**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
                1934****For
                the fiscal year ended March 31, 2007**£
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




For
      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.
                Employer**incorporation
                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: Common Stock, $.01 Par Value
      Per Share**





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





Indicate
      by check mark whether 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 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, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):





.
      Large
      accelerated filer £ Accelerated filer £ Non-accelerated filer 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
      July 2, 2007, 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 American Stock Exchange of $0.63 was
      approximately $18,826,740 (based on 29,883,714 shares outstanding). 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 2, 2007 was
      29,883,714.





DOCUMENTS
      INCORPORATED BY REFERENCE **- None**





**THE
      SINGING MACHINE COMPANY, INC. AND SUBSIDIARY**





**INDEX
      TO ANNUAL REPORT ON FORM 10-K**





**FOR
      THE FISCAL YEAR ENDED MARCH 31, 2007**


PAGEPART
                  IItem
                  1.
              
              Business
              3Item
                  1A.
              
              Risk
                  Factors
              9Item
                  1B.
              
              Unresolved
                  Staff Comments
              14Item
                  2.
              
              Properties
              14Item
                  3.
              
              Legal
                  Proceedings
              15Item
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders
              15PART
                  IIItem
                  5.
              
              Market
                  for Company's Common Equity and Related Stockholder Matters and
                  Issuer
                  Purchasesof
                  Equity Securities
              16Item
                  6.
              
              Selected
                  Financial Data
              17Item
                  7.
              
              Management's
                  Discussion and Analysis of Financial Condition and Results of Operations
              18Item
                  7A.
              
              Quantitative
                  and Qualitative Disclosures About Market Risk
              24Item
                  8.
              
              Financial
                  Statements and Supplementary Data
              24Item
                  9.
              
              Changes
                  in and Disagreements With Accountants on Accounting and Financial
                  Disclosure
              25Item
                  9A.
              
              Controls
                  and Procedures
              25Item
                  9B.
              
              Other
                  Information
              25PART
                  IIIItem
                  10.
              
              Directors
                  and Executive Officers of the Registrant
              25Item
                  11.
              
              Executive
                  Compensation
              28Item
                  12.
              
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  StockholderMatters
              35Item
                  13.
              
              Certain
                  Relationships and Related Transactions and Director
                  Independence
              37Item
                  14.
              
              Principal
                  Accounting Fees and Services
              38PART
                  IVItem
                  15.
              
              Exhibits,
                  Financial Statement Schedules
              38


**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. 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;




2




·
            
            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
      prospectus.





**PART
      I**





**ITEM
      1. BUSINESS**





**OVERVIEW**





The
      Singing Machine Company, Inc. (“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 also produce
      and market karaoke music, including compact discs plus graphics ("CD+G's"),
      which contain music and lyrics of popular songs for use with karaoke recording
      equipment. We obtain the song licenses from major publishers such as EMI,
      Universal, Sony and Warner and contract for the reproduction of music recordings
      with independent studios.





We
      were
      incorporated in California in 1982. We originally sold our products exclusively
      to professional and semi-professional singers. In 1988, we began marketing
      karaoke equipment for home use. We believe we are the first company to introduce
      the home karaoke products to the United States. In May 1994, we merged into
      a
      wholly-owned subsidiary incorporated in Delaware with the same name. As a result
      of that merger, the Delaware Corporation became the successor to the business
      and operations of the California Corporation and retained the name The Singing
      Machine Company, Inc. In July 1994, we formed a wholly owned subsidiary in
      Hong
      Kong, 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 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
      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 have been listed on the AMEX since March 8, 2001. Our
      common stock currently trades on under the stock symbol "SMD." Our principal
      executive offices are located in Coconut Creek, Florida.





We
      have
      raised approximately $6 million from an equity investment from investors in
      Hong
      Kong from February 2006 to June 2007. The investors include two major suppliers,
      koncept International Limited and Arts Electronics Co., Ltd. The investments
      from the major suppliers underscore their support to the Company.





As
      used
      herein, “Company,” “Singing Machine,” “we,” “us,” and similar terms include The
      Singing Machine Company, International SMC and SMC (Comercial Offshore Do Macau)
      Limitada, unless the context indicates otherwise.




3





**GROWTH
      STRATEGY**





The
      overall objective of the Singing Machine is to create an efficient platform
      for
      the product development, manufacturing, and marketing to bring the latest
      technology to the Karaoke and the youth electronics market. We intend to
      leverage our knowledge, valuable customer base, and strong relationship with
      factories to acquire other consumer electronics companies. We intend to achieve
      this objective by balancing our organic growth and external growth initiatives.





**Organic
      Growth Strategy**




We
      intend
      to pursue various initiatives associated with our organic growth strategy that
      are designed to enhance our market presence, expand our customer base and new
      product development. The key elements of our organic growth strategy include
      the
      following:





*Develop
      and Market the Bratz Licensed Products.* Bratz
      is
      one of most prominent names in the youth female marketplace. We have obtained
      a
      license from MGA entertainment to produce karaoke and youth electronic products
      under the “Bratz” brand name. Currently, our Bratz products are sold at Toy R Us
      stores. We intend to market this product line through various retailers in
      North
      America and Latin America. We expect that the Bratz product line will represent
      10% to 20% of our total revenues in fiscal 2008 and that the profit margin
      from
      Bratz product will be higher than other product lines since the competition
      is
      limited on the licensed products. This will allow our Company to diversify
      our
      product line and reduce our dependency on a single karaoke product.





*Develop
      new features for karaoke equipment.* The
      technology development in the karaoke market has stalled since 2004. We believe
      that in order to revitalize the karaoke market, we need to incorporate new
      technologies into karaoke equipment, such as iPod compatibility with digital
      recording. Our major shareholder and supplier, Starlight International, parent
      of koncept International Limited, has a strong research and development team,
      which is currently working with our team to develop new products. We believe
      the
      development of new products will reinforce our leadership position in the
      karaoke market and regain our market share.





*Focus
      on the key customers.* We
      believe that we have the most selections among the competitors in the karaoke
      market. We will continue to provide the exclusive products for the major
      retailers by understanding that their needs include the specification, target
      price, and service support. We will focus on the product development for
      discounted stores like Wal-Mart and Target, which represent what we believe
      to
      be approximately a $10 million to $15 million market opportunity. We believe
      this is one of the major areas in which we can substantially increase our
      revenues.





*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 (ex. iTune, iPhone, Amazon, etc). Since karaoke music only
      accounts for a small percentage of total music business, the 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 like. While we maintain our physical CD distribution business, we have
      also
      explored the possibility of a music download project with one major download
      company. The customers will be able to download both the music and the lyrics
      directly from the internet and play them on the karaoke products we have
      developed this year.





**External
      Growth Strategy**





While
      our
      historical growth has been solely organic, we intend to pursue a growth strategy
      in the future that contemplates a balanced combination of organic growth and
      external growth. Our external growth strategy will be characterized by strategic
      acquisition of small consumer electronic companies who have growth potential.
      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.





*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 the brokers. In light of these developments,
      product costs have been cut down dramatically, as well as the retail prices.
      We
      believe that the small to medium size companies who primarily depended on a
      constant significant profit margin in the past will not be able to compete
      in
      this business environment in the future. At the same time, the capital funding
      is limited in this mature electronics market. Public and private equity are
      generally difficult to access, especially for those companies with inadequate
      management resources, unproven management teams and unproven market leadership.
      On the other hand, we believe that the factories in China are eager to extend
      their relationship to the major retailers, but they lack the understanding
      of
      the business environment in the United States.





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





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





·
            Our
                efficient business model, which is characterized by a rapid product
                development cycle, low operational costs and high inventory turn
                over;





·
            Strong
                relationship with key factories in China. Two of our major shareholders
                are also major factories in China. This allows us to lower our production
                costs and obtain vendor financing on the purchase;
                and





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




4


*Structure
      of Transaction Contemplated* .
      We
      intend to acquire either the ownership or the assets of the potential
      acquisition targets. Depending on the needs of our potential targets, we
      anticipate using both cash and stock as consideration for these
      acquisitions.





*Acquisition
      Parameters.* We
      intend to acquire companies that have potential for significant growth but
      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 four different product lines which consist 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





**·**
            **Music**which includes a songs library of over 2,500 recordings, which we
                license
                from their publishers. Our library of master recordings covers an
                eclectic
                range of musical tastes including popular hits, golden oldies, country,
                rock and roll, Motown, Christian, Latin, and Rap. SMC offers an exclusive
                line of Original Artist karaoke music under the monikers of “Real Karaoke”
                and “Motown Original Artist Karaoke”. Our music sells at retail prices
                ranging from $6.99 to $19.99.





**·**
            **Bratz
                Licensed Products**which
                includes karaoke products, digital drum sets, clock radios, boom
                boxes,
                TV/DVD combos and portable DVD players. Bratz products will sell
                at retail
                prices ranging from $9.99 to $199.





**·**
            **Musical
                Instruments**which
                includes digital drum sets and keyboards. The retail price will range
                from
                $49 to $299.





**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
      such stores as Best Buy, Wal-Mart, Costco, J.C. Penney, Kohl's, Radio Shack
      and
      Sam's Club.





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





Direct
      Sales. We ship some hardware products sold by us directly to customers from
      China through SMC Macau, our subsidiary. 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
      2007, approximately 60 % of revenues were from direct sales and 40% of revenues
      were domestic sales. Our sales within the US are primarily made by our in-house
      sales team and our independent sales representatives. Our independent sales
      representatives are paid a commission based upon sales 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.





As
      a
      percentage of total revenues, our net sales in the aggregate to our five largest
      customers during the fiscal years ended March 31, 2007, 2006, and 2005, were
      approximately 57%, 55% and 40%, respectively. In fiscal 2007, the top three
      major customers accounted for 49%, 13% and 12% of our net revenues. Although
      we
      have long-established relationships with all of our customers, we do not have
      contractual arrangements with any of them. A decrease in business from any
      of
      our major customers could have a material adverse effect on our results of
      operations and financial condition.





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.




5





Our
      new
      licensing agreement with Bratz for karaoke equipment as well as consumer
      electronics will help us promote our new product lines to the youth electronics
      market. We signed a multi-year licensing agreement with MGA Entertainment to
      produce and distribute a new line of electronic products, in addition to
      karaoke, based on MGA's BRATZTM franchise, one of the world's leading toy lines
      and girls' lifestyle brands. These new products include DVD players, combination
      TV/DVDs, boom boxes, mini radios and sunglass radios.





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 are generally not
      permitted except in approved situations 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.
      Our
      total returns represented 13.4%, 7.4% and 9.4% of our net sales in fiscal 2007,
      2006, and 2005, respectively.





**DISTRIBUTORSHIP
      AGREEMENTS**





In
      September 2005, we signed a one-year exclusive distribution agreement with
      Warner Elektra Atlantic Company (WEA) to distribute our karaoke music products
      in the United States. Our karaoke music products are placed at major mass
      merchants, specialty stores, and music stores through the WEA distribution
      network. The music products are shipped to WEA warehouse on a consignment basis.
      This agreement was extended through August 31, 2007.





**LICENSE
      AGREEMENTS**





In
      February 2003, we entered into a multi-year license agreement with Universal
      Music Entertainment to market a line of Motown Karaoke machines and music.
      This
      agreement and its supplement agreement signed in March 2003, allowed us to
      be
      the first to use original artist recordings for our CD+G formatted karaoke
      music. Over the term of the license agreement, we are obligated to make
      guaranteed minimum royalty payments in the amount of $300,000, which have been
      paid in full as of March 31, 2005. The agreement expired without renewal on
      December 31, 2006 without any additional minimum guarantee payments.





We
      entered into a license agreement with Nickelodeon, Inc., a division of Viacom
      International, Inc. in December 2002. Under this agreement, we licensed
      Nickelodeon branded machines and a wide assortment of music. This license
      originally expired on December 31, 2004. The Company extended the agreement
      to
      December 31, 2006. Over the term of the license agreement, we were obligated
      to
      make guaranteed minimum royalty payments in the amount of $450,000, which have
      been paid in full as of March 31, 2005. The agreement expired without renewal
      on
      December 31, 2006 without any additional minimum guarantee payments.








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**


**FOR
      THE FISCAL YEAR ENDED**


March
      31,


2007
              
              2006
              
              2005MTV
              
              
              8.9%
              
              
              2.1%
              
              
              17.6%Nickelodeon
              
              
              0.0%
              
              
              0.0%
              
              
              0.5%Other
                  Licenses
              
              
              0.0%
              
              
              0.9%
              
              
              2.5%Total
                  Licenses Sales
              
              
              8.9%
              
              
              3.0%
              
              
              20.6%
 6





**DISTRIBUTION**





We
      distribute hardware products to retailers and wholesale distributors through
      two
      methods: shipment of products from inventory held at our warehouse facilities
      in
      Florida and California (domestic sales), 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, 2007, approximately 40% of our sales were sales from our domestic
      warehouses ("Domestic Sales") and 60% were sales shipped directly from China
      ("Direct Sales").





**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 2008, we anticipate
      that 90% of our karaoke products will be produced by one of these factories,
      which has agreed to extend the financing to us. We believe that the
      manufacturing capacity of our factories is adequate to meet the demands for
      our
      products in fiscal year 2008. 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 2008" 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.





We
      have
      obtained copyright licenses from music publishers for all of the songs in our
      music library. We contract with outside studios on a work-for hire basis to
      produce authorings of these songs. We use outside companies to mass-produce
      the
      CD+G's once the masters have been completed.





While
      our
      equipment manufacturers purchase our supplies from a small number of large
      suppliers, all of the electronic components and raw materials used by us are
      available from several sources of supply. While we might depend on limited
      suppliers for some key components the loss of any single supplier would not
      have
      a material long-term adverse effect on our business, operations, or financial
      condition. Similarly, we use a small number of studios to record our music.
      We
      do not anticipate that the loss of any single studio would have a material
      long-term adverse effect on our business, operations or financial condition.
      To
      ensure that our high standards of product quality 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, 2007, 2006, and 2005, 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 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. For Bratz products, our
      competitors are Memorex and Emerson, which also make licensed products for
      youth
      electronics.





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
      United States 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 the past few years, we have also obtained two U.S. patents
      for
      karaoke machines.




7





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.





**GOVERNMENT
      REGULATION**





Our
      karaoke machines must meet the safety standards imposed in various national,
      state, local, and provincial jurisdictions. Our karaoke machines sold in the
      United States are designed, manufactured and tested to meet the safety standards
      of Underwriters Laboratories, Inc. ("ULE") or Electronic Testing Laboratories
      ("ETL"). In Europe and other foreign countries, our products are manufactured
      to
      meet the 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 US
      and
      federal laws pertaining to the sale of our products. Our production and sale
      of
      music products is subject to federal copyright laws.





The
      manufacturing operations of our foreign suppliers in China are subject to
      foreign regulation. China has permanent "normal trade relations" ("NTR") status
      under US tariff laws, which provides a favorable category of US import duties.
      China's NTR status became permanent on January 1, 2002. This substantially
      reduces the possibility of China losing its NTR status, which would result
      in
      increasing costs for us.





**SEASONALITY
      AND SEASONAL FINANCING**





Our
      business is highly seasonal, with consumers making a large percentage of karaoke
      purchases around the traditional holiday season in our second and third quarter.
      These seasonal purchasing patterns and requisite production lead times cause
      risk to our business associated with the underproduction or overproduction
      of
      products that do not match consumer demand. Retailers also attempt to manage
      their inventories more tightly, requiring that we ship products closer to the
      time that retailers expect to sell the products to consumers. These factors
      increase the risk that we may not be able to meet demand for certain products
      at
      peak demand times, or that our own inventory levels may be adversely impacted
      by
      the need to pre-build products before orders are placed. As of March 31, 2007,
      we had inventory of $2.3 million (net of reserves totaling $198,848) compared
      to
      inventory of $1.7 million as of March 31, 2006 (net of reserves totaling $1.1
      million).





Our
      financing of seasonal working capital during fiscal 2007 was from vendor
      financing and factoring the accounts receivables. Our major shareholder,
      Starlight International, is willing and able to provide the financing to the
      Company until March 31, 2008.





During
      fiscal 2008, we plan on financing our inventory purchases by using credit lines
      that have been extended to us by the factories in China and with letters of
      credit that are issued by our customers to be used as collateral for payment
      to
      our vendors.





**BACKLOG**





We
      ship
      our products in accordance with delivery schedules specified by our customers,
      which usually request delivery within three months of the date of the order.
      In
      the consumer electronics industry, orders are subject to cancellation or change
      at any time prior to shipment. In recent years, a trend toward just-in-time
      inventory practices in the consumer electronics industry has resulted in fewer
      advance orders and therefore less backlog of orders for the Company. We believe
      that backlog orders at any given time may not accurately indicate future sales.
      We believe that we will be able to fill all of these orders in fiscal year
      2008.
      However, these orders can be cancelled or modified at any time prior to
      delivery. This backlog does not take into account of any sales ordered by
      customers directly from our domestic inventory with order turnaround time of
      one
      to two weeks. We normally have to keep the minimum inventory in our domestic
      warehouses for this type of sales.




8


**EMPLOYEES**


As
      of
      July 2, 2007 we employed 17 persons, all of whom are full-time employees, with
      the exception of our chief executive officer who divides his time between the
      Company and his legal practice. One of our employees are located at SMC Macau’s
      offices in Hong Kong. The remaining sixteen employees are based in the United
      States, including two executive officers, two engaged in warehousing and
      technical support and twelve 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
      ARE RELYING ON A FACTORING FACILITY TO FINANCE OUR ACCOUNTS RECEIVABLE. THE
      LOSS
      OF THE FACTORING FACILITY MAY CAUSE A PROBLEM TO FULFILL THE CUSTOMER ORDERS
      AND
      THE LOSS OF THE REVENUES.**





The
      factoring facility at Crestmark Bank will expire on August 1, 2007. We are
      currently exploring the possibilities with various banks. However, there is
      no
      assurance that we will obtain a new facility. If we could not obtain the banking
      facility, we may need to borrow a bridge loan or request the factories to extend
      the payment terms. If we fail to do so, we may not be able to fulfill the
      customer orders.





**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 sale has been declining
      since year 2004 and may continue to decline in the future. Music revenue
      accounts for approximately 3% 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 year ended March 31, 2007 and year ended March 31, 2006 were approximately
      57% and 55%, respectively. We do not have long-term contractual arrangements
      with any of our customers and they can cancel their orders at any time prior
      to
      delivery. A substantial reduction in or termination of orders from any of our
      largest customers would decrease our revenues and cash flow.





**WE
      ARE RELYING ON ONE FACTORY TO MANUFACTURE AND PRODUCE THE MAJORITY OF OUR
      KARAOKE MACHINES FOR FISCAL 2008, AND IF THE RELATIONSHIP WITH THIS FACTORY
      IS
      DAMAGED OR INJURED IN ANY WAY, IT WOULD REDUCE OUR REVENUES AND PROFITABILITY.**





We
      have
      worked out a written agreement with a factory in China to produce most of our
      karaoke machines for fiscal 2008. If the factory is unwilling or unable to
      deliver our karaoke machines to us, our business will be adversely affected.
      Because our cash on hand is minimal, we are relying on revenues received from
      the sale of our ordered karaoke machines to provide cash flow for our
      operations. If we do not receive cash from these sales, we may not be able
      to
      continue our business operations.





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





We
      are
      relying on Warner Elektra Atlantic Corporation (WEA) to distribute our music
      products in fiscal 2008, if the distribution agreement is terminated, our music
      revenues might decrease as well as our profitability.





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





In
      fiscal
      2007 and 2006, a number of our customers and distributors returned karaoke
      products that they had purchased from us. Our customers returned goods valued
      at
      $3.8 million or 14% of our net sales in fiscal 2007. Some of the returns
      resulted from customer's overstock of the products. Although we were not
      contractually obligated to accept this return of the products, we accepted
      the
      return of the products because we valued our relationship with our customers.
      Because we are dependent upon a few large customers, we are subject to the
      risk
      that any of these customers may elect to return unsold karaoke products to
      us in
      the future. If any of our customers were to return karaoke products to us,
      it
      would reduce our revenues and profitability.




9





**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, 2007, our sales to customers in the United
      States decreased because of increased price competition. We are also subject
      to
      pressure from our customers regarding certain financial incentives, such as
      return credits or large advertising or cooperative advertising allowances,
      which
      effectively reduce our profit. We gave advertising allowances of approximately
      $200,000 during fiscal 2007 and $200,000 million during fiscal 2006. We have
      historically offered advertising allowances to our customers because it is
      standard practice in the retail industry.





