% and 15% at March
31, 2010.  Accounts receivable from customers that individually owed
over 10% of total accounts receivable was 55% 15% and 11% at March 31, 2009. The
Company performs ongoing credit evaluations of its customers.


F-16


Revenues
derived from five customers in 2010, 2009, and 2008 were 74%, 61% and 62% of
total revenues, respectively. Revenues derived from top three customers in 2010,
2009 and 2008 as percentage of the total revenue were 28%, 17% and 13%; 21%, 18%
and 10%; and 22%, 11% and 11%, respectively. The loss of any of these customers
can have an adverse impact on the financial position of the
Company.





Net sales
derived from the Hong Kong and Macau Subsidiaries aggregated $3.6 million in
2010, $17.1 million in 2009 and $17.3 million in 2008.





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 2010, 2009, and 2008, manufacturers in the People's Republic of
China ("China") accounted for approximately 99%, 99% and 99%; respectively of
the Company's total product purchases, including all of the Company's hardware
purchases.





The
Company primary relied on DBS Bank to finance its accounts receivable for Fiscal
2010. Due to the subsequent loss of the factoring facility we will be reliant on
our parent company, The Starlight Group, to provide bridge financing until a
replacement factoring agreement is secured.  Any change in the ability
of The Starlight Group to provide financing or the company’s inability to secure
a replacement factoring agreement could adversely affect our ability to pay
vendors and receive product to fill customer orders.





NOTE 15 - QUARTERLY FINANCIAL DATA -
UNAUDITED





The
following financial information reflects all normal recurring adjustments that
are, in the opinion of management, necessary for a fair statement of the results
of the interim periods. The quarterly unaudited results for the years 2010,
2009, and 2008 are set forth in the following table:





Sales
                                                            
                                                            
                                                            Gross
      Profit
                                                            
                                                            
                                                            Net Earnings (Loss)
                                                            
                                                            
                                                            Basic
                                                              Earnings
                                                              (Loss)
                                                              Per
      Share
                                                            
                                                            
                                                            Diluted
      Earnings (Loss) Per Share(In
      thousands)
                                                            
                                                            
                                                            (In
      thousands)
                                                            
                                                            
                                                            (In
      thousands)2010First
      quarter
                                                            
                                                            $
                                                            814
                                                            
                                                            
                                                            $
                                                            (286
                                                            )
                                                            
                                                            $
                                                            (1,553
                                                            )
                                                            
                                                            $
                                                            (0.04
                                                            )
                                                            
                                                            $
                                                            (0.04
                                                            )Second
      quarter
                                                            
                                                            
                                                            6,991
                                                            
                                                            
                                                            
                                                            1,384
                                                            
                                                            
                                                            
                                                            (313
                                                            )
                                                            
                                                            
                                                            (0.01
                                                            )
                                                            
                                                            
                                                            (0.01
                                                            )Third
      quarter
                                                            
                                                            
                                                            11,976
                                                            
                                                            
                                                            
                                                            2,994
                                                            
                                                            
                                                            
                                                            247
                                                            
                                                            
                                                            
                                                            0.01
                                                            
                                                            
                                                            
                                                            0.01Fourth
      quarter
                                                            
                                                            
                                                            1,496
                                                            
                                                            
                                                            
                                                            (196
                                                            )
                                                            
                                                            
                                                            4,670
                                                            
                                                            
                                                            
                                                            (0.04
                                                            )
                                                            
                                                            
                                                            (0.04
                                                            )Fiscal
      Year 2009
                                                            
                                                            $
                                                            21,277
                                                            
                                                            
                                                            $
                                                            3,896
                                                            
                                                            
                                                            $
                                                            3,051
                                                            
                                                            
                                                            $
                                                            (0.08
                                                            )
                                                            
                                                            $
                                                            (0.08
                                                            )2009First
      quarter
                                                            
                                                            $
                                                            1,770
                                                            
                                                            
                                                            $
                                                            203
                                                            
                                                            
                                                            $
                                                            (1,050
                                                            )
                                                            
                                                            $
                                                            (0.03
                                                            )
                                                            
                                                            $
                                                            (0.03
                                                            )Second
      quarter
                                                            
                                                            
                                                            12,616
                                                            
                                                            
                                                            
                                                            2,021
                                                            
                                                            
                                                            
                                                            103
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -Third
      quarter
                                                            
                                                            
                                                            16,612
                                                            
                                                            
                                                            
                                                            3,772
                                                            
                                                            
                                                            
                                                            464
                                                            
                                                            
                                                            
                                                            0.01
                                                            
                                                            
                                                            
                                                            0.01Fourth
      quarter
                                                            
                                                            
                                                            783
                                                            
                                                            
                                                            
                                                            (52
                                                            )
                                                            
                                                            
                                                            (1,708
                                                            )
                                                            
                                                            
                                                            (0.03
                                                            )
                                                            
                                                            
                                                            (0.03
                                                            )Fiscal
      Year 2009
                                                            
