UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-K/A

                                  AMENDMENT TO

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

                    For the fiscal year ended MARCH 31, 2004

                                    0 - 24968
                             Commission File Number

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

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

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

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

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

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

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

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

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

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

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

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

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

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      NONE


<PAGE>


                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY

                      INDEX TO ANNUAL REPORT ON FORM 10-KSB

                    FOR THE FISCAL YEAR ENDED MARCH 31, 2004

<TABLE>
<CAPTION>

                                                                                                    PAGE
                                                                                                   -----
<S>                                                                                                <C>
                                     PART I                                                          1
  Item 1.  Business                                                                                  7
  Item 2.  Properties                                                                                7
  Item 3.  Legal Proceedings                                                                         8
  Item 4.  Submission of Matters to a Vote of Security Holders

                                     PART II

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

                                    PART III

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

                                     PART IV

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


                 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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

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


<PAGE>


                                     PART I

ITEM 1.    BUSINESS

OVERVIEW

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

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

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

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

RECENT DEVELOPMENTS

      We had a challenging  year in the twelve month period ended March 31, 2004
("fiscal 2004"). During fiscal 2004, we reported a net loss of $22.7 million, or
$2.65 per diluted share,  on sales of $70.5 million which compares to net income
of $1.2  million in fiscal  2003 or $.14 per  diluted  share,  on sales of $95.6
million.  Sales  decreased  primarily from  increased  competition in the United
States and in international markets.

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

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


                                       1
<PAGE>


PRODUCT LINES

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

MARKETING, SALES AND DISTRIBUTION

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

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

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

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

LICENSE AGREEMENTS

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

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

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

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


                                       2
<PAGE>


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

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

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

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

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

DISTRIBUTORSHIP AGREEMENTS

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

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

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

SALES

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

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


                                       3
<PAGE>


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

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

RETURNS

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

DISTRIBUTION

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

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

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

MANUFACTURING AND PRODUCTION

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


                                       4
<PAGE>


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

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

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

COMPETITION

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

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

TRADEMARKS

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

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

COPYRIGHTS AND LICENSES

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


                                       5
<PAGE>


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

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

GOVERNMENT REGULATION

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

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

SEASONALITY AND SEASONAL FINANCING

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

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


                                       6
<PAGE>


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

BACKLOG

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

EMPLOYEES

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

ITEM 2.    PROPERTIES

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

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

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

ITEM 3.    LEGAL PROCEEDINGS

CLASS ACTION AND DERIVATIVE LAWSUIT

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

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


                                       7
<PAGE>


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

BANKRUPTCY FILING IN FISCAL YEAR 1997

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

OTHER MATTERS

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

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

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

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

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

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

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

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

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



                                       8
<PAGE>


                                     PART II

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

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

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

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

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

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

COMMON STOCK

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

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

SALES OF UNREGISTERED SECURITIES

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


                                       9
<PAGE>


ITEM 6.    SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

                                         2004            2003            2002*          2001*         2000
                                     ------------    ------------    ------------   ------------   -----------
<S>                                  <C>             <C>             <C>            <C>            <C>
STATEMENT OF OPERATIONS:
Net Sales                            $ 70,541,128    $ 95,613,766    $ 62,475,753    $ 34,875,351   $ 19,032,320
Earnings(loss) before income taxes   $(21,924,919)   $  1,416,584    $  8,184,559    $  4,188,021   $    577,686
Income tax expense (benefit)         $    758,505    $    198,772    $  1,895,494    $    494,744   $    160,299
Net earnings (loss)                  $(22,683,424)   $  1,217,813    $  6,289,065    $  3,696,277   $    737,985
BALANCE SHEET:
Working capital                      $ (1,382,939)   $ 15,281,023    $ 14,577,935    $  6,956,879   $  2,985,120
Current ratio                                0.90            1.72            3.82            4.37           7.77
Property, plant and equipment, net   $    983,980    $  1,096,424    $    574,657    $    263,791   $     99,814
Total assets                         $ 15,417,395    $ 38,935,294    $ 21,403,196    $ 10,509,682   $  4,346,901
Shareholders' equity                 $    216,814    $ 17,685,364    $ 16,225,433    $  8,450,237   $  3,906,286
PER SHARE DATA:
Earnings (loss) per common share
- basic                              $      (2.65)   $       0.15    $       0.88    $       0.59   $       0.23
Earnings (loss) per common share
- diluted                            $      (2.65)   $       0.14    $       0.79    $       0.50   $       0.19
Cash dividends paid                          0.00            0.00            0.00            0.00           0.00
</TABLE>