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





Because
      of our reliance on manufacturers in China for our machine production, our
      production lead times range from one to four months. Therefore, we must commit
      to production in advance of customers orders. It is difficult to forecast
      customer demand because we do not have any scientific or quantitative method
      to
      predict this demand. Our forecasting is based on management's general
      expectations about customer demand, the general strength of the retail market
      and management's historical experiences. We overestimated demand for our
      products in fiscal 2003 and 2004 and had $5.9 million in inventory as of March
      31, 2004. Because of this excess inventory, we had liquidity problems in fiscal
      2005 and our revenues, net income and cash flow were adversely affected.





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





Many
      of
      our customers place orders with us several months prior to the holiday season,
      but they schedule delivery two or three weeks before the holiday season begins.
      As such, we are subject to the risks and costs of carrying inventory during
      the
      time period between the placement or the order and the delivery date, which
      reduces our cash flow. As of March 31, 2007 we had $2.3 million in inventory
      on
      hand. It is important that we sell this inventory during fiscal 2008, 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 the
      competition except for fiscal 2005 when we had developed several new models,
      which were in demand and yielded higher profit margins. We expect that our
      gross
      profit margin might decrease under downward pressure in fiscal 2008.





**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 94.0%, 87.5%
      and
      86.7% of net sales in fiscal 2007, 2006 and 2005, 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 2007, 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 2008. 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;




10




·
            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.





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





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





**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 eight 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 2008. 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.




11





**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, or is in the
      process of settling such claims, with each one of the complaining copyright
      owners. 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 pursues licenses so
      diligently.





**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.





**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 2, 2007 we are aware of only three customers, FAO Schwarz,
      Musicland, and KB Toys, which are operating under the protection of bankruptcy
      laws. Deterioration in the financial condition of our customers could result
      in
      bad debt expense to us and have a material adverse effect on our revenues and
      future profitability.





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





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





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





During
      fiscal 2007, approximately 40% of our sales were domestic warehouse sales,
      which
      were made from our warehouses in California and Florida. During the third
      quarter of fiscal 2003, the dock strike on the West Coast affected sales of
      two
      of our karaoke products and we estimate that we lost between $3 and $5 million
      in orders because we 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.




**CURRENCY
      EXCHANGE RATE RISK**





Our
      major
      suppliers are located in China. The Chinese local currency has depreciated
      approximately 5% against the US dollar in 2007. If this trend continues, our
      costs may increase in the future. This may decrease our profit margin.








**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, 2004 through March 31, 2007, our common stock has traded between
      a
      high of $1.60 and a low of $0.21. During this period, we had liquidity problems
      and incurred 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.




12





**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, 2007, investors held a short position of approximately
      32,700 shares of our common stock which represented 0.11% of our public float.
      The anticipated downward pressure on our stock price due to actual or
      anticipated sales of our stock by some institutions or individuals who engage
      in
      short sales of our common stock could cause our stock price to decline.
      Additionally, if our stock price declines, it may be more difficult for us
      to
      raise capital.





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





On
      September 6, 2006, the Company received notice from The American Stock Exchange
      (the "Amex") that the Company has fallen below the continued listing standards
      of the Amex and that its listing is being continued pursuant to an
      extension.





Specifically,
      for the fiscal years ended March 31, 2007 and March 31, 2006, the Company was
      not in compliance with Section 1003(a)(ii) of the Amex Company Guide with
      shareholders' equity of less than $4,000,000 and net losses in three of its
      four
      most recent fiscal years.





The
      Company was previously added to the list of issuers that are not in compliance
      with the Amex's continued listing standards, and the Company's trading symbol
      SMD remains subject to the extension .BC to denote its noncompliance. This
      indicator will remain in effect until such time as the Company has regained
      compliance with all applicable continued listing standards.





If
      our
      common stock is removed from listing on Amex, it may become more difficult
      for
      us to raise funds through the sales of our common stock or
      securities.





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





As
      of
      March 31, 2007, there were outstanding stock options to purchase an aggregate
      of
      1,382,890 shares of common stock at exercise prices ranging from $.32 to $11.09
      per share, not all of which are immediately exercisable. The weighted average
      exercise price of the outstanding stock options is approximately $1.26 per
      share. As of March 31, 2007, there were outstanding and immediately exercisable
      options to purchase an aggregate of 582,307 shares of our common stock. There
      were outstanding stock warrants to purchase 5,000,000 shares of common stock
      at
      exercise prices ranging from $.233 to $.35 per share, all of which are
      exercisable. The weighted average exercise price of the outstanding stock
      warrants is approximately $0.274 per share.





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





As
      of
      July 2, 2007 there were 29,883,714 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 authorizes the issuance of 100,000,000 shares
      of
      common stock as amended in January 2006. As of July 2, 2007 we had 29,883,714
      shares of common stock issued and outstanding and an aggregate of 3,882,890
      shares issuable under our outstanding options and warrants. As such, our Board
      of Directors has the power, without stockholder approval, to issue up to
      66,234,911 shares of common stock.





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





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





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




13





**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 may 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 may identify weaknesses and
      conditions that need to be addressed in our internal controls over financial
      reporting or other matters that may raise concerns for investors. 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. Management will have to assess internal
      controls in accordance with Section 404 of the Sarbanes-Oxley Act for the fiscal
      year ending March 31, 2008.





**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:




·


·          
      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 in a 7,000 square
      feet office and warehouse facility. The lease expires on April 30, 2008. The
      annual rental expense is $99,640.





We
      have
      one warehouse facility in Compton California. The Compton warehouse facility
      has
      79,000 square feet and the lease expires on February 23, 2008. We have subleased
      approximately 40,000 square feet. The annual rental expense is $580,920 and
      our
      sublease income is approximately $400,000 per year.





We
      have a
      1,500 square foot office space in Macau. The lease expires on October 31, 2008.
      The annual rent expense is $32,991.





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.




14





**ITEM
      3. LEGAL PROCEEDINGS**





**LEGAL
      MATTERS**





**SYBERSOUND
      RECORDS, INC., D/B/A PARTY TYME KARAOKE V. UAV CORPORATION, D/B/A KARAOKE BAY
      AND D/B/A STERLING ENTERTAINMENT; MADACY ENTERTAINMENT GROUP, LTD.; AUDIO
      STREAM, INC. D/B/A KEYNOTE KARAOKE; TOP TUNES, INC.; SINGING MACHINE COMPANY;
      COMPASS PRODUCTIONS, INC.; BCI ECLIPSE LLC; AND DOES 1 THROUGH 50 INCLUSIVE.
      (SUPERIOR COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF LOS ANGELES, WEST
      DISTRICT, CASE NO. SC 085498)**





On
      May
      12, 2005, Sybersound Records, Inc., a U.S. karaoke product distributor, filed
      a
      suit in Los Angeles Superior Court against virtually every one of its
      competitors (including Singing Machine), seeking actual and punitive damages
      arising from alleged unfair business practices, unfair competition, and wrongful
      interference with business relationships. The defendants in the case (including
      Singing Machine), all of whom cooperated in vigorously defending themselves
      from
      what they considered to be baseless charges, filed various motions in the case
      seeking dismissal on Constitutional and other grounds. Sybersound thereafter
      moved to dismiss the state court action, a motion which the court granted,
      and
      filed a new action against many of the same defendants, including The Singing
      Machine Company, Inc., in federal court on August 11, 2005 (described
      below).





**SYBERSOUND
      RECORDS, INC. V. UAV CORPORATION; MADACY ENTERTAINMENT L.P., AUDIO STREAM,
      INC.,
      TOP TUNES, INC., SINGING MACHINE, INC., BCI ECLIPSE COMPANY, LLC, AMOS ALTER,
      DAVID ALTER, EDWARD GOETZ, DENNIS NORDEN, FRANK ROBERTSON, DOUGLAS VOGT AND
      RICHARD VOGT (UNITED STATES DISTRICT COURT FOR THE CENTRAL DISTRICT OF
      CALIFORNIA, CV05-5861 JFW); (UNITED STATES COURT OF APPEALS FOR THE NINTH
      CIRCUIT (USCA DOCKET NO. 06-55221)**





The
      new
      federal court action filed on August 11, 2005 alleged violation the Copyright
      Act and the Lanham Act by the defendants, and claims for unfair competition
      under California law. Sybersound was joined in the complaint by several
      publisher owners of musical compositions who alleged copyright infringement
      against all the defendants *except* The
      Singing Machine Company, Inc. On November 7, 2005, the district court ordered
      the publisher plaintiffs’ copyright claims severed from the case. The Singing
      Machine Company, Inc. is not a party to the severed cases.





In
      September, 2005, the defendants, including The Singing Machine Company, Inc.,
      filed multiple motions to dismiss the original complaint. In October 2005,
      Sybersound filed a motion for summary judgment, as well. On January 6, 2006,
      the
      court granted the motions of the defendants and denied the plaintiff’s motion,
      dismissing the case against the defendants, including The Singing Machine
      Company, Inc., with prejudice. Plaintiff Sybersound thereafter appealed the
      decision to the Ninth Circuit Court of Appeals. The case is currently under
      review by the appellate court.





Despite
      the confidence of The Singing Machine Company, Inc. that the ruling in its
      favor
      at the district court level will be affirmed on appeal, it is not possible
      to
      predict such outcomes with any degree of certainty.





**OTHER
      MATTERS**





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





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





We
      held
      our Annual Meeting of Stockholders on Friday, January 12, 2007 at 2:00 p.m
      EST
      at the Company’s executive offices. There were present in person or by proxy
      21,909,111 shares of Common Stock, of a total of 25,274,883 shares of Common
      Stock entitled to vote. At the Annual Meeting, our stockholders voted in favor
      of the following proposals:





1.
      The
      number of shares voted in favor of the election of the following nominees for
      director is set forth opposite each nominee's name:




Nominee
              
              Number
                  of SharesBernard
                  Appel
              
              
              21,904,899Josef
                  Bauer
              
              
              21,898,899Harvey
                  Judkowitz
              
              
              21,837,830Stewart
                  Merkin
              
              
              21,837,830Peter
                  Hon
              
              
              21,881,899Carol
                  Lau
              
              
              21,881,899Yat
                  Tung Lau
              
              
              21,881,899





2.
      21,578,030 shares were voted in favor of the appointment of Berkovits, Lago,
      & Company LLP as the Company’s independent auditors for the fiscal year
      ended March 31, 2007.





15




**PART
      II**





**ITEM
      5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
      STOCKHOLDER MATTERS****AND ISSUER PURCHASES OF EQUITY
      SECURITIES**





Our
      common stock currently trades on the American Stock Exchange under the symbol
      "SMD." Set forth below is the range of high and low information for our common
      stock as traded on the American Stock Exchange during fiscal 2007 and fiscal
      2006. This information regarding trading on AMEX represents prices between
      dealers and does not reflect retail mark-up or markdown or commissions, and
      may
      not necessarily represent actual market transactions.


FISCAL
                  PERIOD
              
              HIGH
              
              LOW2007:First
                  quarter (April 1 - June 30, 2006)
              
              $
              0.40
              
              $
              0.23Second
                  quarter (July 1 - September 30, 2006)
              
              
              0.55
              
              
              0.25Third
                  quarter (October 1 - December 31, 2006)
              
              
              0.79
              
              
              0.24Fourth
                  quarter (January 1 - March 31, 2007)
              
              
              1.60
              
              
              0.702006:First
                  quarter (April 1 - June 30, 2005)
              
              $
              0.80
              
              $
              0.55Second
                  quarter (July 1 - September 30, 2005)
              
              
              0.67
              
              
              0.39Third
                  quarter (October 1 - December 31, 2005)
              
              
              0.50
              
              
              0.22Fourth
                  quarter (January 1 - March 31, 2006)
              
              
              0.47
              
              
              0.23




As
      of
      July 2, 2007, there were approximately 337 record holders of our outstanding
      common stock. Because brokers and other institutions hold many of the shares
      on
      behalf of shareholders, we are unable to determine the actual number of
      shareholders represented by these record holders.





**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, 2007:


WEIGHTED-AVERAGE
              
              NUMBER
                  OF SECURITIES
                REMAININGNUMBER
                  OF SECURITIES
              
              EXERCISE
                  PRICE OF
              
              AVAILABLE
                  FOR EQUITYTO
                  BE ISSUED UPON
              
              OUTSTANDING
              
              COMPENSATION
                  PLANSEXERCISE
                  OF OUTSTANDINGS
              
              OPTIONS,
                  WARRANTS
              
              (EXCLUDING
                  SECURITIES INPLAN
                  CATEGORY
              
              OPTION,
                  WARRANTS AND RIGHTS
              
              AND
                  RIGHTS
              
              COLUMN
                  (A))Equity
                  Compensation Plans approved by Security
                  Holders
              
              
              1,382,890
              
              $
              1.86
              
              
              625,160Equity
                  Compensation Plans Not approved
                  by Security Holders
              
              
              0
              
              $
              0
              
              
              0





**RECENT
      SALES OF UNREGISTERED SECURITIES**





During
      the fiscal year ended March 31, 2007 and 2006, the Company issued 17,225,917
      and
      290,689 shares of its common stock.





During
      the twelve months ended March 31, 2007, the Company issued 285,000 shares of
      common stock to various employees, as well as directors, at prices ranging
      from
      $.32 per share to $.60 per share according to employee stock option
      agreements.





On
      March
      26, 2007, the Company issued 526,316 shares of common stock to Arts Electronics,
      LTD for $500,000 ($.95 per share).





On
      March
      26, 2007, the Company issued 720,000 shares of common stock to Gentle Boss
      Investments LTD to for $600,000 ($.833 per share).




16





On
      March
      26, 2007, the Company issued 480,000 shares of common stock to Timemate
      Industries Limited for $400,000 ($.833 per share).





On
      October 3, 2006, the Company issued 1,380,000 shares of common stock to Gentle
      Boss Investments LTD. for $600,300 ($.435 per share).





On
      October 3, 2006, the Company issued 920,000 shares of common stock to Timemate
      Industries Limited for $400,200 ($.435 per share).





On
      September 27, 2006, the Company issued 39,065 shares of common stock to members
      of the Board of Directors for services provided to the Company for fiscal year
      2006, valued at $12,501, which is included in the selling, general, and
      administrative expenses for the nine months ended December 31,
      2006.





On
      June
      25, 2006, the Company issued 12,875,536 shares of common stock to koncepts
      International Limited for a $3 million investment ($.233 per
      share).





On
      November 1, 2005, the Company issued 12,911 shares of common stock to members
      of
      the Board of Directors for services provided to the Company for fiscal year
      2005, valued at $9,167.





On
      May 1,
      2005, the Company has authorized the issuance of 277,778 shares of common stock
      for the conversion of a $200,000 related party loan.





We
      issued
      Warrants to purchase (i) 2,500,000 shares of our common stock at an exercise
      price of $.233 per share for one year from the date of issuance, (ii) 1,250,000
      shares of our common stock at an exercise price of $.28 per share for three
      years from the date of issuance, and (iii) 1,250,000 shares of our common stock
      at an exercise price of $.35 per share for four years from the date of issuance.
      The Warrants are subject to adjustment upon the occurrence of specific events,
      including stock dividends, stock splits, combinations or reclassifications
      of
      our common stock or distributions of cash or other assets. Under the terms
      of
      the Warrants, in no event shall the Purchaser become the beneficial owner of
      more than 19.99% of the number of shares of common stock outstanding immediately
      after giving effect to such issuance. On April 10, 2007, 2,500,000 options
      were
      exercised at $.233 per share.





*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 of 1933, as amended
      (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.





**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, 2007, 2006, and 2005 and the
      balance sheet data at March 31, 2007 and 2006 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, 2004 and 2003 and
      the
      balance sheet data at March 31, 2005, 2004 and 2003 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.




17




**2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003****Statement
                  of Operations:**Net
                  Sales
              
              $
              26,732,144
              
              $
              32,305,560
              
              $
              38,209,825
              
              $
              70,541,128
              
              $
              95,613,766Income
                  (loss) before income taxes
              
              
              ($1,714,988
              )
              
              ($1,905,250
              )
              
              ($3,591,975
              )
              
              ($21,924,919
              )
              $
              1,416,584Income
                  tax benefit (expense)
              
              $
              2,453,576
              
              $
              0
              
              $
              0
              
              
              ($758,505
              )
              
              ($198,772
              )Net
                  income (loss)
              
              $
              738,588
              
              
              ($1,905,250
              )
              
              ($3,591,975
              )
              
              ($22,683,424
              )
              $
              1,217,813**Balance
                  Sheet:**Working
                  capital
              
              $
              2,394,796
              
              
              ($4,274,100
              )
              
              ($3,378,528
              )
              
              ($1,382,939
              )
              $
              15,281,023Current
                  ratio
              
              
              186.75
              %
              
              0.48
              %
              
              65
              %
              
              90
              %
              
              172
              %Property,
                  plant and equipment, net
              
              $
              446,510
              
              $
              513,615
              
              $
              1,038,843
              
              $
              983,980
              
              $
              1,096,424Total
                  assets
              
              $
              5,657,800
              
              $
              4,524,267
              
              $
              7,668,808
              
              $
              15,417,395
              
              $
              38,935,294Shareholders'
                  equity
              
              $
              2,897,359
              
              
              ($3,661,798
              )
              
              ($1,985,023
              )
              $
              216,814
              
              $
              17,685,364**Per
                  Share Data:**Income
                  (loss) per common share – basic
              
              $
              0.03
              
              
              ($0.19
              )
              
              ($0.39
              )
              
              ($2.65
              )
              $
              0.15Income
                  (loss) per common share – diluted
              
              $
              0.03
              
              
              ($0.19
              )
              
              ($0.39
              )
              
              ($2.65
              )
              $
              0.14Cash
                  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 including, among others, 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.





**OVERVIEW**





Our
      primary objectives for fiscal 2007 were to:





·
            restructure
                our Hong Kong operation and spin off the Hong Kong
                subsidiary;





·
            raise
                additional capital;





·
            establish
                the Macau operation;





·
            continue
                to drive down the operating costs;





·
            expand
                our business into other product categories.





We
      believe that the plans were well executed and we have achieved our primary
      goals. We have sold our former Hong Kong Subsidiary along with the potential
      tax
      liability of approximately $2.4 million. The monthly operation cost in Asia
      has
      been reduced by 50% by outsourcing the engineering and shipping services to
      Starlight International, the parent of our majority shareholder. Our gross
      profit margin increased by 1% in fiscal 2007 compared to prior year and our
      general and administrative expenses decreased to $4.9 million in fiscal 2007
      from $6.1 million in fiscal 2006, a decrease of $1.2 million or 19% compared
      to
      prior year. The decrease of fixed operating expenses was primarily due to the
      improvement of the employees’ productivity and the reduction of major expenses
      in various categories. Even though our revenues have decreased from $32,305,560
      to $26,732,144, a decrease of $5,573,416 or 17%, our loss from operations
      decreased from $2,159,422 to $1,701,661, a decrease of $457,761 or 21%. Our
      net
      income for fiscal 2007 is $738,588 as compared with a loss of $1,905,250 in
      fiscal 2006. We have entered into two licensing agreements with MGA
      Entertainment to produce the karaoke and youth electronics products under the
      Bratz license and have developed over 20 models. The additional revenues from
      Bratz products in fiscal 2008 are estimated at 10% to 20% of total revenues
      in
      fiscal 2008.




18


**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:


**2007**
              
              **2006**
              
              **2005**Total
                  Revenues
              
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %Cost
                  of Sales
              
              
              77.1
              %
              
              78.1
              %
              
              75.8
              %Operating
                  expenses
              
              
              29.2
              %
              
              28.6
              %
              
              28.5
              %Operating
                  (loss) income
              
              
              -6.4
              %
              
              -6.7
              %
              
              -4.2
              %Other
                  (expenses), income, net
              
              
              -0.05
              %
              
              0.1
              %
              
              -5.2
              %Loss
                  before taxes
              
              
              -6.4
              %
              
              -5.9
              %
              
              -9.4
              %Provision
                  (benefit) for income taxes
              
              
              9.2
              %
              
              0.0
              %
              
              0.0
              %Net
                  Income (loss)
              
              
              2.8
              %
              
              -5.9
              %
              
              -9.4
              %


**FISCAL
      YEAR ENDED MARCH 31, 2007 COMPARED WITH FISCAL YEAR ENDED MARCH 31,
      2006**





**NET
      SALES**





Net
      sales
      for the fiscal year ended March 31, 2007 were approximately $26.7 million,
      a
      decrease of approximately $5.6 million from approximately $32.3 million for
      fiscal 2006. The decrease in net sales was a result of both decreases in unit
      volume as well as pricing. The decrease in sales is primarily attributed to
      the
      following:





·
            We
                lost a $2.7 million order from a major specialty store in the United
                States because the customer decided not to carry karaoke products.
                Also,
                one of our European customers had carried over inventory from fiscal
                2006
                and therefore they lowered their fiscal 2007 purchases by $3
                million.