                                                            $
                                                            31,781
                                                            
                                                            
                                                            $
                                                            5,944
                                                            
                                                            
                                                            $
                                                            (2,191
                                                            )
                                                            
                                                            $
                                                            (0.07
                                                            )
                                                            
                                                            $
                                                            (0.07
                                                            )2008First
      quarter
                                                            
                                                            $
                                                            2,446
                                                            
                                                            
                                                            $
                                                            339
                                                            
                                                            
                                                            $
                                                            (852
                                                            )
                                                            
                                                            $
                                                            (0.03
                                                            )
                                                            
                                                            $
                                                            (0.03
                                                            )Second
      quarter
                                                            
                                                            
                                                            16,108
                                                            
                                                            
                                                            
                                                            3,193
                                                            
                                                            
                                                            
                                                            1,054
                                                            
                                                            
                                                            
                                                            0.04
                                                            
                                                            
                                                            
                                                            0.03Third
      quarter
                                                            
                                                            
                                                            13,784
                                                            
                                                            
                                                            
                                                            3,747
                                                            
                                                            
                                                            
                                                            767
                                                            
                                                            
                                                            
                                                            0.03
                                                            
                                                            
                                                            
                                                            0.03Fourth
      quarter
                                                            
                                                            
                                                            1,730
                                                            
                                                            
                                                            
                                                            400
                                                            
                                                            
                                                            
                                                            (967
                                                            )
                                                            
                                                            
                                                            (0.03
                                                            )
                                                            
                                                            
                                                            (0.03
                                                            )Fiscal
      Year 2008
                                                            
                                                            $
                                                            34,068
                                                            
                                                            
                                                            $
                                                            7,679
                                                            
                                                            
                                                            $
                                                            2
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -


F-17


NOTE
16 – RELATED PARTY TRANSACTIONS





TRADE





On August
1 2009, our subsidiary SMC-L entered into a service and logistics agreement with
Starlite Consumer Electronics (USA), Inc. (“Starlite USA”), an indirect
wholly-owned subsidiary of Starlight International, and Cosmo to provide
logistics, fulfillment, and warehousing services for Starlite USA and Cosmo,
domestic sales.  For these services, Starlite USA and Cosmo have
agreed to pay the Company an annual service fee of $1,000,000 payable monthly
beginning August 1, 2009. This agreement generated approximately $667,000 for
Fiscal 2010 and is projected to generate $333,000 in fees for Fiscal 2011. These
amounts were used to offset logistics expenses for the warehouse and are shown
in the accompanying Consolidated Statements of Operations as a component of
general and administrative expenses.  This agreement terminates on
July 31, 2010 at which time another annual agreement is expected to be signed
for approximately the same amount.





During
Fiscal 2010 the Company sold approximately $877,000 of product to Cosmo at
discounted pricing granted to major distributors.  The average gross
profit margin on sales to Cosmo yielded 10.6% as compared to an overall gross
profit margin of 18.7%.  Cosmo is the Company’s primary distributor of
its products to Canada. This amount was included as a component of cost of goods
sold in the accompanying Consolidated Statements of Operations.









On May
23, 2008, SMC-L entered into a service and logistics agreement with affiliates
Starlight and Cosmo to provide logistics, fulfillment, and warehousing services
for Starlight and Cosmo’s domestic sales. The agreement expired on June 30,
2009. The Agreement generated approximately $800,000 for fiscal year 2009 and
$300,000 for fiscal year 2010.  These amounts were used to offset
logistics expenses for the warehouse and are shown in the accompanying
Consolidated Statements of Operations as a component of general and
administrative expenses.





The
Company purchased products from Starlight Marketing Macao Commercial Offshore
Limited (“Starlight Macao”), an indirect wholly-owned subsidiary of Starlight
International. The purchases from Starlight Macao for Fiscal 2010 and Fiscal
2009 were $4,716,956 and $10,170,825, respectively. In addition, the Company
also purchased molds and tooling from Starlight R&D, an indirect
wholly-owned subsidiary of Starlight International, in the amount of $252,900
and $235,000 in Fiscal 2010 and Fiscal 2009, respectively, which are included in
Property and Equipment in the accompanying Consolidated Balance
Sheets.





On August
1, 2006, our subsidiary SMC Macao entered into a service agreement with Star
Light Electronics Company Limited, an indirect wholly-owned subsidiary of
Starlight International, to provide shipping and engineering services to us for
a fee of $25,000 per month.  This amount increased to $29,000 per
month effective July 1, 2008 however, due to a decrease in services provided to
us in Fiscal 2009, the fee was temporarily reduced for a period of time.
Effective July 1, 2009 this amount was permanently reduced to $14,000 per month.
For Fiscal 2010 and Fiscal 2009, this service charge was $216,000 and $261,000,
respectively, and is included in the general and administrative expenses in the
accompanying Consolidated Statements of Operations.