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

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

OVERVIEW

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

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

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


                                       10
<PAGE>


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

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

RESULTS OF OPERATIONS

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

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

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

RESTATEMENT OF FINANCIAL STATEMENTS

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

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

                                       11
<PAGE>


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

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

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

      NET SALES

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

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

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

      GROSS PROFIT

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

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

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

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

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


                                       12
<PAGE>


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

      OPERATING EXPENSES

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

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

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

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

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

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

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

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

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

      DEPRECIATION AND AMORTIZATION

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

      NET OTHER EXPENSES

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

      INCOME BEFORE TAXES

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


                                       13
<PAGE>


      INCOME TAX EXPENSE

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

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

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

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

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

      NET LOSS/NET INCOME

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

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

      NET SALES

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

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

      GROSS PROFIT

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


                                       14
<PAGE>


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

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

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

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

      OPERATING EXPENSES

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

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

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

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

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

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

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

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

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

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


                                       15
<PAGE>


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

      DEPRECIATION AND AMORTIZATION

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

      OTHER EXPENSES

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

      INCOME TAX EXPENSE

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

      NET INCOME

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

LIQUIDITY AND CAPITAL RESOURCES

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

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


                                       16
<PAGE>


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

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

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

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

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

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

<TABLE>
<CAPTION>

                                                                  YEARS ENDING MARCH 31,
                                    ---------------------------------------------------------------------------
                                      TOTAL         2005         2006         2007         2008         2009
                                    ----------   ----------   ----------   ----------   ----------   ----------
<S>                                 <C>          <C>          <C>          <C>          <C>          <C>
Merchandise License Guarantee       $  525,000   $  375,000   $  150,000           --           --           --
Property Leases                     $2,657,506   $  838,792   $  579,851   $  495,545   $  371,659   $  371,659
Equipment Leases                    $  120,263   $   71,746   $   19,502   $    7,969   $   13,044   $    8,002
Subordinated Debt-related parties   $1,000,000           --   $1,000,000           --           --           --
Convertible Debentures              $4,000,000           --   $4,000,000           --           --           --
</TABLE>

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

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

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


                                       17
<PAGE>


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

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

      WORKING CAPITAL REQUIREMENTS DURING THE SHORT AND LONG TERM

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

      (i)   Collection of accounts receivable;

      (ii)  Sales of existing inventory;

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

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

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

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

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


                                       18
<PAGE>


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

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

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

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

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

EXCHANGE RATES

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

SEASONAL AND QUARTERLY RESULTS

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

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


                                       19
<PAGE>


INFLATION

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

CRITICAL ACCOUNTING POLICIES

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

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

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

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

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

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

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


                                       20
<PAGE>


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

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

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

FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK

      RISKS ASSOCIATED WITH OUR BUSINESS

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

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

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

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

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

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

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

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


                                       21
<PAGE>


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

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

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

      o     accounting for consigned inventory and inventory costing.