·
            We
                did not complete the investment transaction with koncept International
                until June 2006. Most of major retailers had decided their buying
                plan
                before June. Our financial constraints affect our ability to compete
                for
                the major accounts.





·
            The
                decrease of karaoke Compact Disc (CD) sales. We had higher than usual
                returns of karaoke CD’s in our quarter ended March 31, 2007. As a result,
                our music sales decreased by approximately $700,000 to approximately
                $1
                million for fiscal 2007. The music industry has been experiencing
                a
                continuing decline in CD sales; while the music download business
                has
                increased dramatically. We have explored the possibilities with various
                download companies to sell our music and lyrics on line in fiscal
                2008.





In
      fiscal
      year 2007, 60% of our sales were direct sales, which represent sales made by
      International SMC and SMC Macau, and 40% were domestic sales, which represents
      sales made from our warehouses in the United States.





The
      sales
      decrease occurred in all segments of our business. Our total hardware sales
      decreased to approximately $25.7 million in fiscal 2007 compared to total
      hardware sales of approximately $30.9 million in fiscal 2006.





Music
      sales decreased to approximately $1 million, or 3.7% of net sales, in fiscal
      2007, compared to approximately $1.4 million, or 5% of net sales, in fiscal
      2006. The decrease in music sales was a result of a sharp decline in overall
      CD
      sales as experienced by other major companies in the music
      industry.





**GROSS
      PROFIT**





Gross
      profit for fiscal 2007 was approximately $6.1 million or 22.9% of total revenues
      compared to approximately $7.1 million or 21.9% of sales for fiscal 2006. The
      increase in gross margin, compared to the prior year, was primarily due to
      a
      better pricing model for hardware and the loss of the low margin customers.
      The
      increase of the hardware profit margin was partly offset by the decrease of
      the
      music profit margin. Music sales yield higher profit margin than our other
      products.





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





**OPERATING
      EXPENSES**





Operating
      expenses, including depreciation and amortization, for the fiscal year ended
      March 31, 2007 decreased from approximately $9.2 million to approximately $7.8
      million, a decrease of approximately $1.4 million or 15.4% compared to the
      same
      period last year. The decrease in operating expenses consists of approximately
      $100,000 increase in selling expenses, which include advertising, commission,
      freight and royalty expenses, and an approximately $1.2 million decrease in
      general and administration expenses. The increase of selling expenses was
      primarily due to the increase of freight expenses of approximately $200,000.
      The
      decrease of the general and administrative expenses was primarily due to
      reductions in warehouse expenses, compensation expenses and the bad debt
      expense.





**DEPRECIATION
      AND AMORTIZATION**





Our
      depreciation and amortization expenses were $556,051 for fiscal 2007 compared
      to
      $688,951 for fiscal 2006. This decrease in depreciation and amortization
      expenses can be attributed to the fact that we produced fewer models with higher
      volume per model, which increased the economies of scale for our product lines.
      In addition, the Company did not amortize any loan costs for the fiscal year
      ended March 31, 2007.




19





**NET
      OTHER INCOME (EXPENSES)**





Net
      other
      expense was $13,327 in fiscal 2007 compared to net other income of $254,172
      in
      fiscal 2006. In fiscal 2006, we recognized a one time gain of approximately
      $2.2
      million from the restructuring of approximately $4 million convertible debts
      and
      we also incurred approximately $1.6 million amortization of discount on
      convertible debentures. In addition, we incurred approximately $487,000 in
      interest expense in fiscal 2006. Our interest expense was approximately $42,000
      for fiscal 2007.





**INCOME
      BEFORE TAXES**





We
      had a
      net loss before taxes of $1,714,988 in fiscal 2007 compared to a net loss before
      taxes of $1,905,250 in fiscal 2006. The decrease of the loss was primarily
      due
      to the decrease of the operating expenses.





**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, 2007 and 2006, we had gross
      deferred tax assets of approximately  $
      2.7
      million and
      approximately $6.4 million, against which we recorded valuation allowances
      totaling approximately  $
      2.7
      million and
      approximately $6.4, respectively.





For
      the
      fiscal years ended March 31, 2007 and March 31, 2006, we did not record any
      income tax expense. This occurred because the Company had taxable losses for
      the
      US operations and the Macau subsidiary is exempt from income tax according
      to
      the Macau Offshore Company (MOC) regulations.





The
      Company's former wholly-owned subsidiary, International SMC (HK) Limited had
      applied for an exemption of income tax in Hong Kong. Therefore, no taxes had
      been expensed or provided for at International SMC (HK) Limited. Although no
      decision has been reached by the governing body, the parent company had reached
      the decision to provide for the possibility that the exemption could be denied
      and accordingly had recorded a provision of $2,453,576 in the consolidated
      financial statements for Hong Kong taxes in fiscal 2003, 2002 and 2001.





As
      a
      result of restructuring its operations in China, the Company established a
      wholly owned Macau subsidiary to conduct its operations in China. In August
      2006, the Company engaged the parent of its major shareholder in Hong Kong,
      Starlight International, to provide engineering and shipping services. In
      September 2006, the Company sold its wholly owned Hong Kong subsidiary,
      International SMC (HK) Limited (“ISMC”) to See Bright Investments Limited.




As
      a
      consequence of the ISMC divestiture, and based on the opinion of the Hong Kong
      tax counsel, as well as “hold harmless” representations from the present
      shareholders of ISMC, the Company reversed the previously recorded provision
      of
      Hong Kong tax of approximately $2,453,000 in the quarter ended December 31,
      2006. Such reversal has been presented in the income tax section of the
      accompanying Consolidated Statements of Operations.





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 income of approximately $738,588 in fiscal
      2007 compared to a net loss of approximately $1.9 million in fiscal 2006. Our
      decrease in net loss is primarily attributable to a one time tax reversal of
      approximately $2.5 million.








**FISCAL
      YEAR ENDED MARCH 31, 2006 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2005**


**NET
      SALES**





One
      of
      our primary goals in fiscal 2006 was to stabilize the revenues. Net sales for
      the fiscal year ended March 31, 2006 was approximately $32.3 million, a decrease
      of approximately $5.9 million from approximately $38.2 million for fiscal 2005.
      The decrease in net sales was a result of both decreases in unit volume as
      well
      as pricing. The decrease in sales is primarily attributed to:





·
            Customers
                concerned of our financial
                liquidity;





·
            Most
                of the overstock inventory from prior years has been sold at a very
                lower
                price in fiscal 2004 and fiscal 2005, which generated the higher
                revenues.
                There were only approximately $2 million of old inventory carried
                over to
                fiscal 2006;





·
            Increase
                of price competition in the United States and international
                market.




20




In
      fiscal
      year 2006, 67% of our sales were direct sales, which represent sales made by
      International SMC, and 33% were domestic sales, which represents sales made
      from
      our warehouse in the United States.





The
      sales
      decrease occurred in all segments of our business. Our total hardware sales
      decreased to approximately $30.9 million, in fiscal 2006 compared to total
      hardware sales of approximately $35.9 million in fiscal 2005.





Music
      sales decreased to approximately $1.4 million, or 5% of net sales, in fiscal
      2006, compared to approximately $2.3 million, or 6% of net sales, in fiscal
      2005. The decrease in music sales was a result of increased competition in
      this
      category.





**GROSS
      PROFIT**





Gross
      profit for fiscal 2006 was approximately $7.1 million or 21.9% of total revenues
      compared to approximately $9.3 million or 24.2% of sales for fiscal 2005. The
      decrease in gross margin, compared to the prior year, was primarily due to
      increased price competition and the increase of factory labor and raw material
      cost. The decrease of music sales also had negative effect on the gross margin
      since music sales yield higher profit margin than our other products.





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





**OPERATING
      EXPENSES**





Operating
      expenses for the fiscal year ended March 31, 2006 decreased from approximately
      $10.9 million in fiscal year 2005 to approximately $9.2 million, a decrease
      of
      approximately $1.7 million or 15.1% compared to the same period last year.
      The
      decrease in operating expenses consists of a $1.4 million decrease in variable
      expenses (Advertising, Commission, Freight and Royalty expenses) and a $300,000
      decrease in fixed expenses (compensation and general and administration
      expenses). The variable expenses were decreased proportionally as revenues
      decreased. The fixed expense decrease of approximately $300,000 was primarily
      due to reductions in warehouse expenses and compensation expenses, which were
      partially off set by an increase of bad debts expense.





**DEPRECIATION
      AND AMORTIZATION**





Our
      depreciation and amortization expenses were $688,951 for fiscal 2006 compared
      to
      $709,291 for fiscal 2005. This decrease in depreciation and amortization
      expenses can be attributed to the fact that we produced fewer models with higher
      volume per model, which increased the economies of scale for our product
      lines.





**NET
      OTHER INCOME (EXPENSES)**





Net
      other
      income was $254,172 in fiscal 2006 compared to net other expenses of $1,971,740
      in fiscal 2005. The decrease in net other expenses in fiscal 2006 was because
      we
      recognized approximately $2.2 million on a one time gain from the restructuring
      of approximately $4 million convertible debts and the decrease of interest
      expense of $62,199.





**INCOME
      BEFORE TAXES**





We
      had a
      net loss before taxes of $1,905,250 in fiscal 2006 compared to a net loss before
      taxes of $3,591,975 in fiscal 2005. The decreased net loss was primarily due
      to
      approximately $2.2 million gain from debt restructuring.





**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, 2006 and 2005, we had gross
      deferred tax assets of approximately  $6.4
      million and
      approximately $10.4 million, against which we recorded valuation allowances
      totaling approximately  $6.4
      million and
      approximately $10.4, respectively.





For
      the
      fiscal year ended March 31, 2006, we did not record income tax expense. This
      occurred because the Company had taxable losses for both US operations and
      Hong
      Kong operations.





Our
      subsidiary has applied for an exemption of income tax in Hong Kong. Although
      no
      decision has been reached by the governing body, the parent Company had decided
      to provide for the possibility that the exemption could be denied and
      accordingly has recorded a provision for Hong Kong taxes in fiscal 2003 and
      2002. There was no provision for Hong Kong income taxes in fiscal 2006 and
      fiscal 2005 due to the subsidiary's taxable loss. Hong Kong income taxes payable
      totaled approximately $2.4 million at March 31, 2006 and 2005 and is included
      in
      the accompanying balance sheets as income taxes payable.




21





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





**NET
      LOSS/NET INCOME**





As
      a
      result of the foregoing, we had a net loss of approximately $1.9 million in
      fiscal 2006 compared to a net loss of approximately $3.6 million in fiscal
      2005.
      Our decrease in net loss is primarily attributable to $2.2 million one time
      gain
      from the restructuring of the $4 million convertible debentures.





**LIQUIDITY
      AND CAPITAL RESOURCES**





On
      March
      31, 2007, we had cash on hand of approximately $1.2 million compared to cash
      on
      hand of approximately $400,000 and restricted cash of approximately $300,000
      on
      March 31, 2006. The increase of cash on hand was primarily due to the
      approximately $3.1 million equity investments we received from investors in
      fiscal year 2007.





Cash
      used
      by operating activities was approximately $2.1 million for the twelve months
      ended March 31, 2007. This was primarily due to a loss from operations of
      approximately $1.7 million, payments to vendors for the old debt of
      approximately $160,000 and the settlement of customer credit balances of
      approximately $400,000.





Cash
      used
      in investing activities for the twelve months ended March 31, 2007 was
      approximately $200,000. Cash used in investing activities was for the purchase
      of tooling and molds in the amount of $500,000, offset by the release of the
      restricted cash of $300,000 from a bank in Hong Kong.





Cash
      provided by financing activities was approximately $3.1 million for the fiscal
      year ended March 31, 2007, which was due to additional equity investments of
      approximately $3.1 million.





As
      of
      March 31, 2007, our working capital was approximately $2.4 million. Our current
      liabilities of approximately $2.8 million include:





·
            Customer
                credit on account of approximately $600,000 - the amount will be
                offset by
                future purchases or refund.





·
            Subordinate
                debt of approximately $225,000 - this amount is payable on
                demand





·
            Current
                liabilities resulting from normal course of the business of approximately
                $1.9 million.





As
      of
      July 2, 2007, our cash on hand is approximately $800,000. Our average monthly
      operating expenses are approximately $300,000 and we need approximately $0.9
      million to cover our operating expenses during the next three month period.
      Our
      primary expenses are normal operating costs including salaries, lease payments
      for our warehouse space in Compton, California and other operating costs.





As
      of
      March 31, 2007, our commitments for debt and other contractual arrangements
      are
      summarized as follows:


Total
              
              Less
                  than 1 year
              
              1
                  -
                  3 years
              
              3
                  -
                  5 years
              
              Over
                  5 yearsProperty
                  Leases
              
              $
              656,533
              
              $
              626,408
              
              $
              30,125
              
              $
              -
              
              $
              -Equipment
                  Leases
              
              
              34,816
              
              
              9,888
              
              
              24,928
              
              
              -
              
              
              -Subordinated
                  Debt - Related Party
              
              
              225,000
              
              
              -
              
              
              -
              
              
              225,000
              
              
              -Licensing
                  Agreement
              
              
              470,000
              
              
              242,500
              
              
              227,500
              
              
              -
              
              
              -Interest
                  Payments
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
              
              $
              1,386,349
              
              $
              878,796
              
              $
              282,553
              
              $
              225,000
              
              $
              -





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





**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 investments to expand
      its
      business and to meet AMEX listing requirements. We expect to raise $1 million
      to
      $2 million additional capital in fiscal 2008.




2)
      Vendor
      financing - 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 accounted for more than 60% of the total revenues.




3)
      Factoring of accounts receivable - The Company would factor its accounts
      receivable for sales originated in the United States. We are currently exploring
      the possibilities with various banks. We might need a higher credit facility
      to
      meet the cash requirements during the shipping season.




22




4)
      Inventory financing - The Company expects to purchase more inventory for
      shipping to the United States this year in anticipation of the sales increase
      generated by the Bratz product line. Our inventory level may be higher compared
      with fiscal 2007. We plan to obtain an asset-based lending facility to cover
      the
      cash requirements of the inventory




5)
      Cost
      reduction - The Company has reduced significant operating expenses in recent
      years. The cost reduction initiatives are part of our intensive effort to
      achieve a successful turn-around restructuring. The Company plans to continue
      its cost cutting efforts in fiscal 2008.




6)
      Bridge
      Loan - We may be able to raise additional short term bridge loan from the parent
      of our majority shareholder ,Starlight International, who is also one of our
      suppliers.





Our
      sources of cash for working capital in the long term are the same as our sources
      during the short term. If we need additional financing, we intend to approach
      different financing companies or insiders. However, we cannot guarantee that
      our
      financing plan will succeed. If we need to obtain additional financing and
      fail
      to do so, it may have a material adverse effect on our ability to meet our
      financial obligations and continue our operations.





During
      fiscal 2008, we will strive to reduce additional operating costs. In order
      to
      reduce the need to maintain inventory in our warehouses in California and
      Florida, 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.





**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 $8.05 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 94.0%, 87.5 % and 86.7%
      of
      net sales in fiscal 2007, 2006, and 2005.





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.




23





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





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





**INCOME
      TAXES.** Significant management judgment is required in developing our provision for
      income taxes, including the determination of foreign tax liabilities, deferred
      tax assets and liabilities and any valuation allowances that might be required
      against the deferred tax assets. Management evaluates its ability to realize
      its
      deferred tax assets on a quarterly basis and adjusts its valuation allowance
      when it believes that it is more likely than not that the asset will not be
      realized.





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
      1" to the attached financial statements.





**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





Market
      risk represents the risk of loss that may impact our financial position, results
      of operations or cash flows due to adverse changes in financial and commodity
      market prices and interest rates. We are exposed to market risk in the areas
      of
      changes in United States and international borrowing rates and changes in
      foreign currency exchange rates. In addition, we are exposed to market risk
      in
      certain geographic areas that have experienced or remain vulnerable to an
      economic downturn, such as China. We purchase substantially all our inventory
      from companies in China, and, therefore, we are subject to the risk that such
      suppliers will be unable to provide inventory at competitive prices. While
      we
      believe that, if such an event were to occur we would be able to find
      alternative sources of inventory at competitive prices, we cannot assure you
      that we would be able to do so. These exposures are directly related to our
      normal operating and funding activities. Historically and as of March 31, 2007,
      we have not used derivative instruments or engaged in hedging activities to
      minimize market risk.





**INTEREST
      RATE RISK**




As
      of
      March 31, 2007, our exposure to market risk resulting from changes in interest
      rates is immaterial.





**FOREIGN
      CURRENCY RISK**





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





**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**





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




24





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





N/A





**ITEM
      9A.****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,
      under the supervision and with the participation of our interim chief executive
      officer and 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 chief financial
      officer concluded that our disclosure controls and procedures are effective
      to
      ensure that information required to be disclosed by us in the reports that
      we
      file or submit under the Exchange Act is recorded, processed, summarized and
      reported, within the time periods specified in the Commission's rules and forms.





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) ***Changes
      in Internal Controls***





There
      was
      no change in our internal controls or in other factors that could affect these
      controls during our last fiscal quarter that has materially affected, or is
      reasonably likely to materially affect, our internal control over financial
      reporting.





**ITEM
      9B. OTHER INFORMATION**





None.


**PART
      III**





**ITEM
      10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**





The
      following table sets forth certain information with respect to our executive
      officers, directors and significant employees as of March 31, 2007.


**Name**
                
                **Age**
                
                **Position**Anton
                    H. Handal *
                
                52
                
                Chief
                    Executive OfficerDanny
                    Zheng *
                
                37
                
                Chief
                    Financial OfficerAlicia
                    Haskamp
                
                59
                
                Senior
                    Vice President of Sales and Product DevelopmentCarol
                    Lau
                
                58
                
                ChairwomanJosef
                    A. Bauer
                
                68
                
                DirectorHarvey
                    Judkowitz
                
                62
                
                DirectorBernard
                    Appel
                
                75
                
                DirectorStewart
                    A. Merkin
                
                64
                
                DirectorPeter
                    Hon
                
                66
                
                DirectorYat
                    Tung Lau
                
                28
                
                Director




*
      Mr.
      Handal was appointed as our Chief Executive Officer on June 21, 2007. Mr. Zheng
      resigned as our Interim Chief Executive Officer on the same date.





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:





**Anton
      “Tony” H.**  **Handal** became
      the CEO of the Singing Machine on June 21, 2007. Mr. Handal is also the founder
      and principal of Handal & Associates.  He has over 25 years experience
      in solving client problems and finding creative solutions to difficult problems.
      He is an experienced lawyer who provides personal service to every
      client.




25




Mr.
      Handal has extensive practical business experience. He has negotiated,
      documented and closed a myriad of business transactions and has successfully
      managed several mergers, acquisitions and reverse mergers. Mr. Handal, together
      with a close group of financial and accounting affiliates, has structured
      corporate finance transactions, managed due diligence assignments and negotiated
      purchase and sale agreements. He has also overseen corporate due diligence,
      licensed Intellectual Property and negotiated vendor/supply
      agreements.





Not
      only
      is Mr. Handal a quality attorney, he is also known for his creative approach
      to
“Problem-solving”.   He has brought these qualities to bear in
      advising his clients on asset purchases, mergers and acquisitions, contract
      negotiations and risk management. Mr. Handal has negotiated and acted as lead
      counsel in business transactions exceeding $130,000,000 in value.





Mr.
      Handal has also extended his own personal time, and directed members of his
      firm
      to contribute to the community by actively pursuing pro bono work for and on
      behalf of several non profit and community based organizations.





Mr.
      Handal, between 1995 and 1999, had served as CEO of a start-up technology
      company, secured patents, raised capital and handled communications with
      shareholders/investors. Since 1998, he has acted as US legal counsel for
      Starlight International Holdings, Ltd. a major shareholder of the Company.
      He
      has also served as a member of the Villa View Hospital board of directors,
      former member of the Board of Trustees of the San Diego Railroad Museum and
      was
      counsel to the San Diego Fire Youth Soccer Team.  In addition to his strong
      dedication to the firm and his community, Mr. Handal has acted as counsel to
      the
      San Diego Convention Center Corporation. He has actively engaged in fundraising
      and supporting local, statewide and national political candidates.