In
addition, on October 1, 2006 the Company entered into a warehouse services
agreement with Starlight Industrial Holding LTD, to provide them with
warehousing services at the Company’s California warehouse at a monthly service
charge of $26,000.  In May 2008, that amount was increased to $39,000
per month. This amount was used to offset logistics expenses for the warehouse
and is shown in the accompanying Consolidated Statements of Operations as a
component of general and administrative expenses.  This agreement was
terminated on June 30, 2009.





NOTE
17 – SUBSEQUENT EVENTS





MGA
Entertainment, Inc. (MGA) filed an action against the Company on April 16, 2010
alleging breach of contract, breach of implied covenant of good faith and fair
dealing, and conversion claims relating to two licensing agreements between the
parties entered into on May 10, 2006 and November 21, 2006. The two licensing
agreements involved the manufacture, distribution and marketing of “Bratz”
branded merchandise. At the time of this filing, the case is still in early
stages of litigation and the outcome is unknown, however at this time management
is confident that MGA’s claims are without merit.  Reference Note 9
“Commitments and Contingencies” for additional information regarding the MGA
matter.





On June
8, 2010 the Company was notified by DBS Bank (“DBS”) that our credit and
factoring facilities totaling $13.0M were being withdrawn effective upon receipt
of amounts due on both factoring and accounts payable financing facilities. As
of issuing date of the financial statements, the Company had an outstanding
balance due of approximately $232,224 in short term borrowings against the
accounts payable financing facility and $0 amount due under the accounts
receivable factoring facility.  As of the date of this filing, the
Company was in default of the outstanding balance due to DBS in the amount of
$232,224 which was due on June 24, 2010.  The Company proposed a
payment plan wherein DBS would use the proceeds from the factored receivables
remaining with DBS to apply against the remaining balance when these receivables
are collected.  As the amount due on the factoring facility is $0 and
the uncollected factored receivables remaining with DBS exceed the amount of
outstanding debt, DBS has agreed to accept the Company’s payment
plan.  As of the filing date, this debt to DBS has been paid in
full.





We
evaluated the effects of all subsequent events from the end of the fiscal year
ended March 31, 2010 through July 14, 2010, the date we filed our financial
statements with the U.S. Securities and Exchange Commission
("SEC").  Except as noted, there are no additional events requiring
disclosure as per FASBASC 855, Subsequent Events (“ASC855”).


F-18


SUPPLEMENTAL
DATA


SCHEDULE
II





Balance
      at
                        
                        
                        Charged
      to
                        
                        
                        
                        
                        
                        Credited
      to
                        
                        
                        Balance
      atBeginning
      of
                        
                        
                        Costs
      and
                        
                        
                        Reduction
      to Allowance
                        
                        
                        Costs
      and
                        
                        
                        End
      ofDescription
                        Period
                        
                        
                        Expenses
                        
                        
                        for
      Write off
                        
                        
                        Expenses
                        
                        
                        PeriodYear
      ended March 31, 2010Reserves
      deducted from assets to which they apply:Allowance
      for doubtful accounts
                        
                        $
                        261,980
                        
                        
                        $
                        59,085
                        
                        
                        $
                        (135,658
                        )
                        
                        $
                        -
                        
                        
                        $
                        185,407Deferred
      tax valuation allowance
                        
                        $
                        3,129,940
                        
                        
                        $
                        983,094
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        4,113,034Inventory
      reserve
                        
                        $
                        745,388
                        
                        
                        $
                        376,855
                        
                        
                        $
                        (773,174
                        )
                        
                        $
                        -
                        
                        
                        $
                        349,069Year
      ended March 31, 2009Reserves
      deducted from assets to which they apply:Allowance
      for doubtful accounts
                        
                        $
                        120,899
                        
                        
                        $
                        197,178
                        
                        
                        $
                        (70,058
                        )
                        
                        $
                        13,961
                        
                        
                        $
                        261,980Deferred
      tax valuation allowance
                        
                        $
                        2,477,202
                        
                        
                        $
                        689,390
                        
                        
                        $
                        (36,652
                        )
                        
                        $
                        -
                        
                        
                        $
                        3,129,940Inventory
      reserve
                        
                        $
                        497,984
                        
                        
                        $
                        700,709
                        
                        
                        $
                        (316,734
                        )
                        
                        $
                        (136,571
                        )
                        
                        $
                        745,388Year
      ended March 31, 2008Reserves
      deducted from assets to which they apply:Allowance
      for doubtful accounts
                        
                        $
                        61,824
                        
                        
                        $
                        112,390
                        
                        
                        $
                        (53,315
                        )
                        
                        $
                        -
                        
                        
                        $
                        120,899Deferred
      tax valuation allowance
                        
                        $
                        2,671,264
                        
                        
                        $
                        123,910
                        
                        
                        $
                        -
                        
                        
                        $
                        (317,972
                        )
                        
                        $
                        2,477,202Inventory
      reserve
                        
                        $
                        198,848
                        
                        
                        $
                        382,048
                        
                        
                        $
                        -
                        
                        
                        $
                        (82,911
                        )
                        
                        $
                        497,984


F-19