Mr.
      Handal is a member of the California and Florida State Bars; Federal District
      Court Bar of the Northern, Southern and Central Districts of California and
      Florida and also a member of the Ninth Circuit Court of Appeals. He is a
      graduate of the University of California at Los Angeles (UCLA) school of
      Economics and received a Juris Doctorate degree from Southwestern University
      School of Law.





**Danny
      Zheng** has been
      part of the Singing Machine management team since April 2004 and has served
      as
      financial controller and principal accounting officer until April 5, 2005 when
      he became the Chief Financial Officer of the Singing Machine. On January 1,
      2007, Danny became the interim Chief Executive Officer of the Company. Mr.
      Zheng
      is a certified public accountant licensed by the state of Delaware. He held
      controller and VP finance positions with various private and public companies.
      Previously, he was also employed by a New York regional CPA firm as tax
      consultant for 4 years. Mr. Zheng also served as general manager from 1999
      to
      2002 for PC Ware International Miami branch, a Taiwan based computer
      manufacturer. He was responsible for its distribution, marketing and finance
      operation in six countries throughout Latin America. He also served as director
      of operations for PC Micro, a joint venture computer manufacturer in Manaus,
      Brazil from 1999 to 2002. Mr. Zheng earned a B.S. degree in accounting from
      Nankai University in China. Mr. Zheng is currently pursuing an Executive MBA
      degree at the Wharton School, University of Pennsylvania.




**Alicia
      Haskamp** was
      promoted to the key position of Senior Vice President of Sales and Product
      Development in October 2006. She had been Managing Director of the Company's
      operations in Asia since 2000, with responsibility for sourcing, product
      development, engineering, production, vendor relationship management and
      international sales. From 1998 to 2000, Ms. Haskamp was Vice President of
      Operations for Ulysse Nardin USA, a Swiss luxury watch company, and served
      as
      Human Resources Manager for Nike Asia Pacific from 1996 to 1998. Earlier, she
      founded and ran executive search firms in Hong Kong and Thailand. Ms. Haskamp
      holds a BA in Business Administration from Pacific Southern University.




**Carol
      Lau** joined
      the Starlight Group in 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. 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.





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





**Harvey
      Judkowitz** has
      served as a director since March 29, 2004 and is the chairman of the Audit
      Committee. He is licensed as a Certified Public Accountant in New York and
      Florida. From 1988 to the present date, Mr. Judkowitz has conducted his own
      CPA
      practices. He 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 presently is the Chairman of AHM Financial Services Inc.,
      a start-up management company.





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




26




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





**Peter
      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. Mr. Hon joined the Company’s board on January 12,
      2007.





**Yat
      Tung Lau** joined
      the Starlight group in 2003 as assistant to the Chairman of the Board of the
      Starlight group 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. Mr. Lau joined the
      Company’s board on January 12, 2007.





**BOARD
      COMMITTEES**





We
      have
      an audit committee, an executive compensation/stock option committee and a
      nominating committee.





As
      of
      July 2, 2007, the audit committee consists of Messrs. Judkowitz (Chairman),
      Appel and Merkin. The Board has designated Mr. Judkowitz as the "audit committee
      financial expert," as defined by Item 401(h) of Regulation S-K of the Securities
      Exchange Act of 1934. The Board has determined that Messrs. Judkowitz, Merkin
      and Appel are "independent directors" within the meaning of the listing
      standards of the American Stock Exchange. The audit committee recommends the
      engagement of independent auditors to the board, initiates and oversees
      investigations into matters relating to audit functions, reviews the plans
      and
      results of audits with our independent auditors, reviews our internal accounting
      controls, and approves services to be performed by our independent auditors.





As
      of
      July 2, 2007, the executive compensation/stock option committee consists of
      Ms.
      Carol Lau (Chairwoman), Messrs. Judkowitz and Bauer. The executive
      compensation/stock option committee considers and authorizes remuneration
      arrangements for senior management and grants options under, and administers
      our
      employee stock option plan.





As
      of
      July 2, 2007, the nominating committee consists of Messrs. Appel (Chairman),
      Bauer, 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 its 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 stockholders, (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





·
            
            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;




27





·
            
            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 American Stock Exchange;





·
            
            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.





**FAMILY
      RELATIONSHIPS**





There
      are
      no other family relationships among any of our officers or other directors,
      except for Chairwoman Carol Lau who is the aunt of Director Yat Tung
      Lau.





**CODE
      OF ETHICS**





We
      have
      adopted a Code of Business Conduct and Ethics, which is applicable to all
      directors, officers and employees of the Singing Machine, including our
      principal executive officer, our principal financial officer, our principal
      accounting officer or controller or other persons performing similar functions.
      A copy of the Code of Ethics will be filed as Exhibit 14.1 via an amendment
      to
      this Annual Report or filed as an exhibit to a Current Report on Form 8-K.
      We
      intend to post amendments to or waives from our Code of Ethics (to the extent
      applicable to our chief executive officer, principal financial officer,
      principal accounting officer or controller or other persons performing similar
      functions) on our website.





**COMPLIANCE
      WITH SECTION 16(A) OF THE EXCHANGE ACT**





To
      our
      knowledge, based solely on a review of the copies of such reports furnished
      to
      the Company and written representations that no other reports were required,
      the
      Company believes that during the year ended March 31, 2007, its officers,
      directors and 10% shareholders complied with all Section 16(a)
      filing.





**ITEM
      11. EXECUTIVE COMPENSATION**





**COMPENSATION
      DISCUSSION AND ANALYSIS**





*PHILOSOPHY*





The
      Executive Compensation Committee believes that the Singing Machine must maintain
      short and long-term executive compensation plans that enable us to attract
      and
      retain well-qualified executives. Furthermore, we believe that our compensation
      plans must also provide a direct incentive for our executives to create
      shareholder value. A well designed executive compensation plan will align the
      interests between the executives and the shareholders as well as creating a
      positive environment of goals, performances and rewards.





We
      believe that the executive compensation should reflect the success of the
      management team, rather than the individual, in attaining the key operating
      objectives such as revenues growth, operation cost reduction, fund raising
      and
      the appreciation of the stock price. A clear measurement should be established
      to reward the performance. We will also evaluate our executive compensation
      package by comparison to similar companies to ensure the competitiveness of
      our
      compensation.





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





*BASE
      SALARIES*





Annual
      base salaries for executive officers are initially determined by evaluating
      the
      responsibility of the position and the experience and the skill sets of the
      individual. Also taken into consideration is the competitiveness of the market
      place for executive talent, including a comparison of base annual salaries
      with
      comparable positions within similar companies.





*INCENTIVE
      CASH BONUSES*





Generally,
      we award cash bonuses to our management employees and other employees, based
      on
      their personal performance in the past year and overall performance of our
      Company. The overall performance of our Company includes the revenue growth,
      reduction of the operation expenses, fund raising and the stock price
      appreciation.




28


*LONG
      TERM COMPENSATION - STOCK OPTION GRANTS*





We
      have
      utilized stock options to motivate and retain executive officers and other
      employees for the long-term. We believe that stock options closely align the
      interests of our executive officers and other employees with those of our
      stockholders and provide a major incentive to building stockholder value.
      Options are typically granted annually, and are subject to vesting provisions
      to
      encourage officers and employees to remain employed with the Company. Our stock
      options are usually granted at a price equal to or above the fair market value
      of our common stock on the date of grant. As such, our officers only benefit
      from the grant of stock options if our stock price appreciates. Generally,
      we
      try to tie bonus payments to our financial performance. However, if an
      individual has made significant contributions to our Company, we will provide
      them with a bonus payment for their efforts even if our Company's financial
      performance has not been strong.





**COMPENSATION
      OF CHIEF EXECUTIVE OFFICER**





Effective
      as of October 17, 2003, Yi Ping Chan became our Interim Chief Executive Officer.
      Mr. Chan's salary was $250,000 per year, as set forth in his employment
      agreement. In July 2003, Mr. Chan agreed to accept 15% of his salary during
      the
      nine-month period between July 1, 2003 through March 31, 2004 in the form of
      stock rather than cash. We also agreed to grant Mr. Chan options to purchase
      150,000 shares of our common stock, at an exercise price of $5.60 per share,
      of
      which 50,000 options vest each year and to reimburse him for moving expenses
      of
      up to $40,000. Mr. Chan has voluntarily cancelled the 150,000 options on May
      10,
      2006.





We
      did
      not grant any cash bonuses to Mr. Chan in fiscal 2006 or fiscal 2007.





We
      awarded Mr. Chan options to purchase 52,800 shares of our common stock at an
      exercise price of $1.97 per share in December 2003. These shares were
      voluntarily cancelled in fiscal year 2007. We awarded 80,000 stock options
      to
      Mr. Chan at exercise price of $0.60 on May 9, 2005. On April 10, 2006, Mr.
      Chan
      was given stock options, which vest in 1 year, to purchase 120,000 shares of
      our
      common stock at an exercise price of $.33 per share. All of these options were
      granted under our Year 2001 Stock Option Plan and were granted at a price that
      was equal to closing price of our common stock on the date of grant. Mr. Chan's
      options, with the exception of the options granted in fiscal 2007, vest at
      a
      rate of one-third per year over a period of three years. Mr. Chan resigned
      as
      Interim Chief Executive Officer of the Company effective as of December 31,
      2006.





Danny
      Zheng served as the Company’s Interim Chief Executive Officer from January 1,
      2007 through June 21, 2007. During this time, Mr. Zheng had an employment
      contract, for the Chief Financial Officer position, which was entered into
      on
      July 20, 2006. Based on the agreement, Mr. Zheng’s base salary is $160,000 per
      year. The agreement also includes a monthly car allowance of $500 per month
      and
      a bonus, which is at the sole discretion of the Company’s Board of Directors.
      The agreement expires on July 17, 2008. Mr. Zheng was not granted any cash
      bonuses in fiscal 2007.





**COMPENSATION
      COMMITTEE REPORT**





The
      compensation committee is responsible for discharging the responsibilities
      of
      the board with respect to compensation of executive officers. The compensation
      committee sets performance goals and objectives for the chief executive officer
      and the other executive officers, evaluates their performance with respect
      to
      those goals and sets their compensation based upon the evaluation of their
      performance. The compensation committee assesses the information it receives
      in
      accordance with its business judgment. The compensation committee also
      periodically reviews director compensation. All decision with respect to
      executive and director compensation are approved by the compensation committee
      and recommended to the full board of directors for ratification.





The
      compensation committee has reviewed and discussed the Compensation Discussion
      and Analysis (the “CD&A”) for the year ended March 31, 2007 with management.
      In reliance on the reviews and discussions referred to above, the compensation
      committee recommended to the board, and the board has approved, that the
      CD&A be included in the Company’s Annual Report on Form 10-K for the year
      ended March 31, 2007 for filing with SEC.





Submitted
      by the Compensation Committee of the Board of Directors:





***Carol
      Lau (Chairwoman), Jay Bauer & Harvey Judkowitz***





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 whose total compensation exceeded $100,000
      (collectively, the “named officers”) for fiscal year 2007.




29




**SUMMARY
      COMPENSATION TABLE**


**Name
                  and Principal Position**
              
              **Year**
              
              **Salary**
              
              **Bonus**
              
              **Stock
                  Awards**
              
              **Option
                  Awards (1)**
              
              **Non-Equity
                  incentive plan compensation**
              
              **Change
                  in Pension Value and Non-Qualified Deferred Compensation Earnings**
              
              **All
                  other compen-sation (2)**
              
              **Total
                  Compensation**Yi
                  Ping Chan (3)
              
              
              2007
              
              $
              245,115
              
              $
              -
              
              $
              -
              
              $
              24,000
              
              $
              -
              
              $
              -
              
              $
              56,025
              
              $
              325,140*Former
                  Interim CEO & COO*Danny
                  Zheng (4)
              
              
              2007
              
              $
              159,231
              
              $
              -
              
              $
              -
              
              $
              20,000
              
              $
              -
              
              $
              -
              
              $
              13,894
              
              $
              193,125*Interim
                  Chief Executive Officer & Chief Financial Officer*Alicia
                  Haskamp
              
              
              2007
              
              $
              152,500
              
              $
              -
              
              $
              -
              
              $
              20,000
              
              $
              -
              
              $
              -
              
              $
              44,435
              
              $
              216,935*Senior
                  Vice President of Sales & Product Development*Dennis
                  Norden (5)
              
              
              2007
              
              $
              126,325
              
              $
              -
              
              $
              -
              
              $
              10,000
              
              $
              -
              
              $
              -
              
              $
              12,479
              
              $
              148,804*Former
                  Vice President of Sales*




(1)
      Represents stock-based compensation expense for the fiscal year ended March
      31,
      2007, for stock options granted in 2007 under SFAS 123(R), Share based
      payments as discussed in Note 1, “Stock Based Compensation” of the Notes to
      Consolidated Financial Statements included elsewhere in this Annual Report
      on
      Form 10-K.





(2)
      Includes matching contributions under our 401(k) savings plan, medical and
      life
      insurance pursuant to the executive's employment agreement and other expenses
      described herein. For Yi Ping Chan for fiscal year 2007, this amount includes
      $40,000 in moving expenses per the separation agreement dated December 6, 2006.
      For Alicia Haskamp, a housing allowance of approximately $27,000 is
      included.





(3)
      Yi
      Ping Chan resigned as Interim CEO and Chief Operating Officer effective December
      31, 2006. Any exercisable options expired 90 days after leaving the
      Company.





(4)
      Mr.
      Danny Zheng joined our Company on April 19, 2004 as financial controller and
      became our Chief Financial Officer on April 5, 2005 and our Interim Chief
      Executive Officer on January 1, 2007. On June 21, 2007, Mr. Zheng resigned
      as
      our Interim Chief Executive Officer and Mr. Anton “Tony” H. Handal was appointed
      as our Chief Executive Officer.





(5)
      Mr.
      Norden was terminated by the Company effective December 8, 2006. Any exercisable
      options expired 90 days after leaving the Company.




30




**OPTION
      GRANTS IN FISCAL 2007**





The
      following table sets forth information regarding stock option awards to our
      named executive officers under our Year 2001 Stock Option Plan during the fiscal
      year ended March 31, 2007:




**GRANTS
      OF PLAN BASED AWARDS**


**All Other Option**
              
              **Exercise or**
              
              **Grant Date****Awards: Number of**
              
              **Base Price of**
              
              **Fair Value****Securities**
              
              **Awards**
              
              **of
                  Stock****Underlying**
              
              **Option**
              
              **and** **Option****Name
                  and Principal Position**
              
              **Grant Date**
              
              **Options(#)**
              
              **($/Sh)
                  (1)**
              
              **Awards
                  (2)**Yi
                  Ping Chan
              
              
              4/10/2006
              
              
              120,000
              
              $
              0.33
              
              $
              24,000*Former
                  Interim CEO & COO*Danny
                  Zheng
              
              
              4/10/2006
              
              
              100,000
              
              $
              0.33
              
              $
              20,000*Interim
                  Chief Executive Officer & Chief Financial Officer*Alicia
                  Haskamp
              
              
              4/10/2006
              
              
              100,000
              
              $
              0.33
              
              $
              20,000*Senior
                  Vice President of Sales & Product Development*Dennis
                  Norden
              
              
              4/10/2006
              
              
              50,000
              
              $
              0.33
              
              $
              10,000*Former
                  Vice President of Sales*


(1)
      The
      exercise price of the stock option awards is equal to the closing price of
      the
      common stock as reported by the American Stock Exchange on the date of the
      grant
      of the award





(2)
      Refer
      to Note 1 “Stock Based Compensation” in the Notes to the Consolidated Financial
      Statements included elsewhere in this Annual Report on Form 10K for the relevant
      assumptions used to determine the valuation of our option awards.




**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 the fiscal year ended March 31, 2007:





**Option
                  Awards**
              
              
              
              
              
              
              
              
              
              **Stock
                  Awards****Name
                  and Principal Position**
              
              **Number
                  of Securities Underlying Unexercised Options (#)
                  Exercisable**
              
              **Number
                  of Securities Underlying Unexercised Options (#)
                  Unexercisable**
              
              **Equity
                  Incentive Plan Awards: Number of Securities Underlying Unexercised
                  Unearned Options (#)**
              
              **Option
                  Exercise Price ($)**
              
              **Option
                  Expiration Date**
              
              **Number
                  of Shares or Units of Stock That Have Not Vested
                  (#)**
              
              **Market
                  Value of Shares or Units of Stock That Have Not Vested
                  ($)**
              
              **Equity
                  Incentive Plan Awards: Number of Unearned Shares, Units or Other
                  Rights
                  That Have Not Vested (#)**
              
              **Equity
                  Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                  Units or
                  Other Rights That Have Not Vested ($)**Yi
                  Ping Chan
              
              
              -
              
              
              -
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A*Former
                  Interim CEO & COO*Danny
                  Zheng
              
              
              7,200
              
              
              4,800
              
              
              N/A
              
              
              1.05
              
              
              4/26/2014
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A*Interim
                  Chief Executive Officer & Chief Financial Officer*
              
              
              23,333
              
              
              46,667
              
              
              
              
              
              0.60
              
              
              5/8/201530,000
              
              
              -
              
              
              
              
              
              0.34
              
              
              1/19/2011-
              
              
              100,000
              
              
              
              
              
              0.33
              
              
              4/9/201160,533
              
              
              151,467Alicia
                  Haskamp*Senior
                  Vice President of Sales & Product Development*
              
              
              14,400
              
              
              3,600
              
              
              N/A
              
              
              9.00
              
              
              10/31/2012
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A30,000
              
              
              -
              
              
              
              
              
              5.60
              
              
              3/7/20138,400
              
              
              5,600
              
              
              
              
              
              1.97
              
              
              12/19/201310,600
              
              
              -
              
              
              
              
              
              1.97
              
              
              12/19/201326,667
              
              
              53,333
              
              
              
              
              
              0.60
              
              
              5/8/2015-
              
              
              100,000
              
              
              
              
              
              0.33
              
              
              4/9/201190,067
              
              
              162,533Dennis
                  Norden
              
              
              -
              
              
              -
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A*Former
                  Vice President of Sales*
  *The
                  Company does not grant any stock-based awards




31





The
      following table sets forth with respect to the named director, compensation
      information inclusive of equity awards and payments made in the fiscal year
      ended March 31, 2007. All option awards were granted from our Year 2001 Stock
      Option Plan.





**DIRECTOR
      COMPENSATION**




**Name**
              
              **Fees
                  Earned or Paid in Cash**
              
              **Stock
                  Awards**
              
              **Option
                  (4)**
              
              **Non-Equity
                  Incentive Plan Compensation ($)**
              
              **Change
                  in Pension Value and Nonqualified Deferred Compensation
                  Earnings**
              
              **All
                  Other Compensation (5)**
              
              **Total**Yi
                  Ping Chan (1)
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Bernie
                  Appel
              
              $
              10,500
              
              $
              2,500
              
              $
              7,400
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              20,400Jay
                  Bauer
              
              $
              10,500
              
              $
              2,500
              
              $
              7,400
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              20,400Marc
                  Goldberg (2)
              
              $
              10,200
              
              $
              2,500
              
              $
              7,400
              
              $
              -
              
              $
              -
              
              $
              3,639
              
              $
              23,739Peter
                  Hon (3)
              
              $
              1,603
              
              $
              534
              
              $
              7,400
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              9,537Harvey
                  Judkowitz
              
              $
              10,500
              
              $
              2,500
              
              $
              7,400
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              20,400Carol
                  Lau (3)
              
              $
              2,103
              
              $
              534
              
              $
              7,400
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              10,037Yat
                  Tung Lau (3)
              
              $
              2,103
              
              $
              534
              
              $
              7,400
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              10,037Stewart
                  Merkin
              
              $
              10,700
              
              $
              2,500
              
              $
              7,400
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              20,600




(1)
            Yi
                Ping Chan was our former Interim Chief Financial Officer and Chief
                Operating Officer and did not receive additional compensation for
                serving
                as our director.


(2)
            Marc
                Goldberg resigned from our board effective January 12,
                2007


(3)
            Carol
                Lau, Yat Tung Lau and Peter Hon joined our board effective January
                12,
                2007.


(4)
            Refer
                to Note 1 “Stock Based Compensation” in the Notes to the Consolidated
                Financial Statements included elsewhere in this Annual Reporton
                Form 10K for the relevant assumptions used to determine the valuation
                of
                our option awards.


(5)
            Includes
                payments for consulting services
                provided.





32





Refer
      to
      Note 1 “Stock Based Compensation” in the Notes to the Consolidated Financial
      Statements included elsewhere in this Annual Report on Form 10K for the relevant
      assumptions used to determine the valuation of our option awards.





During
      fiscal 2007, 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 eight
      non-employee directors during fiscal 2007 were Messrs. Bauer, Appel, Judkowitz,
      Goldberg, Hon, Carol Lau, Yat Tung Lau and Merkin.





During
      fiscal 2007, we have implemented 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 Shareholder 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 Shareholder
                Meeting. If the Annual Meeting is held less than 6 months after the
                board
                member first joined the board he or she will not receive another
                option
                grant.





·
            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.





**EMPLOYMENT
      AGREEMENTS**





The
      Company has an employment contract with its Chief Financial Officer as of March
      31, 2007. The employment agreement was entered into on July 20, 2006, with
      Danny
      Zheng, Chief Financial Officer of the Company. Based on the agreement, Mr.
      Zheng’s base salary is $160,000 per year. The agreement also includes a monthly
      car allowance of $500 per month and a bonus, which is at the sole discretion
      of
      the Company’s Board of Directors. The agreement expires on July 17, 2008. In the
      event of a termination without cause, as defined in the agreement, the employee
      would be entitled to his base salary earned up to the effective date of
      termination.





Mr.
      Zheng
      received a cash bonus of $12,000 in fiscal year 2006. He did not receive any
      cash bonus in fiscal year 2007.





We
      awarded Mr. Zheng options to purchase 12,000 shares of our common stock, which
      vest in 5 years, at an exercise price of $1.05 per share in April 2004. We
      awarded 70,000 stock options, which vest in 3 years, to Mr. Zheng at exercise
      price of $0.60 on May 9, 2005. On January 20, 2006, the Company granted 30,000
      stock options, which vest in 1 year, at an exercise price of $.34 per share.
      On
      April 10, 2006, Mr. Zheng was given stock options, which vest in 1 year, to
      purchase 100,000 shares of our common stock at an exercise price of $.33 per
      share. All of these options were granted under our Year 2001 Stock Option Plan
      and were granted at a price that was equal to closing price of our common stock
      on the date of grant.





In
      addition, the Company entered into an employee agreement with Alicia Haskamp,
      Senior Vice President of Sales and Product Development, on October 4, 2006.
      Based on the agreement, the base salary is $160,000 per year. The agreement
      also
      includes a monthly car allowance of $500 per month and a bonus, which is based
      on hardware net sales revenue. The agreement expires on October 31, 2008. In
      the
      event of a termination without cause, as defined in the agreement, the employee
      would be entitled to their base salary earned up to the effective date of
      termination.





Anton
      H.
      Handal who became our Chief Executive Officer effective June 21, 2007, has
      no
      employment agreements with the Company as of the date of this
      report.





**SEPARATION
      AND CONSULTING AGREEMENTS**





On
      December 6, 2006, the Company entered into a separation and release agreement
      with Yi Ping Chan, former interim chief executive officer and chief operating
      officer of the Company. Per the agreement, Mr. Chan is entitled to a severance
      payment equal to $72,916, in addition to a relocation expense of $40,000. These
      amounts are included in the general and administrative expenses for the twelve
      months ended March 31, 2007.




33




**EQUITY
      COMPENSATION PLANS AND 401(K) PLAN**





We
      have
      two stock option plans: our 1994 Amended and Restated Stock Option Plan ("1994
      Plan") and our Year 2001 Stock Option Plan ("Year 2001 Plan"). Both the 1994
      Plan and the Year 2001 Plan provide for the granting of incentive stock options
      and non-qualified stock options to our employees, officers, directors and
      consultants As of March 31, 2007, we had 13,050 options issued and outstanding
      under our 1994 Plan and 1,369,840 options are issued and outstanding under
      our
      Year 2001 Plan.





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


NUMBER
                  OF
                SECURITIES
                TO
                  BE ISSUED
              
              WEIGHTED-
                AVERAGE
                EXERCISE
              
              NUMBER
                  OF
                SECURITIES
                REMAINING
                AVAILABLEUPON
              
              PRICE
              
              FOR
                  EQUITYEXERCISE
              
              OF
              
              COMPENSATIONOF
              
              OUTSTANDING
              
              PLANSOUTSTANDINGS
              
              OPTIONS,
              
              (EXCLUDINGOPTION,
                  WARRANTS
              
              WARRANTS
              
              SECURITIES
                  INPLAN
                  CATEGORY
              
              AND
                  RIGHTS
              
              AND
                  RIGHTS
              
              COLUMN
                  (A))Equity
                  Compensation Plans approved by Security
                  Holders
              
              
              1,382,890
              
              $
              1.86
              
              
              625,160Equity
                  Compensation Plans Not approved
                  by Security Holders
              
              
              0
              
              $
              0
              
              
              0


**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 share of our common stock pursuant
      to the exercise of options granted under the Plan. As of March 31, 2003, we
      had
      granted all the options that are available for grant under our 1994 Plan. As
      of
      March 31, 2007, we have 13,050 options issued and outstanding under the 1994
      Plan and all of these options are fully vested as of March 31, 2007.





**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, 2007, we have granted 1,369,840 options under the Year
      2001
      Plan, 569,257 of which are fully vested.





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





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





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




34




**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, 2007, 2006 and 2005
      totaled approximately $39,460, $39,572 and $30,025, respectively.




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





The
      following table sets forth as of July 2, 2007, 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.





We
      had
      29,883,714 shares of our common stock issued and outstanding. In addition,
      the
      following amounts were included as they will be exercisable within 60 days
      of
      July 2, 2007: 2,500,000 stock warrants, 15,162 shares of common stock, and
      1,161,373 stock options issued under the 1994 and 2001 Stock Option
      Plans.





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




35


Name
                  and position of owner
              
              Title
                  of Class
              
              Shares
                  of Common Stock (1)
              
              Percent
                  of Common StockYi
                  Ping Chan
              
              
              Common
                  Stock
              
              
              21,580
              
              
              *Former
                  Interim CEO snd Chief Operating OfficerDanny
                  Zheng
              
              
              Common
                  Stock
              
              
              186,267
              
              
              *Interim
                  Chief Executive Officer and Chief Financial OfficerAlicia
                  Haskamp
              
              
              Common
                  StockSenior
                  Vice President of Sales and Product Development
              
              
              
              
              
              216,733
              
              
              *Dennis
                  Norden
              
              
              Common
                  StockFormer
                  President of Sales
              
              
              
              
              
              -
              
              
              *Joseph
                  Bauer (2)
              
              
              Common
                  Stock
              
              
              1,336,141
              
              
              3.98
              %DirectorBernard
                  Appel
              
              
              Common
                  Stock
              
              
              74,022
              
              
              *DirectorHarvey
                  Judkowitz
              
              
              Common
                  Stock
              
              
              74,022
              
              
              *DirectorCarol
                  Lau
              
              
              Common
                  Stock
              
              
              574
              
              
              *ChairwomanYat
                  Tung Lau
              
              
              Common
                  Stock
              
              
              574
              
              
              *DirectorPeter
                  Hon
              
              
              Common
                  Stock
              
              
              574
              
              
              *DirectorMarc
                  Goldberg
              
              
              Common
                  Stock
              
              
              2,688
              
              
              *Former
                  DirectorStewart
                  Merkin
              
              
              Common
                  Stock
              
              
              51,675
              
              
              *DirectorKoncept
                  International Ltd (3)
              
              
              Common
                  Stock
              
              
              17,875,536
              
              
              53.27
              %Majority
                  ShareholderGentle
                  Boss Investments Ltd
              
              
              Common
                  Stock
              
              
              2,100,000
              
              
              6.26
              %ShareholderAll
                  Directors and Executive Officers as a Group (10 people)
              
              
              Common
                  Stock
              
              
              1,748,117
              
              
              5.21
              %


*Less
      than 1%.





(1)
      Includes as to the person indicated the following outstanding stock options
      to
      purchase shares of the Company’s Common Stock issued under the 1994 and 2001
      Stock Option Plans, which will be vested and exercisable within 60 days of
      July
      2, 2007: 186,267 options held by Danny Zheng; 216,733 options held by Alicia
      Haskamp; 102,740 options held by Jay Bauer; 60,000 options held by Bernie Appel;
      60,000 options held by Harvey Judkowitz and 40,000 held by Stewart
      Merkin.





(2)
      Includes 138,423 shares held individually by Mr. Bauer, 299,016 held by Mr.
      Bauer’s wife, 178,374 held jointly by Mr. Bauer and his wife, 369,400 shares
      held by Mr. Bauer’s pension account, 245,500 shares held in Mr. Bauer’s Family
      LTD Partnership, 2,688 shares of common stock for fiscal year 2007 service
      and
      102,740 issuable upon the exercise of stock options that can be exercisable
      within 60 days of July 2, 2007.




36




(3)
      Includes 2,500,000 stock warrants exercised on April 10, 2007.





**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE**





On
      or
      about July 10, 2003, an officer and two directors of our Company advanced $1
      million to our Company pursuant to written loan agreements. The officer is
      Yi
      Ping Chan and the directors were Josef A. Bauer and Howard Moore. Mr. Moore
      resigned from our Board, effective as of October 17, 2003. Additionally, Maureen
      LaRoche, a business associate of Mr. Bauer, participated in the financing.
      The
      loans are subordinated to the factoring company and accrued interest at 9.5%
      per
      annum. These loans were originally scheduled to be repaid by October 31, 2003,
      but were extended past March 31, 2006. All interest was accrued, and the unpaid
      amount totaled approximately $9,500 as of 3/31/07. A portion of the loans and
      the accrued interest in the amount of $409,500 has been converted into 563,274
      shares of common stock at $0.72 per share on January 5, 2005. In addition,
      another portion of the loans in the amount of $200,000 has been converted into
      277,778 shares of common stock on May 18, 2005. On November 30, 2005, Maureen
      LaRoche was repaid $107,917 ($100,000 principle and $7,917 interest). The
      balance of related party loan as of March 31, 2006 was $300,000. According
      to
      the Security Purchase Agreement with Starlight, parent of koncepts International
      Ltd, dated on February 21, 2006, the company may use $50,000 from $3 million
      investment to retire part of these related party loans. The remainder of the
      loan will be extended for 3 years at an interest rate of 5.5%.





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





On
      June
      2, 2006, the Company received a $200,000 loan from Andrew Shapiro, a relative
      of
      Mr. Bauer. The interest rate on the loan is 8% per annum and is due on June
      20,
      2006 or such later date as mutually agreed between the parties. The loan was
      repaid on June 30, 2006 with interest.





**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.





**Parents**





Not
      applicable





**Promoter
      and Certain Control Persons**





Not
      applicable.





**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.




37




**ITEM
      14. PRINCIPAL ACCOUNTING FEES AND SERVICES**





The
      following is a summary of the fees billed to the Singing Machine by Berkovits,
      Lago & Co, LLP, HLB Hodgson Impey Cheng and Grant Thornton, LLP for
      professional services rendered for the fiscal years ended March 31, 2007 and
      2006:


Fee
                  Category
              
              Fiscal
                  2007
              
              Fiscal
                  2006Audit
                  Fees
              
              $
              227,675
              
              $
              155,193Tax
                  Fees
              
              
              15,000
              
              
              0All
                  Other Fees
              
              
              1,150
              
              
              1,500Total
                  Fees
              
              $
              243,825
              
              $
              156,693




Audit
      Fees - Consists of fees billed for professional services rendered for the audit
      of the Singing Machine's consolidated financial statements and review of the
      interim consolidated financial statements included in quarterly reports and
      services that were provided by Berkovits, Lago & Co, LLP, HLB Hodgson Impey
      Cheng and Grant Thornton LLP in connection with statutory and regulatory filings
      or engagements. For fiscal year 2007 amount also includes approximately $47,000
      for audit fees in conjunction with acquisition by Starlight.





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 2007 and fiscal 2006 audit and other fees, $164,774 and
      $151,943 were billed by Berkovits, Lago and Co., LLP, 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.





**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, 2007 and 2006




Consolidated
      Statements of Operations--Years ended March 31, 2007, 2006 and
      2005.




Consolidated
      Statements of Shareholders' (deficit) Equity--Years ended March 31, 2007, 2006
      and 2005.




Consolidated
      Statements of Cash Flows--Years ended March 31, 2007, 2006 and
      2005.




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).




38




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





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





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





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





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





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





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





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





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





10.6
      Employment Agreement dated February 27, 2004 between the Singing Machine and
      Eddie Steele. (incorporated by reference to the Singing Machine's Annual Report
      on Form 10-K for the fiscal year ended March 31, 2005)





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





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





10.9
      Separation and Release Agreement effective as of April 9, 2004 between the
      Singing Machine and April Green. (incorporated by reference to the Singing
      Machine's Annual Report on Form 10-K for the fiscal year ended March 31, 2005)





10.10
      Separation and Release Agreement dated December 16,2003 between the Singing
      Machine and Jack Dromgold. (incorporated by reference to the Singing Machine's
      Annual Report on Form 10-K for the fiscal year ended March 31, 2005)





10.11
      Separation and Release Agreement effective as of April 12, 2004 between the
      Singing Machine and John Dahl. (incorporated by reference to the Singing
      Machine's Annual Report on Form 10-K for the fiscal year ended March 31, 2005)





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





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





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





10.15
      Securities Purchase Agreement dated as of August 20, 2003 by and among the
      Singing Machine and Omicron Master Trust, SF Capital Partners, Ltd., Bristol
      Investment Fund, Ltd., Ascend Offshore Fund, Ltd., Ascend Partners, LP and
      Ascend Partners Sapient, LP (collectively, the "Investors") (filed as Exhibit
      10.1 to the Singing Machine's Registration Statement filed with the SEC on
      October 9, 2003, File No. 333-109574).




39




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





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





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





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





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





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





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





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





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





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





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





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





10.28
      Distribution Agreement dated April 1, 2003 between the Singing Machine and
      Arbiter Group, PLC. (incorporated by reference to the Singing Machine's Annual
      Report on Form 10-K for the fiscal year ended March 31, 2005)





10.29
      Loan Agreements dated August 13, 2003 in the aggregate amount of $1 million
      between the Company and each of Josef Bauer, Howard Moore & Helen Moore
      Living Trust, Maureen G. LaRoche and Yi Ping Chan.(incorporated by reference
      to
      the Singing Machine's Annual Report on Form 10-K for the fiscal year ended
      March
      31, 2005)





10.30
      Letter dated March 4, 2003 from Jay Bauer to the Singing Machine regarding
      a
      $400,000 loan. (incorporated by reference to the Singing Machine's Annual Report
      on Form 10-K for the fiscal year ended March 31, 2005)





10.31 Securities
      Purchase Agreement dated February 21, 2006, 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,
      2006)





10.32 Registration
      Rights Agreement dated February 21, 2006, 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, 2006)





10.33 One
      Year
      Stock Purchase Warrant of The
      Singing Machine Company, Inc .
      dated
      February 21, 2006. (incorporated by reference to the Singing Machine’s Current
      Report on Form 8-K filed with the SEC on February 27, 2006)




40


10.34 Three
      Year Stock Purchase Warrant of The
      Singing Machine Company, Inc .
      dated
      February 21, 2006. (incorporated by reference to the Singing Machine’s Current
      Report on Form 8-K filed with the SEC on February 27, 2006)





10.35 Four
      Year
      Stock Purchase Warrant of The
      Singing Machine Company, Inc .
      dated
      February 21, 2006. (incorporated by reference to the Singing Machine’s Current
      Report on Form 8-K filed with the SEC on February 27, 2006)





10.36 Bridge
      Loan Agreement dated March 8, 2006, 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, 2006)





10.37 Collateral
      Security Agreement dated March 8, 2006, 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, 2006)





10.38 Bridge
      Note of The
      Singing Machine Company, Inc .
      dated
      March 8, 2006. (incorporated by reference to the Singing Machine’s Current
      Report on Form 8-K filed with the SEC on March 14, 2006)





10.39
      Settlement Agreement and Release dated as of March 5, 2006 by and among The
      Singing Machine Company, Inc .
      and the
      holders of the Company’s $4,000,000 principal amount 8% Convertible Debentures.
      (incorporated by reference to the Singing Machine’s Current Report on Form 8-K
      filed with the SEC on March 14, 2006)





10.40
      Settlement Agreement dated April 27, 2006, by and between The Singing Machine
      Company, Inc. and Abacus Advisors Group LLC. (incorporated by reference to
      the
      Singing Machine’s Current Report on Form 8-K filed with the SEC on May 3, 2006)




31.1
      Certification of Anton Handal, Chief Executive Officer, dated July 16, 2007,
      pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as
      amended.*





31.2
      Certification of Danny Zheng, Chief Financial Officer, dated July 16, 2007,
      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.




41




**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 16, 2007
            *By:*
            */s/ Anton
                H. Handal*Anton
                H. HandalChief
                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/
                  ANTON
                  H. HANDAL
              
              Chief
                  Executive Officer
              
              July
                  16, 2007Anton
                  H. Handal/s/
                  DANNY
                  ZHENG
              
              Chief
                  Financial Officer
              
              July
                  16, 2007Danny
                  Zheng
              
              (Principal
                Accounting and Financial Officer)Director
              
              July
                  16, 2007Josef
                A. Bauer/s/
                  BERNARD APPEL
              
              Director
              
              July
                  16, 2007Bernard
                  Appel/s/
                  HARVEY JUDKOWITZ
              
              Director
              
              July
                  16, 2007Harvey
                  Judkowitz/s/
                  STEWART MERKIN
              
              Director
              
              July
                  16, 2007Stewart
                  Merkin/s/
                  CAROL LAU
              
              Director
              
              July
                  16, 2007Carol
                  LauDirector
              
              July
                  16, 2007Yat
                  Tung LauDirector
              
              July
                  16, 2007Peter
                  Hon




42







**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 Stockholders' 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.







We
      have
      audited the accompanying consolidated balance sheets of The Singing Machine
      Company, Inc. and it’s Subsidiaries (the “Company”) as of March 31, 2007 and
      2006, and the related consolidated statements of operations, shareholders’
deficit, and cash flows for each of the years in the three year period ended
      March 31, 2007. 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
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, 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,
      2007 and 2006, and the results of its operations and its cash flows for each
      of
      the years in the three year period ended March 31, 2007, 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, 2007,
      March 31, 2006 and March 31, 2005. In our opinion, this schedule, when
      considered in relation to the basic consolidated financial statements taken
      as a
      whole, presents fairly, in all material respects, the information
      therein.




/s/
      Berkovits, Lago & Company, LLP.




Fort
      Lauderdale, Florida


June
      14,
      2007





F-2




**THE
      SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**





**March
                31, 2007**
            
            
            **March
                31, 2006****Assets****Current
                Assets**Cash
                and cash equivalents
            
            $
            1,188,900
            
            
            $
            423,548Restricted
                cash
            
            
            -
            
            
            
            268,405Accounts
                receivable, net of allowances of $61,825 and$103,615,
                respectively
            
            
            1,054,371
            
            
            
            1,169,271Due
                from factor
            
            
            109,991
            
            
            
            134,281Inventories
            
            
            2,280,083
            
            
            
            1,688,058Prepaid
                expenses and other current assets
            
            
            521,891
            
            
            
            228,402**Total
                Current Assets**
            
            
            5,155,236
            
            
            
            3,911,965**Property
                and Equipment**,****at
                cost less accumulated depreciationof
                $1,045,119 and $3,246,072 , respectively
            
            
            446,510
            
            
            
            513,615**Other
                Non-Current Assets**
            
            
            56,054
            
            
            
            98,687**Total
                Assets**
            
            $
            5,657,800
            
            
            $
            4,524,267**Liabilities
                and Shareholders' Equity (Deficit)****Current
                Liabilities**Accounts
                payable
            
            $
            903,243
            
            
            $
            1,563,810Accounts
                payable - related party
            
            
            199,316
            
            
            
            -Accrued
                expenses
            
            
            624,994
            
            
            
            648,182Customer
                credits on account
            
            
            594,169
            
            
            
            1,034,215Deferred
                gross profit on estimated returns
            
            
            213,718
            
            
            
            186,282Loan
                payable
            
            
            -
            
            
            
            2,000,000Subordinated
                debt-related parties
            
            
            225,000
            
            
            
            300,000Income
                tax payable
            
            
            -
            
            
            
            2,453,576**Total
                Current Liabilities**
            
            
            2,760,440
            
            
            
            8,186,065**Shareholders'
                Equity (Deficit)**Preferred
                stock, $1.00 par value; 1,000,000 shares authorized; noshares
                issued and outstanding
            
            
            -
            
            
            
            -Common
                stock, Class A, $.01 par value; 100,000 sharesauthorized;
                no shares issued and outstanding
            
            
            -
            
            
            
            -Common
                stock, $0.01 par value; 100,000,000 shares authorized;27,286,199
                and 10,060,282 shares issued and outstanding
            
            
            272,862
            
            
            
            100,603Additional
                paid-in capital
            
            
            17,306,342
            
            
            
            11,658,031Accumulated
                deficit
            
            
            (14,681,844
            )
            
            
            (15,420,432
            )**Total
                Shareholders' Equity (Deficit)**
            
            
            2,897,360
            
            
            
            (3,661,798
            )**Total
                Liabilities and Shareholders' Equity (Deficit)**
            
            $
            5,657,800
            
            
            $
            4,524,267




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




F-3





**THE
      SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**For
                  Years Ended****March
                  31, 2007**
              
              **March
                  31, 2006**
              
              **March
                  31, 2005****Net
                  Sales**
              
              $
              26,732,144
              
              $
              32,305,560
              
              $
              38,209,825**Cost
                  of Goods Sold**
              
              
              20,616,541
              
              
              25,223,056
              
              
              28,945,283**Gross
                  Profit**
              
              
              6,115,603
              
              
              7,082,504
              
              
              9,264,542**Operating
                  Expenses**Selling
                  expenses
              
              
              2,308,959
              
              
              2,169,168
              
              
              3,546,185General
                  and administrative expenses
              
              
              4,952,254
              
              
              6,140,542
              
              
              6,629,263Depreciation
                  and amortization
              
              
              556,051
              
              
              932,216
              
              
              709,329**Total
                  Operating Expenses**
              
              
              7,817,264
              
              
              9,241,926
              
              
              10,884,777**Loss
                  from Operations**
              
              
              (1,701,661
              )
              
              (2,159,422
              )
              
              (1,620,235
              )**Other
                  Income (Expenses)**Other
                  income
              
              
              -
              
              
              103,396
              
              
              204,267Gain
                  on sale of subsidiary and other assets
              
              
              29,028
              
              
              -
              
              
              -Net
                  gain (loss) on retirement of convertible debentures
              
              
              
              
              
              
              
              
              -including
                  unpaid accrued interest of $259,726
              
              
              -
              
              
              2,253,725
              
              
              -Interest
                  expense
              
              
              (42,355
              )
              
              (487,307
              )
              
              (549,506
              )Interest
                  expense - amortization of discounton
                  convertible debentures
              
              
              -
              
              
              (1,615,642
              )
              
              (1,626,501
              )**Net
                  Other Income (Expenses)**
              
              
              (13,327
              )
              
              254,172
              
              
              (1,971,740
              )**Loss
                  Before Reversal of Provision for Income Taxes**
              
              
              (1,714,988
              )
              
              (1,905,250
              )
              
              (3,591,975
              )**Reversal
                  of Provision for Income Taxes**
              
              
              2,453,576
              
              
              -
              
              
              -**Net
                  Income (Loss)**
              
              $
              738,588
              
              $
              (1,905,250
              )
              $
              (3,591,975
              )**Income
                  (Loss) per Common Share**Basic
              
              $
              0.03
              
              $
              (0.19
              )
              $
              (0.39
              )Diluted
              
              $
              0.03
              
              $
              (0.19
              )
              $
              (0.39
              )**Weighted
                  Average Common and Common****Equivalent
                  Shares:**Basic
              
              
              21,145,003
              
              
              10,029,085
              
              
              9,112,278Diluted
              
              
              24,753,864
              
              
              10,029,085
              
              
              9,112,278
  ***The
                  accompanying notes are an integral part of these financial
                  statements.***




F-4




**THE
      SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**For
                  Years Ended****March
                  31, 2007**
              
              **March
                  31, 2005**
              
              **March
                  31, 2005****Cash
                  flows from operating activities***Net
                  Income (Loss)*
              
              $
              738,588
              
              $
              (1,905,250
              )
              $
              (3,591,975
              )Adjustments
                  to reconcile net income (loss) to net cash (used in) provided by
                  operating
                  activities:Gain
                  on disposal of assets
              
              
              (29,028
              )
              
              -
              
              
              -Gain
                  from debt restructure
              
              
              -
              
              
              (2,253,725
              )Depreciation
                  and amortization
              
              
              556,051
              
              
              688,951
              
              
              709,291Change
                  in inventory reserve
              
              
              (902,071
              )
              
              (681,767
              )
              
              (4,912,717
              )Change
                  in allowance for bad debts
              
              
              (41,790
              )
              
              95,016
              
              
              19,797Amortization
                  of discount/deferred fees on convertible debentures
              
              
              -
              
              
              1,858,911
              
              
              938,864Stock
                  compensation
              
              
              194,870
              
              
              22,473
              
              
              990,138Deferred
                  gross profit on estimated sales returns
              
              
              27,436
              
              
              (209,949
              )
              
              396,231Reversal
                  of provision for income taxes
              
              
              (2,453,576
              )
              
              -
              
              
              -*Changes
                  in assets and liabilities:*(Increase)
                  Decrease in:Accounts
                  receivable
              
              
              156,690
              
              
              (113,445
              )
              
              2,635,527Insurance
                  Receivable
              
              
              -
              
              
              -
              
              
              800,000Inventories
              
              
              310,046
              
              
              2,088,646
              
              
              7,741,047Due
                  from manufacturer
              
              
              -
              
              
              -
              
              
              95,580Prepaid
                  expenses and other assets
              
              
              (293,489
              )
              
              278,902
              
              
              276,188Other
                  non-current assets
              
              
              42,633
              
              
              12,711
              
              
              261,112Increase
                  (Decrease) in:Accounts
                  payable
              
              
              (160,566
              )
              
              97,239
              
              
              (3,185,104
              )Accounts
                  payable - related party
              
              
              199,316
              
              
              -
              
              
              -Accrued
                  expenses
              
              
              (23,190
              )
              
              214,133
              
              
              (2,788,129
              )Customer
                  credits on account
              
              
              (440,046
              )
              
              (625,110
              )
              
              (452,160
              )Current
                  income taxes
              
              
              -
              
              
              -
              
              
              1,184,342Net
                  cash (used in) provided by operating activities
              
              
              (2,118,126
              )
              
              (432,264
              )
              
              1,118,032**Cash
                  flows from investing activities**Purchase
                  of property and equipment
              
              
              (488,946
              )
              
              (163,723
              )
              
              (764,153
              )Receipt
                  of restricted cash
              
              
              268,405
              
              
              602,390
              
              
              3,488Proceeds
                  from sale of subsidiary and other assets
              
              
              29,028
              
              
              -
              
              
              -Net
                  cash (used in) provided by investing activities
              
              
              (191,513
              )
              
              438,667
              
              
              (760,665
              )**Cash
                  flows from financing activities**Borrowings
                  from factoring, net
              
              
              24,290
              
              
              (99,909
              )
              
              (34,372
              )Bank
                  overdraft
              
              
              -
              
              
              -
              
              
              (62,282
              )Payment
                  on convertible debentures
              
              
              -
              
              
              (2,000,000
              )
              
              -Proceeds
                  from related party loan
              
              
              -
              
              
              2,200,000
              
              
              240,000Payment
                  on related party loan
              
              
              (75,000
              )
              
              (300,000
              )
              
              (240,000
              )Proceeds
                  from issuance of stock
              
              
              3,125,700
              
              
              -
              
              
              -Net
                  cash provided by (used in) financing activities
              
              
              3,074,990
              
              
              (199,909
              )
              
              (96,654
              )**Change
                  in cash and cash equivalents**
              
              
              765,352
              
              
              (193,506
              )
              
              260,712**Cash
                  and cash equivalents at beginning of period**
              
              
              423,548
              
              
              617,054
              
              
              356,342**Cash
                  and cash equivalents at end of period**
              
              $
              1,188,900
              
              $
              423,548
              
              $
              617,054**Supplemental
                  Disclosures of Cash Flow Information:**Cash
                  paid for Interest
              
              $
              57,769
              
              $
              272,852
              
              $
              557,339Cash
                  paid for Taxes
              
              $
              -
              
              $
              -
              
              $
              50,000**Non-Cash
                  Financing Activities:**Related
                  party loan paid off with stock
              
              $
              -
              
              $
              200,000
              
              $
              409,500Conversion
                  of loan payable to equity
              
              $
              2,000,000
              
              $
              -
              
              $
              -Discounts
                  for warrants issued in connection with thebeneficial
                  conversion feature of the convertible debentures
              
              $
              -
              
              $
              -
              
              $
              687,638Conversion
                  of accounts payable to equity
              
              $
              500,000
              
              $
              -
              
              $
              -
  ***The
                  accompanying notes are an integral part of these financial
                  statements.***




F-5




**THE
      SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)**




**Preferred
                Stock**
            
            **Common
                Stock**
            
            **Additional
                Paid**
            
            **Accumulated****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **in
                Capital**
            
            **Deficit**
            
            **Total****Balance
                at March 31, 2004**
            
            
            -
            
            
            -
            
            
            **8,752,318**
            
            **$**
            **87,523**
            
            **$**
            **10,052,498**
            
            **$**
            **(9,923,207**
            **)**
            **$**
            **216,814**Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,591,975
            )
            
            (3,591,975
            )Adjustment
                for 3 to 2 rev. split fraction share
            
            
            -
            
            
            -
            
            
            4,001
            
            
            40
            
            
            (40
            )
            
            -
            
            
            -Stock
                Compensation
            
            
            -
            
            
            -
            
            
            450,000
            
            
            4,500
            
            
            288,500
            
            
            -
            
            
            293,000Additional
                discount due to Convertible debenturesprice
                reset
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            687,638
            
            
            -
            
            
            687,638Stock
                issued as payment of related party loans
            
            
            -
            
            
            -
            
            
            563,274
            
            
            5,633
            
            
            403,867
            
            
            -
            
            
            409,500**Balance
                at March 31, 2005**
            
            
            -
            
            
            -
            
            
            **9,769,593**
            
            
            **97,696**
            
            
            **11,432,463**
            
            
            **(13,515,182**
            **)**
            
            **(1,985,023**
            **)**Net
                Loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,905,250
            )
            
            (1,905,250
            )Conversion
                of Insider Loan
            
            
            -
            
            
            -
            
            
            290,689
            
            
            2,907
            
            
            206,260
            
            
            
            
            
            209,167Warrants
                related to debenture payment settlement
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            6,000
            
            
            -
            
            
            6,000Employee
                compensation - stock option
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            13,308
            
            
            -
            
            
            13,308**Balance
                at March 31, 2006**
            
            
            -
            
            
            -
            
            
            **10,060,282**
            
            
            **100,603**
            
            
            **11,658,031**
            
            
            **(15,420,432**
            **)**
            
            **(3,661,798**
            **)**Net
                Income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            738,588
            
            
            738,588Employee
                compensation-stock option
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            182,369
            
            
            -
            
            
            182,369Exercise
                of employee stock options
            
            
            -
            
            
            -
            
            
            285,000
            
            
            2,850
            
            
            122,350
            
            
            -
            
            
            125,200Director
                Fees
            
            
            -
            
            
            -
            
            
            39,065
            
            
            391
            
            
            12,110
            
            
            -
            
            
            12,501Issuances
                of common stock
            
            
            -
            
            
            -
            
            
            16,901,852
            
            
            169,018
            
            
            5,331,482
            
            
            -
            
            
            5,500,500**Balance
                at March 31, 2007**
            
            
            -
            
            
            -
            
            
            **27,286,199**
            
            $
            **272,862**
            
            $
            **17,306,342**
            
            $
            **(14,681,844**
            **)**
            $
            **2,897,360**




F-6




**THE
      SINGING MACHINE COMPANY, INC AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      1 - SUMMARY OF ACCOUNTING POLICIES**





**OVERVIEW**





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





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





**THE
      MANAGEMENT OF THE COMPANY BELIEVES THAT THE FOLLOWING ACCOUNTING POLICIES
      REQUIRE A HIGH DEGREE OF JUDGMENT OR COMPLEXITY** **:**





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





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





**INCOME
      TAXES** Significant management judgment is required in developing The Singing Machine's
      provision for income taxes, including the determination of foreign tax
      liabilities, deferred tax assets and liabilities and any valuation allowances
      that might be required against the deferred tax assets. Management evaluates
      its
      ability to realize its deferred tax assets on a quarterly basis and adjusts
      its
      valuation allowance when it believes that it is more likely that the asset
      will
      not be realized.





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





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





**THE
      FOLLOWING ARE THE COMPANY'S REMAINING ACCOUNTING POLICIES:**





**PRINCIPLES
      OF CONSOLIDATION**





The
      consolidated financial statements include the accounts of The Singing Machine
      Company, Inc. its wholly-owned Macau Subsidiary, SMC (Comercial Offshore De
      Macau) Limitada (“Macau Subsidiary”) and The Singing Machine Holdings Ltd. (a
      B.V.I. Company) and the statement of operations of its former wholly-owned
      Hong
      Kong Subsidiary, International SMC (HK) Limited ("Hong Kong Subsidiary") through
      date of sale. All inter-company accounts and transactions have been eliminated
      in consolidation for all periods presented.





**FOREIGN
      CURRENCY TRANSLATION**





The
      functional currency of the Hong Kong and Macau Subsidiaries 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 are included in the
      consolidated statements of operations and were not material during the periods
      presented. The effect of exchange rate changes on cash at March 31, 2007, 2006,
      and 2005 were also not material.




F-7





**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, 2007 and March 31, 2006 were $1,188,900 and $423,548,
      respectively.





**CONCENTRATION
      OF CREDIT RISK**





Occasionally
      the Company maintains cash balances in foreign financial institutions. Such
      balances are not insured. The uninsured amounts at March 31, 2007, and 2006
      approximate $240,682 and $251,108 respectively.





**INVENTORY**





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





**LONG-LIVED
      ASSETS**





The
      Company reviews long-lived assets for impairment whenever circumstances and
      situations change such that there is an indication that the carrying amounts
      may
      not be recoverable. If the undiscounted future cash flows attributable to the
      related assets are less than the carrying amount, the carrying amounts are
      reduced to fair value and an impairment loss is recognized in accordance with
      SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."





**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.





**PROPERTY
      AND EQUIPMENT**





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





**REVENUE
      RECOGNITION**





Revenue
      from the sale of equipment, accessories, and musical recordings are recognized
      upon the later of (a) the time of shipment or (b) when title passes to the
      customers and all significant contractual obligations have been satisfied and
      collection of the resulting receivable is reasonably assured. Revenues from
      sales of consigned inventory are recognized upon sale of the product by the
      consignee. Net sales are comprised of gross sales net of actual and estimated
      future returns, discounts and volume rebates. The returns for the twelve months
      ended March 31, 2007 and 2006 were $2,778,236  and
      $2,403,697, respectively. These include the provision for future returns in
      the
      amount of $848,522 and $470,796, respectively. The total return represents
      13.4%
      and 7.4% of the net sales for the twelve months ended March 31, 2007 and 2006,
      respectively.





**STOCK
      BASED COMPENSATION**





The
      Company began to apply the provisions of SFAS No. 123 (revised 2004),
      Share-Based Payments ("SFAS 123 (R)"), starting on January 1, 2006. SFAS 123
      (R)
      which became effective after June 15, 2005, replaces SFAS No. 123, Accounting
      for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion
      ("APB") No. 25, Accounting for Stock Issued to Employees. SFAS 123 (R) 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 SFAS 123 (R) using the modified
      prospective application, whereby compensation cost is only recognized in the
      consolidated statements of operations beginning with the first period that
      SFAS
      123 (R) 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 SFAS 123 (R) 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 SFAS 123. The Company continues to use the
      Black-Scholes option valuation model to value stock options. As a result of
      the
      adoption of SFAS 123 (R), the Company recognized a charge of $182,369 (included
      in selling, general and administrative expenses) in the year ended March 31,
      2007 associated with the expensing of stock options. For the year ended March
      31, 2006, the stock option expense was $13,307. Employee stock option
      compensation expense in fiscal years 2007 and 2006 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.




F-8





Prior
      to
      June 15, 2005, the Company followed Accounting Principles Board Opinion ("APB")
      No. 25, Accounting for Stock Issued to Employees. Reported and pro forma net
      income (loss) and earnings (loss) per share based on APB No. 25 are as
      follows:




For
                  year endedMarch
                  31, 2006
              
              March
                  31, 2005Net
                  loss, as reported
              
              
              
              
              $
              (1,905,250
              )
              $
              (3,591,975
              )Less:
                  Total stock-based employee compensation expense determined under
                  fair
                  value based method
              
              
              
              
              
              (484,103
              )
              
              (497,902
              )Net
                  loss, pro forma
              
              
              
              
              $
              (2,389,353
              )
              $
              (4,089,877
              )Net
                  loss, per share - basic
              
              
              As
                  reported
              
              $
              (0.19
              )
              $
              (0.39
              )Pro
                  forma
              
              $
              (0.24
              )
              $
              (0.45
              )Net
                  loss, per share - diluted
              
              
              As
                  reported
              
              $
              (0.19
              )
              $
              (0.39
              )Pro
                  forma
              
              $
              (0.24
              )
              $
              (0.45
              )


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 in the detail below.
      During fiscal year 2007, the Company took into consideration guidance under
      SFAS
      123 (R) and SEC Staff Accounting Bulletin No. 107 (SAB 107) when reviewing
      and
      updating assumptions. 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. Set forth below are the assumptions used for each year
      presented.





Fiscal
      2007: expected dividend yield 0%, risk- free interest rate from 4.65% to 5.1%,
      volatility between 90.77% and 91.6% and expected term of three years.





Fiscal
      2006: expected dividend yield 0%, risk- free interest rate from 4% to 4.86%,
      volatility from 91% to 104% and expected term of three to five years.





Fiscal
      2005: expected dividend yield 0%, risk- free interest rate of 4%, volatility
      from 110% to199% and expected term of three to five years.





**ADVERTISING**





Costs
      incurred for producing and publishing advertising of the Company, are charged
      to
      operations as incurred. The Company had entered into cooperative advertising
      agreements with its major clients that specifically indicated that the client
      has to spend the cooperative advertising fund on mutually agreed events. The
      percentage of the cooperative advertising allowance ranges from approximately
      2%
      to 5% of the purchase. The clients have to advertise the Company's products
      in
      the client's catalog, local newspaper and other advertising media. The client
      must submit the proof of the performance (such as a copy of the advertising
      showing the Company’s products) to the Company to request for the allowance. The
      client does not have the ability to spend the advertising 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, 2007, 2006 and 2005 was $212,362, $168,739 and
      $597,821, 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, 2007, 2006, and 2005, these amounts totaled $104,218, $132,282, and
      $239,242, respectively.





**EARNINGS
      PER SHARE**





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





F-9





**FAIR
      VALUE OF FINANCIAL INSTRUMENTS**





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





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





**RECLASSIFICATIONS**





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




**RECENT
      ACCOUNTING PRONOUNCEMENTS**





In
      July
      2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), "Accounting for
      Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,
      Accounting for Income Taxes." FIN 48 clarifies the accounting for income taxes
      by prescribing the minimum recognition threshold a tax position is required
      to
      meet before being recognized in the financial statements. FIN 48 also provides
      guidance on de-recognition, measurement, classification, interest and penalties,
      accounting in interim periods, disclosure and transition. The interpretation
      applies to all tax positions related to income taxes subject to FASB Statement
      No. 109.





In
      September 2006, the FASB issued SFAS No. 157, Fair Value Measurement
      which defines fair value, establishes a framework for measuring fair value
      and
      expands disclosures about fair value measurement. Companies are required to
      adopt the new standard for fiscal periods beginning after November 15,
      2007. We are currently evaluating the impact of this standard on our
      Consolidated Financial Statements.




In
      February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
      Financial Assets and Financial Liabilities - including an amendment to FAS
      115.
      This statement permits companies to choose to measure many financial instruments
      and certain other items at fair value. Unrealized gains and losses on items
      for
      which the fair value option has been elected will be recognized in earnings
      at
      each subsequent reporting date. Companies are required to adopt the new standard
      for fiscal periods beginning after November 15, 2007. We are currently
      evaluating the impact of this standard on our Consolidated Financial Statements.




**NOTE
      2 - INVENTORIES**





Inventories
      are comprised of the following components:


March
                  31,
              
              March
                  31,2007
              
              2006Finished
                  Goods
              
              $
              2,334,381
              
              $
              2,637,277Inventory
                  in Transit
              
              
              144,550
              
              
              146,904Less:
                  Inventory Reserve
              
              
              (198,848
              )
              
              (1,096,123
              )Total
                  Inventories
              
              $
              2,280,083
              
              $
              1,688,058


Inventory
      consigned to customers at March 31, 2007 and March 31, 2006 was $418,598 and
      $176,750, respectively.





**NOTE
      3 - ACCOUNTS RECEIVABLE FACTORING AGREEMENT -**





On
      August
      4, 2004, the Company entered into a 3 year factoring agreement with Crestmark
      Bank, Detroit, Michigan. The agreement allows the Company, at the discretion
      of
      Crestmark, to factor its outstanding receivables, with recourse, up to a maximum
      of the lesser of $2.5 million or 70% of eligible accounts receivable. The
      Company pays 1% of gross receivables in fees with a $9,000 minimum maintenance
      fee per month. The average balance of the line will be subject to interest
      payable on a monthly basis at prime plus 2% (10.25% at March 31, 2007). The
      agreement contains a liquidated damage fee, which equals to $9,000 multiplied
      by
      the remaining months of the contract term for early termination by the Company.





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




F-10





As
      of
      March 31, 2007 and 2006, the outstanding amount due from Crestmark bank for
      factoring was $109,991 and $134,281, respectively. The amount represents excess
      of customer payments received by Crestmark Bank over advances made to the
      Company.





**NOTE
      4 - PROPERTY AND EQUIPMENT**





The
      Company applied the straight-line depreciation method for molds and tools and
      an
      accelerated method for all other assets.


A
      summary
      of property and equipment is as follows:


USEFUL
              
              MARCH
                  31,
              
              MARCH
                  31,LIFE
              
              2007
              
              2006Computer
                  and office equipment
              
              5
                  years
              
              $
              440,946
              
              $
              478,401Furniture
                  and fixtures
              
              5-7
                  years
              
              
              220,171
              
              
              402,081Leasehold
                  improvement
              
              *
              
              
              209,004
              
              
              154,125Molds
                  and tooling
              
              3
                  years
              
              
              621,508
              
              
              2,725,0801,491,629
              
              
              3,759,687Less:
                  Accumulated depreciation
              
              
              
              
              (1,045,119
              )
              
              (3,246,072
              )$
              446,510
              
              $
              513,615


*
      Shorter
      of remaining term of lease or useful life





**NOTE
      5 - RESTRICTED CASH**





The
      Company, through its former wholly-owned Hong Kong Subsidiary, maintained a
      letter of credit facility and short term loan with a major international bank.
      The Hong Kong Subsidiary was required to maintain a separate deposit account
      in
      the amount $268,405 at March 31, 2006. This amount is shown as restricted cash
      in the accompanying balance sheets. The restricted cash is not covered by the
      bank’s deposit insurance. The facility was terminated in April 2006 and the
      restricted cash was released to the Company.





**NOTE
      6 - LOANS**





**LOAN
      PAYABLE**





On
      March
      10, 2006, the Company borrowed $2 million
      from Ever Solid Ltd, a subsidiary of Starlight International Holdings LTD
      (“Starlight”), to pay off the $4 million convertible debentures. This bridge
      loan was subsequently converted into equity upon closing of the Starlight $3
      million investment on June 25, 2006 (see note 8).





**RELATED
      PARTY LOANS**





On
      or
      about July 10, 2003, an officer and two directors of our Company advanced $1
      million to our Company pursuant to written loan agreements. The officer is
      Yi
      Ping Chan and the directors were Josef A. Bauer and Howard Moore. Mr. Moore
      resigned from our Board, effective as of October 17, 2003. Additionally, Maureen
      LaRoche, a business associate of Mr. Bauer, participated in the financing.
      The
      loans are subordinated to the factoring company and accrued interest at 9.5%
      per
      annum. These loans were originally scheduled to be repaid by October 31, 2003,
      but were extended past March 31, 2006. All interest was accrued, and the unpaid
      amount totaled approximately $ 14,250 .
      A
      portion of the loans and the accrued interest in the amount of $409,500 has
      been
      converted into 563,274 shares of common stock at $0.72 per share on January
      5,
      2005. In addition, another portion of the loans in the amount of $200,000 has
      been converted into 277,778 shares of common stock on May 18, 2005. On November
      30, 2005, Maureen LaRoche was repaid $107,917 ($100,000 principle and $7,917
      interest). The balance of related party loan as of March 31, 2006 was $300,000.





On
      August
      15, 2006, the Company repaid $50,000 to a related party, Maureen LaRoche, a
      business associate of Mr. Bauer, Chairman of the Company’s Board





On
      December 4, 2006, Yi Ping Chan, former interim CEO and COO of The Singing
      Machine Company, Inc., was repaid $25,000 for a loan plus $244 of interest
      upon
      Mr. Chan’s demand. The loan was advanced to the Company in July 2003.





The
      related party loans as of March 31, 2007, which total $225,000 are due to a
      director and an individual and currently bear interest at 5.5%. The balance
      of
      the loans is due on demand and is subordinated to the loan with Crestmark Bank
      (See Note 3).




**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.




F-11





**NOTE
      8 - NET GAIN ON RETIREMENT OF CONVERTIBLE DEBENTURES**





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





On
      March
      10, 2006, the holders of the Company’s 8% convertible debentures agreed to
      accept $2,000,000 in full payment of principal and unpaid interest due them
      on
      the convertible debentures.





The
      funds
      to complete this transaction were provided by a $2 million bridge loan from
      Ever
      Solid Ltd., a subsidiary of Starlight International Holding Ltd (see note 9).
      The $2 million bridge loan was recorded as loan payable in the balance sheet
      as
      of March 31, 2006. The Company also agreed to reset the price of 457,143
      warrants issued to the debenture holders from $1.41 to $0.85. The warrants
      expired on September 7, 2006. The Company has recorded the fair value of the
      price reset in the amount of $6,000 to financing expense for the year ended
      March 31, 2006.





This
      agreed upon final payment resulted in a net gain of $2,253,725 which has been
      reflected under other income in the accompanying consolidated statement of
      operations for the fiscal year ended March 31, 2006.





**NOTE
      9- SECURITY PURCHASE AGREEMENTS**




On
      February 21, 2006, we entered into a Securities Purchase Agreement (the “koncept
      Purchase Agreement”) with koncepts International Limited (the “Purchaser”), a
      subsidiary of Starlight International (“Starlight”) pursuant to which the
      Company agreed to sell and issue 12,875,536 shares of common stock, $.01 par
      value per share (the “Common Shares”), for an aggregate purchase price of
      $3,000,000, or per share purchase price of $.233.





On
      March
      10, 2006 the Company borrowed $2 million from a subsidiary of Starlight to
      pay
      off the $4 million convertible debentures. The bridge loan was converted into
      equity upon closing of Starlight $3 million investment.





On
      June
      15, 2006, the shareholders of Starlight approved the koncept Purchase Agreement.
      The Company received the remaining $1,000,000 cash payment from the Purchaser
      on
      June 20, 2006. The Company issued 12,875,536 shares of common stock to the
      Purchaser in the quarter ending June 30, 2006.





In
      addition to the 12,875,536 shares of common stock, the Company issued warrants
      to purchase (i) 2,500,000 shares of our stock at an exercise price of $.233
      per
      share for one year from the date of issuance, (ii) 1,250,000 shares of our
      common stock at an exercise price of $.28 per share for three years from the
      date of issuance, and (iii) 1,250,000 shares of our common stock at an exercise
      price of $.35 per share for four years from the date of issuance. The Warrants
      are subject to adjustment upon the occurrence of specific events, including
      stock dividends, stock splits, combinations or reclassifications of our common
      stock or distributions of cash or other assets. Under the terms of the Warrants,
      in no event shall the Purchaser become the beneficial owner of more that 19.99%
      of the number of shares of common stock outstanding immediately after giving
      the
      effect to such issuance.





On
      August
      1, 2006, we entered into two new Securities Purchase Agreements (the “Purchase
      Agreements”) with two accredited and/or institutional investors (the
“Purchasers”) pursuant to which we agreed to sell and issue an aggregate of
      2,300,000 shares of common stock, $.01 par value per share (the “Common Shares”)
      for an aggregate purchase price of approximately $1,000,500, or a per share
      purchase price of $0.435. These agreements were closed on October 3, 2006 upon
      approval of The American Stock Exchange.





On
      January 16, 2007, we entered into another two Securities Purchase Agreements
      (the “Purchase Agreements”) with the same accredited and/or institutional
      investors (the “Purchasers”) from the agreements above pursuant to which we
      agreed to sell and issue an aggregate of 1,200,000 shares of common stock,
      $.01
      par value per share (the “Common Shares”) for an aggregate purchase price of
      approximately $1,000,000, or a per share purchase price of $0.833. These
      agreements were closed on March 26, 2007 upon approval of The American Stock
      Exchange.





On
      February 1, 2007, we entered into a Securities Purchase Agreement (the “Purchase
      Agreement”) with an
      accredited and/or institutional investor (the
“Purchaser”) pursuant to which we agreed to sell and issue an aggregate of
      526,316 shares of common stock, $.01 par value per share (the "Common Shares")
      for an aggregate purchase price of approximately $500,000, or a per share
      purchase price of $0.95. This agreement was closed on March 26, 2007 upon
      approval of The American Stock Exchange.





In
      addition, under the Purchase Agreements entered into in fiscal year 2007, we
      granted the Purchasers “piggy-back” registration rights with respect to the
      Common Shares on the next registration statement (other than on Form S-8, S-4
      or
      similar Forms) filed by us.




F-12





**NOTE
      10 - COMMITMENTS AND CONTINGENCIES**





**LEGAL
      MATTERS**





**SYBERSOUND
      RECORDS, INC. V. UAV CORPORATION; MADACY ENTERTAINMENT L.P., AUDIO STREAM,
      INC.,
      TOP TUNES, INC., SINGING MACHINE, INC., BCI ECLIPSE COMPANY, LLC, AMOS ALTER,
      DAVID ALTER, EDWARD GOETZ, DENNIS NORDEN, FRANK ROBERTSON, DOUGLAS VOGT AND
      RICHARD VOGT (UNITED STATES DISTRICT COURT FOR THE CENTRAL DISTRICT OF
      CALIFORNIA, CV05-5861 JFW); (UNITED STATES COURT OF APPEALS FOR THE NINTH
      CIRCUIT (USCA DOCKET NO. 06-55221)**





The
      federal court action filed on August 11, 2005 alleged violation of the Copyright
      Act and the Lanham Act by the defendants, and claims for unfair competition
      under California law. Sybersound was joined in the complaint by several
      publisher owners of musical compositions who alleged copyright infringement
      against all the defendants *except* The
      Singing Machine Company, Inc. On November 7, 2005, the district court ordered
      the publisher plaintiffs’ copyright claims severed from the case. The Singing
      Machine Company, Inc. is not a party to the severed cases.





In
      September 2005, the defendants, including The Singing Machine Company, Inc.,
      filed multiple motions to dismiss the original complaint. In October 2005,
      Sybersound filed a motion for summary judgment. On January 6, 2006, the court
      granted the motions of the defendants and denied the plaintiff’s motion, thereby
      dismissing the case against the defendants, including The Singing Machine
      Company, Inc., with prejudice. The plaintiff Sybersound thereafter appealed
      the
      decision to the Ninth Circuit Court of Appeals. The case is currently under
      review by the appellate court.





Despite
      the confidence of The Singing Machine Company, Inc. that the ruling in its
      favor
      at the district court level will be affirmed on appeal, it is not possible
      to
      predict such outcomes with any degree of certainty.





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.





**NON-COMPLIANCE
      NOTICE FROM AMEX**




On
      September 6, 2006, the Company received notice from The American Stock Exchange
      (the "Amex") that the Company has fallen below the continued listing standards
      of the Amex and that its listing is being continued pursuant to an
      extension.





For
      the
      fiscal years ended March 31, 2007 and March 31, 2006, the Company was not in
      compliance with Section 1003(a)(ii) of the Amex Company Guide with shareholders'
      equity of less than $4,000,000 and net losses in three of its four most recent
      fiscal years.





In
      order
      to maintain its Amex listing, the Company was required to submit a Revised
      Plan
      to the American Stock Exchange by October 2, 2006 advising the Amex of actions
      it will take, which may allow it to regain compliance with all of the Exchange's
      continued listing standards within a maximum of 18 months from July 18, 2005.
      The Revised Plan will supplement the Plan originally submitted to the American
      Stock Exchange on August 18, 2005, as required under a notice of non-compliance
      announced by The Singing Machine on July 22, 2005. The Revised Plan was
      submitted by the Company prior to the deadline of October 2, 2006. As of July
      2,
      2007 the Company is still not in compliance with Amex continuing listing
      requirement and waiting for Amex’s decision.





The
      Listings Qualifications Department will evaluate the Revised Plan, including
      any
      supplemental information provided, and make a determination as to whether the
      Company has made a reasonable demonstration in the Revised Plan of an ability
      to
      regain compliance. If the Revised Plan is accepted, the Company may be able
      to
      continue its listing during the plan period, during which time it will be
      subject to periodic review to determine whether it is making progress consistent
      with the Revised Plan. The Company may be subject to delisting proceedings
      if
      the Revised Plan is not accepted, or if the Revised Plan is accepted but the
      Company is not in compliance with all of the Exchange's continued listing
      standards within the time frame provided or does not make progress consistent
      with the Revised Plan during the plan period.





The
      Company was previously added to the list of issuers that are not in compliance
      with the Amex's continued listing standards, and the Company's trading symbol
      SMD remains subject to the extension “.BC” to denote its noncompliance. This
      indicator will remain in effect until such time as the Company has regained
      compliance with all applicable continued listing standards.




**LEASES**





The
      Company has entered into various operating lease agreements for office and
      warehouse facilities in Coconut Creek, Florida, Compton, California, and Macau.
      The leases expire at varying dates. Rent expense, offset by rental income,
      for
      fiscal 2007, 2006, and 2005 was $409,608, $632,586, and $673,148, respectively.




F-13





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





Future
      minimum lease payments under property and equipment leases with terms exceeding
      one year as of March 31, 2007 are as follows:




Property
                  Lease
              
              Equipment
                  LeaseFor
                  periodLess
                  than 1 year
              
              $
              626,408
              
              $
              9,8881
                  -
                  3 years
              
              
              30,125
              
              
              24,928$
              656,533
              
              $
              34,816




The
      Company subleases space in its California warehouse to various lessees on a
      month to month basis. This income is not included in the figures presented
      above.





**MERCHANDISE
      LICENSE AGREEMENTS**





In
      February 2003, we entered into a multi-year license agreement with Universal
      Music Entertainment to market a line of Motown Karaoke machines and music.
      This
      agreement and its subsidiary agreement signed in March 2003, allow us to be
      the
      first to use original artist recordings for our CD+G formatted karaoke music.
      Over the term of the license agreement, we are obligated to make guaranteed
      minimum royalty payments in the amount of $300,000, which has been paid in
      full
      as of March 31, 2005. The agreement expired December 31, 2006 without any
      additional minimum guarantee payments.





We
      entered into a license agreement with Nickelodeon, Inc., a division of Viacom
      International, Inc. in December 2002. Under this agreement, we licensed
      Nickelodeon branded machines and a wide assortment of music. This license
      originally expired on December 31, 2004. The company has extended the agreement
      to December 31, 2005. Over the term of the license agreement, we are obligated
      to make guaranteed minimum royalty payments in the amount of $450,000, which
      has
      been paid in full as of March 31, 2005. The agreement expired December 31,
      2006.





On
      December 20, 2005, we entered into a three-year license agreement with Hi-5
      to
      produce and distribute karaoke software, including compact discs with graphics
      (CDGs) and karaoke music downloadable via the Internet, a variety of karaoke
      hardware products, and youth-oriented cassette players, CD and DVD players,
      and
      clock radios based on the popular “Hi-5” television show. The agreement contains
      an option to extend for an additional three years.





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. The license agreement contains
      a
      minimum guarantee payment term.





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, one of the world's leading toy lines
      and girls' lifestyle brands, in North America, New Zealand, Chile and Australia.
      These consumer electronic products include boom boxes, clock radios and portable
      DVDs. The license agreement contains a minimum guarantee payment
      term.





Future
      royalty payments due as of March 31, 2007 include the following:




Royalty
                  PaymentsFor
                  periodLess
                  than 1 year
              
              $
              242,5001
                  -
                  3 years
              
              
              227,500$
              470,000
  **EMPLOYMENT
      AND SEPERATION AGREEMENTS**





The
      Company has an employment contract with one key officer as of March 31, 2007.
      The employment agreement was entered into on July 20, 2006, with Danny Zheng,
      Chief Financial Officer of the Company. Mr. Zheng became the Interim Chief
      Executive Officer on January 1, 2007. Based on the agreement, Mr. Zheng’s base
      salary is $160,000 per year. The agreement also includes a monthly car allowance
      of $500 per month and a bonus, which is at the sole discretion of the Company’s
      Board of Directors. The agreement expires on July 17, 2008. In the event of
      a
      termination without cause, as defined in the agreement, the employee would
      be
      entitled to his base salary earned up to the effective date of
      termination.





F-14




In
      addition, the company entered into an employee agreement with Alicia Haskamp,
      Senior Vice President of Sales and Product Development on October 4, 2006.
      Based
      on the agreement, the base salary is $160,000 per year. The agreement also
      includes a monthly car allowance of $500 per month and a bonus, which is based
      on hardware net sales revenue. The agreement expires on October 31, 2008. In
      the
      event of a termination without cause, as defined in the agreement, the employee
      would be entitled to their base salary earned up to the effective date of
      termination.





On
      December 6, 2006, the Company entered into a separation and release agreement
      with Yi Ping Chan, former interim chief executive officer and chief operating
      officer of the Company. Per the agreement, Mr. Chan is entitled to a severance
      payment equal to $72,916, in addition to a relocation expense of $40,000. These
      amounts are included in the general and administrative expenses for the twelve
      months ended March 31, 2007.




**NOTE
      11 - STOCKHOLDERS' EQUITY (DEFICIT)**





**COMMON
      STOCK ISSUANCES**





During
      the fiscal year ended March 31, 2007 and 2006, the Company issued 17,225,917
      and
      290,689 shares of its common stock, respectively.





Included
      in these shares issued during the fiscal year ended March 31, 2007, the Company
      issued 285,000 shares of common stock to various employees, as well as
      directors, at prices ranging from $.32 per share to $.60 per share according
      to
      employee stock option agreements.





On
      March
      26, 2007 the Company issued 526,316 shares of common stock to Arts Electronics,
      LTD for $500,000 ($.95 per share).





On
      March
      26, 2007, the Company issued 720,000 shares of common stock to Gentle Boss
      Investments LTD to for $600,000 ($.833 per share).





On
      March
      26, 2007, the Company issued 480,000 shares of common stock to Timemate
      Industries Limited for $400,000 ($.833 per share).





On
      October 3, 2006, the Company issued 1,380,000 shares of common stock to Gentle
      Boss Investments LTD. for $600,300 ($.435 per share).





On
      October 3, 2006, the Company issued 920,000 shares of common stock to Timemate
      Industries Limited for $400,200 ($.435 per share).





On
      September 27, 2006, the Company issued 39,065 shares of common stock to members
      of the Board of Directors for services provided to the Company for fiscal year
      2006, valued at $12,501, which is included in the selling, general, and
      administrative expenses for the nine months ended December 31,
      2006.





On
      June
      25, 2006, the Company issued 12,875,536 shares of common stock to koncept
      International Limited, a subsidiary of Starlight for a $3 million investment
      ($.233 per share) (See Note 9).





On
      November 1, 2005, the Company issued 12,911 shares of common stock to members
      of
      the Board of Directors for services provided to the Company for fiscal year
      2005, valued at $9,167.





On
      May 1,
      2005, the Company has authorized the issuance of 277,778 shares of common stock
      for the conversion of a $200,000 related party loan.




**EARNINGS
      PER SHARE**





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




F-15




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




FISCAL
                  YEARS ENDED MARCH 312007
              
              2006
              
              2005Net
                  earnings (loss)
              
              $
              738,588
              
              $
              (1,905,250
              )
              $
              (3,576,706
              )Earnings
                  (loss) available to common shareholders
              
              $
              738,588
              
              $
              (1,905,250
              )
              $
              (3,576,706
              )Weighted
                  average shares outstanding - basic
              
              
              21,145,003
              
              
              10,029,085
              
              
              9,112,278Earnings
                  (loss) per share - basic
              
              $
              0.03
              
              $
              (0.19
              )
              $
              (0.39
              )Effect
                  of dilutive securities:Stock
                  options/Warrants
              
              
              3,608,861
              
              
              -
              
              
              -Weighted
                  average shares outstanding - diluted
              
              
              24,753,864
              
              
              10,029,085
              
              
              9,112,278Earnings
                  (loss) per share - diluted
              
              $
              0.03
              
              $
              (0.19
              )
              $
              (0.39
              )


For
      fiscal 2007, 2006, and 2005, 1,973,446, 1,133,201 and 4,674,338 common stock
      equivalents were not included in the computation of diluted earnings per share
      as their effect would have been antidilutive for fiscal years ended March 31,
      2007, 2006, and 2005.





**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, 2007, 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, 2007, the Company
      had
      granted 1,654,840 options under the Year 2001 Plan, leaving 295,160 options
      available to be granted. As of March 31, 2007, the Company had 13,050 options
      outstanding under its 1994 Plan.





The
      exercise price of employee common stock option issuances in 2007, 2006, and
      2005
      was equal to the fair market value on the date of grant. Accordingly, no
      compensation cost has been recognized for options issued under the Plan in
      these
      years prior to June 15, 2006. The Company adopted SFAS 123(R) for the reporting
      period ending after June 15, 2005 and recognized the fair value of the stock
      option as part of the selling, general and administration expense. A summary
      of
      the options issued as of the presented period and changes during the years
      are
      presented below.





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


**Fiscal
                  2007**
              
              **Fiscal
                  2006**
              
              **Fiscal
                  2005****Number
                  of Options**
              
              **Weighted
                  Average Exercise Price**
              
              **Number
                  of Options**
              
              **Weighted
                  Average Exercise Price**
              
              **Number
                  of Options**
              
              **Weighted
                  Average Exercise Price****Stock
                  Options:****Balance
                  at beginning of period**
              
              
              1,300,110
              
              $
              1.74
              
              
              1,041,610
              
              $
              3.67
              
              
              1,027,530
              
              $
              3.95**Granted**
              
              
              943,000
              
              $
              0.39
              
              
              841,000
              
              $
              0.50
              
              
              261,890
              
              $
              0.85**Exercised**
              
              
              (285,000
              )
              $
              0.44
              
              
              -
              
              $
              0.00
              
              
              -
              
              $
              0.00**Forfeited**
              
              
              (575,220
              )
              $
              1.34
              
              
              (582,500
              )
              $
              3.48
              
              
              (247,810
              )
              $
              1.76**Balance
                  at end of period**
              
              
              1,382,890
              
              $
              1.26
              
              
              1,300,110
              
              $
              1.74
              
              
              1,041,610
              
              $
              3.67**Options
                  exercisable at end of period**
              
              
              582,307
              
              $
              2.14
              
              
              392,161
              
              $
              3.52
              
              
              775,831
              
              $
              3.58


F-16


The
      following table summarizes information about employee stock options outstanding
      at March 31, 2007:


Range
                    of Exercise Price
                
                Number
                    Outstanding at March 31, 2007
                
                Weighted
                    Average Remaining Contractural Life
                
                Weighted
                    Average Exercise Price
                
                Number
                    Exercisable at March 31, 2007
                
                Weighted
                    Average Exercise Price$0.32-$0.77
                
                
                1,136,000
                
                
                6.14
                
                $
                0.50
                
                
                365,667
                
                
                0.55$1.05-$1.97
                
                
                120,840
                
                
                7.02
                
                $
                1.53
                
                
                101,190
                
                
                1.50$2.04-$5.60
                
                
                43,050
                
                
                5.18
                
                $
                4.52
                
                
                43,050
                
                
                4.52$7.20-$11.09
                
                
                83,000
                
                
                5.67
                
                $
                9.54
                
                
                72,400
                
                
                9.671,382,890
                
                
                
                
                
                
                
                
                582,307


**STOCK
      WARRANTS**





In
      September 2003, 457,143 warrants were issued to investors in connection with
      the
      $4 million debenture offering and 103,896 warrants were issued to the respective
      investment banker. The estimated fair value of the warrants issued to the
      investors in the amount of $1,180,901 was recorded as a discount on the
      debentures and the estimated fair value of the warrants issued to the investment
      banker in the amount of $268,386 has been record as deferred expense. Both
      amounts were being amortized over the term of the debentures. In February 2004,
      the Company issued an additional 30,001 warrants to the investors in connection
      with a settlement agreement. The estimated fair value of these warrants totaled
      $30,981, which was expensed as component of selling, general and administrative
      expenses. The weighted average fair value of warrants issued during fiscal
      2005
      was $2.67. As of March 31, 2007, these warrants were expired.





As
      of
      March 31, 2007, the Company had a total of 5,000,000 stock purchase warrants
      outstanding. These warrants were issued to koncept International Limited related
      to the Securities Purchase Agreement dated February 21, 2006 (see note 9).
      The
      exercise price of these warrants range from $0.233 to $0.35. The expiration
      date
      of these warrants range from July 25, 2007 to July 25, 2010. On April 16, 2007,
      2,500,000 warrants at $0.233 were exercised and the Company received a total
      of
      $582,500.





**NOTE
      12 - INCOME TAXES**





The
      Company files separate tax returns for the parent in the United States and
      for
      the Macau Subsidiary. 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, 2007,
      2006 and 2005, the Company 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.





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, 2007, March 31,
      2006,
      and March 31, 2005, The Singing Machine had net deferred tax assets of
      approximately $2.7 million, $6.4 million, and $10.4 million, respectively,
      against which the Company recorded valuation allowances totaling approximately
      $ 2.7 million,
      $6.4 million, and $10.4 million, respectively.





The
      Company's former wholly-owned subsidiary, International SMC (HK) Limited
      (“ISMC”) had applied for an exemption of income tax in Hong Kong. Therefore, no
      taxes had been expensed or provided for at ISMC. Although no decision has been
      reached by the governing body, the parent company reached the decision to
      provide for the possibility that the exemption could be denied and accordingly
      had recorded a provision of $2,453,576 in the consolidated financial statements
      for Hong Kong taxes in fiscal 2003, 2002 and 2001.





As
      a
      result of restructuring its operations in China, the Company established a
      wholly owned Macau subsidiary to conduct its operations in China. In August
      2006, the Company engaged Starlight International, the parent of the Company’s
      majority shareholder, to provide engineering and shipping services. In September
      2006, the Company sold its wholly owned Hong Kong subsidiary, ISMC to See Bright
      Investments Limited.




As
      a
      consequence of the ISMC divestiture, and based on the opinion of the Hong Kong
      tax counsel, as well as “hold harmless” representations from the present
      shareholders of ISMC, the Company has reversed the previously recorded provision
      of Hong Kong tax of approximately $2,453,000 in the quarter ended December
      31,
      2006. Such reversal has been presented in the income tax section of the
      accompanying statements of operations.




F-17





The
      income tax expense (benefit) for federal, foreign, and state income taxes in
      the
      consolidated statement of operations consisted of the following components
      for
      2007, 2006, and 2005:




2007
              
              2006
              
              2005Current:U.S.
                  Federal
              
              $
              (781,917
              )
              $
              550,839
              
              $
              -Foreign
              
              
              (2,453,576
              )
              
              (129,090
              )
              
              -State
              
              
              (69,080
              )
              
              74,870
              
              
              -Deferred
              
              
              850,997
              
              
              (496,619
              )
              
              -$
              (2,453,576
              )
              $
              -
              
              $
              -


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





2007
              
              2006
              
              2005United
                  States
              
              $
              (2,316,348
              )
              $
              (1,167,591
              )
              $
              (2,943,847
              )Foreign
              
              
              601,360
              
              
              (737,659
              )
              
              (648,128
              )$
              (1,714,988
              )
              $
              (1,905,250
              )
              $
              (3,591,975
              )
  The
        actual tax expense differs from the "expected" tax expense for the years
        ended
        March 31, 2007, 2006, and 2005 (computed by applying the U.S. Federal Corporate
        tax rate of 34 percent to income before taxes) as follows:





2007
              
              2006
              
              2005Expected
                  tax (benefit) expense
              
              $
              (583,096
              )
              $
              (647,785
              )
              $
              (1,221,272
              )State
                  income taxes, net of Federal income tax benefit
              
              
              (69,080
              )
              
              (110,506
              )
              
              (195,293
              )Permanent
                  differences
              
              
              5,640
              
              
              5,550
              
              
              5,561Deemed
                  Dividend
              
              
              -
              
              
              1,224,000
              
              
              -Change
                  in valuation allowance
              
              
              (3,702,790
              )
              
              (4,019,030
              )
              
              1,370,786Tax
                  rate differential on foreign earnings
              
              
              (204,462
              )
              
              121,714
              
              
              106,941Reversal
                  of provision for foreign income taxes
              
              
              (2,453,576
              )
              
              -
              
              
              -Other
              
              
              4,553,788
              
              
              3,426,057
              
              
              (66,723
              )Actual
                  tax (benefit) expense
              
              $
              (2,453,576
              )
              $
              -
              
              $
              -
  F-18


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




2007
              
              2006
              
              2005Deferred
                  tax assets:Federal
                  net operating loss carryforward
              
              $
              2,034,910
              
              $
              2,325,138
              
              $
              5,874,969State
                  net operating loss carryforward
              
              
              291,285
              
              
              466,092
              
              
              697,710Hong
                  Kong net operating loss carryforward
              
              
              -
              
              
              340,916
              
              
              211,826AMT
                  credit carryforward
              
              
              70,090
              
              
              70,090
              
              
              70,090Inventory
                  differences
              
              
              66,942
              
              
              505,452
              
              
              600,628Hong
                  Kong foreign tax credit
              
              
              -
              
              
              2,453,576
              
              
              2,447,746Allowance
                  for doubtful accounts
              
              
              21,021
              
              
              35,229
              
              
              40,054Reserve
                  for sales returns
              
              
              72,664
              
              
              63,336
              
              
              336,188Charitable
                  contributions
              
              
              60,700
              
              
              60,573
              
              
              59,364Amortization
                  of reorganization intangible
              
              
              53,652
              
              
              53,652
              
              
              68,981Total
                  deferred tax assets
              
              
              2,671,264
              
              
              6,374,054
              
              
              10,407,556Deferred
                  tax liability:Depreciation
              
              
              -
              
              
              -
              
              
              (14,473
              )Total
                  deferred tax liability
              
              
              -
              
              
              -
              
              
              (14,473
              )Net
                  deferred tax assets before valuation allowance
              
              
              2,671,264
              
              
              6,374,054
              
              
              10,393,083Valuation
                  allowance
              
              
              (2,671,264
              )
              
              (6,374,054
              )
              
              (10,393,083
              )Net
                  deferred tax assets
              
              $
              -
              
              $
              -
              
              $
              -


At
      March
      31, 2007, the Company has federal tax net operating loss carry forwards in
      the
      amount of approximately $5.9 million, which expire beginning in the year 2023.
      In addition, state tax net operating loss carry forwards in the amount of
      approximately $6.6 million expire beginning in 2013.





**NOTE
      13 - 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 ENDED**March
                  31,2007
              
              2006
              
              2005North
                  America
              
              $
              20,552,962
              
              $
              22,458,950
              
              $
              28,227,140Europe
              
              
              5,793,062
              
              
              9,655,939
              
              
              9,531,632Others
              
              
              386,120
              
              
              190,671
              
              
              451,053$
              26,732,144
              
              $
              32,305,560
              
              $
              38,209,825
 The
          geographic area of sales is based primarily on the location where the product
          is
          delivered.




**NOTE
      14 - 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, 2007,
      2006, and 2005 totaled $39,460, $39,571 and $30,027, 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.




F-19





**NOTE
      15 - CONCENTRATIONS OF CREDIT RISK, CUSTOMERS, SUPPLIERS, AND FINANCING**





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, 2007, 29% of accounts receivable were
      due
      from three customers: all from the domestic sales. Accounts receivable from
      customers that individually owed over 10% of total accounts receivable was
      11%
      at March 31, 2007. Accounts receivable from customers that individually owed
      over 10% of total accounts receivable was 31% at March 31, 2006. The Company
      performs ongoing credit evaluations of its customers and generally does not
      require collateral.





Revenues
      derived from five customers in 2007, 2006, and 2005 were 58%, 56% and 40% of
      total revenues, respectively. Revenues derived from top three customers in
      2007,
      2006 and 2005 as percentage of the total revenue were 24%, 16% and 10%; 13%,
      12%
      and 11%; and 9%, 8% and 9%, 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 $16.2 million
      in
      2007, $21.9 million in 2006 and $26.9 million in 2005.





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 2007, 2006, and 2005, manufacturers in the People's Republic of
      China ("China") accounted for approximately 98%, 98% and 96%; respectively
      of
      the Company's total product purchases, including all of the Company's hardware
      purchases.





The
      Company is primary relying on one factoring company in the United State to
      finance its accounts receivable. The loss of the factoring facility might have
      an adverse effect on its business.





**NOTE
      16 - 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 2007,
      2006, and 2005 are set forth in the following table:




F-20




**Basic**
              
              **Diluted****Earnings**
              
              **Earnings****Net
                    Earnings**
              
              **(Loss)**
              
              **(Loss)****Sales**
              
              **Gross
                  Profit**
              
              **(Loss)**
              
              **Per
                  Share**
              
              **Per
                  Share**(In
                  thousands)
              
              (In
                  thousands)
              
              (In
                  thousands)**2007**First
                  quarter
              
              $
              1,036
              
              $
              126
              
              $
              (1,151
              )
              $
              (0.11
              )
              $
              (0.11
              )Second
                  quarter
              
              
              14,299
              
              
              3,046
              
              
              806
              
              
              0.04
              
              
              0.03Third
                  quarter
              
              
              11,018
              
              
              3,289
              
              
              2,824
              
              
              0.11
              
              
              0.10Fourth
                  quarter
              
              
              379
              
              
              (345
              )
              
              (1,740
              )
              
              (0.08
              )
              
              (0.08
              )Fiscal
                  Year 2007
              
              $
              26,732
              
              $
              6,116
              
              $
              739
              
              $
              0.03
              
              $
              0.03**2006**First
                  quarter
              
              $
              2,792
              
              $
              437
              
              $
              (1,902
              )
              $
              (0.19
              )
              $
              (0.19
              )Second
                  quarter
              
              
              18,532
              
              
              3,823
              
              
              926
              
              
              0.09
              
              
              0.09Third
                  quarter
              
              
              9,877
              
              
              2,580
              
              
              (565
              )
              
              (0.06
              )
              
              (0.06
              )Fourth
                  quarter
              
              
              1,104
              
              
              243
              
              
              (364
              )
              
              (0.03
              )
              
              (0.03
              )Fiscal
                  Year 2006
              
              $
              32,305
              
              $
              7,083
              
              $
              (1,905
              )
              $
              (0.19
              )
              $
              (0.19
              )**2005**First
                  quarter
              
              $
              3,857
              
              $
              770
              
              $
              (1,520
              )
              $
              (0.17
              )
              $
              (0.17
              )Second
                  quarter
              
              
              18,753
              
              
              4,260
              
              
              722
              
              
              0.08
              
              
              0.06Third
                  quarter
              
              
              14,368
              
              
              4,923
              
              
              493
              
              
              0.05
              
              
              0.05Fourth
                  quarter
              
              
              1,232
              
              
              (688
              )
              
              (3,287
              )
              
              (0.35
              )
              
              (0.33
              )Fiscal
                  Year 2005
              
              $
              38,210
              
              $
              9,265
              
              $
              (3,592
              )
              $
              (0.39
              )
              $
              (0.39
              )


**NOTE
      17- GAIN FROM DISPOSAL OF ASSETS**





On
      September 30, 2006, the Company sold the Hong Kong subsidiary to a non-related
      third party and recognized a gain of $20,077. The Company also recognized a
      gain
      of $8,950 from the sale of old tools, during the quarter ended June 30, 2006.





The
      buyer
      of the Hong Kong Subsidiary, See Bright Investments Ltd, also assumed the
      approximate potential tax liability of $2.4 million. See Income Tax Note
      12.





**NOTE
      18- RELATED PARTY TRANSACTIONS**





koncept
      International Limited, a subsidiary of Starlight International Holding Ltd,
      invested $3 million in the Company. The investment was approved by the American
      Stock Exchange on July 25, 2006. Currently, koncept owns 52% of the Company’s
      outstanding common stock.





The
      Company also purchased products from Starlight Marketing Macao, a subsidiary
      of
      Starlight International Holding Ltd. The purchases from Starlight for the fiscal
      year ended March 31, 2007 were $3,232,694. In addition, the Company also
      purchased molds and tooling from Starlight in the amount of $269,700 in fiscal
      2007 and is included in Property and Equipment in the accompanying Consolidated
      Balance Sheets.





On
      August
      1, 2006, the Company entered into a service agreement with Starlight Electronics
      Co., Ltd, a subsidiary of Starlight International Holding Ltd, to provide
      shipping and engineering service to the Company at a charge of $25,000 per
      month. For the fiscal year ended March 31, 2007, this service charge was
      $200,000 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 service
      agreement with Starlight Industrial Holding LTD, to provide them with
      warehousing services at the Company’s Compton, California warehouse at a monthly
      service charge of $26,000. The amount paid to the Company was $156,000 for
      the
      fiscal year ended March 31, 2007. This amount was used to offset the Company’s
      rent expense for the warehouse and is shown in the accompanying Consolidated
      Statements of Operations as a component of general and administrative
      expenses.




F-21





The
      amount due to Starlight and its subsidiary as of March 31, 2007 was $199,316.




**NOTE
      19 - SUBSEQUENT EVENTS**




As
      of
      March 31, 2007, the Company had a total of 5,000,000 stock purchase warrants
      outstanding. These warrants were issued to koncept International Limited related
      to the Securities Purchase Agreement dated February 21, 2006. The exercise
      price
      of these warrants range from $0.233 to $0.35. The expiration date of these
      warrants range from July 25, 2007 to July 25, 2010. On April 16, 2007, 2,500,000
      warrants at $0.233 were exercised and the Company received $582,500 in proceeds.





F-22


**SUPPLEMENTAL
      DATA**


**SCHEDULE
      II**




Description
              
              **Balance
                    at Beginning of**Period
              
              **Charged
                    to Costs and**Expenses
              
              **Reduction
                    to Allowance**for Write off
              
              **Credited
                      to**Costs andExpenses
              
              **Balance
                      at**End ofPeriodYear
                  ended March 31, 2007Reserves
                  deducted from assets to which they apply:apply:Allowance
                  for doubtful accounts
              
              $
              103,615
              
              $
              40,082
              
              $
              (26,973
              )
              $
              (54,900
              )
              $
              61,824Deferred
                  tax valuation allowance
              
              $
              6,374,053
              
              $
              -
              
              $
              -
              
              $
              (3,702,789
              )
              $
              2,671,264Inventory
                  reserve
              
              $
              1,096,123
              
              $
              121,969
              
              $
              (747,505
              )
              $
              (271,739
              )
              $
              198,848Year
                  ended March 31, 2006Reserves
                  deducted from assets to which they apply:apply:Allowance
                  for doubtful accounts
              
              $
              117,805
              
              $
              561,271
              
              $
              (575,460
              )
              $
              -
              
              $
              103,615Deferred
                  tax valuation allowance
              
              $
              10,393,084
              
              $
              -
              
              $
              -
              
              $
              (4,019,031
              )
              $
              6,374,053Inventory
                  reserve
              
              $
              1,668,430
              
              $
              83,099
              
              $
              (516,742
              )
              $
              (138,664
              )
              $
              1,096,123Year
                  ended March 31, 2005Reserves
                  deducted from assets to which they apply:apply:Allowance
                  for doubtful accounts
              
              $
              98,009
              
              $
              42,101
              
              $
              (7,954
              )
              $
              (14,351
              )
              $
              117,805Deferred
                  tax valuation allowance
              
              $
              8,160,924
              
              $
              2,232,160
              
              $
              -
              
              $
              -
              
              $
              10,393,084Inventory
                  reserve
              
              $
              7,161,875
              
              $
              273,611
              
              $
              (191,942
              )
              $
              (5,575,115
              )
              $
              1,668,430






F-23