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

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

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

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

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

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

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


                                       22
<PAGE>


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

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

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

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

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

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

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

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

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

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


                                       23
<PAGE>


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

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

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

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

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

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

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

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

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

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


                                       24
<PAGE>


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

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

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

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

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

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

      o     transition our products to new manufacturing process technologies;

      o     identify emerging technological trends in our target markets;

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

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

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

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

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

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

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

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


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<PAGE>


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

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

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

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

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

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

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

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

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


                                       26
<PAGE>


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

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

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

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

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

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

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

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

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

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

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

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


                                       27
<PAGE>


      RISKS ASSOCIATED WITH OUR CAPITAL STRUCTURE

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

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

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

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

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

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

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

      Additionally, we cannot:

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

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

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


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<PAGE>


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

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

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

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

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

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

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

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

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


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<PAGE>


ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

INTEREST RATE RISK

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

FOREIGN CURRENCY RISK

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

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

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

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

CHANGE OF ACCOUNTANTS IN MARCH 2003

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

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

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

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

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


                                       30
<PAGE>


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

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

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

RESTATEMENT

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

ITEM 9A.   CONTROLS AND PROCEDURES

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

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

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

      o     accounting for consigned inventory and inventory costing.

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


                                       31
<PAGE>


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

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

      2.    Retention of additional personnel in finance positions;

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

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

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


                                       32
<PAGE>


                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

<TABLE>
<CAPTION>

NAME                AGE    POSITION
------------------  -----  ---------------------------------------------------------
<S>                 <C>    <C>
Yi Ping Chan        40     Interim CEO, Chief Operating Officer, Director, Secretary
April J. Green*     40     Chief Financial Officer
John Dahl*          30     Executive Vice President of Finance
Josef A. Bauer      65     Chairman
Harvey Judkowitz    58     Director
Bernard Appel       72     Director
Richard Ekstract*   72     Director
</TABLE>

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

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

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

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

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

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


                                       33
<PAGE>


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

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

NEW CHIEF FINANCIAL OFFICER

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

BOARD COMMITTEES

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

CODE OF ETHICS

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


                                       34
<PAGE>


DIRECTOR'S COMPENSATION

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

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

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

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

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

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

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


                                       35
<PAGE>


ITEM 11.   EXECUTIVE COMPENSATION

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

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>

                                          ANNUAL COMPENSATION          LONG TERM  COMPENSATION
                                    -------------------------------   --------------------------
                                                                         OTHER       SECURITIES
NAME OF INDIVIDUAL AND                                                  ANNUAL       UNDERLYING    ALL OTHER
PRINCIPAL POSITION                   YEAR     SALARY         BONUS   COMPENSATION(1) OPTIONS/SAR COMPENSATION(2)
----------------------------------- -------  --------      --------   ------------   ----------- ------------
<S>                                 <C>      <C>           <C>       <C>             <C>         <C>
Yi Ping Chan                          2004   $247,470(4)         --   $  6,000         52,800   $ 12,180
Interim Chief Executive Officer and
Chief Operating Officer(3)

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

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

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

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

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

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

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

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

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

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

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


                                       36
<PAGE>


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

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

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

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

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

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

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

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

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

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

                          OPTION GRANTS IN FISCAL 2004

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


<TABLE>
<CAPTION>

                         SHARES        TOTAL OPTIONS                                             POTENTIAL REALIZABLE VALE AT
                       UNDERLYING       GRANTED TO                                            ASSUMED ANNUAL RATES OF STOCK PRICE
                         OPTIONS       EMPLOYEES IN    EXERCISE PRICE      EXPIRATION           APPRECIATION FOR OPTION TERM
                       GRANTED (1)    FISCAL YEAR         PER SHARE           DATE                5%                    10%
                       ------------   ---------------  ---------------   ----------------  -----------------     ------------------
<S>                    <C>            <C>              <C>               <C>               <C>                   <C>
Yi Ping Chan                52,800         3.3%        $     1.97           12/18/14       $        169,431      $         269,791
Edward Steele               10,000         .6%         $     1.97           12/18/14       $         32,089      $          51,097
April J. Green               4,380         .3%         $     1.97           12/18/14       $         14,055                $22,380
John Dahl                   50,000         3.1%        $     1.97           12/18/14       $        160,446      $         255,484
John Klecha                     --          --                 --                 --                     --                     --
Jack Dromgold               50,000         3.1%        $     7.60         Cancelled(3)                   --                     --
Robert Weinberg                 --          --                 --                 --                     --                     --
</TABLE>

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

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

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


                                       37
<PAGE>


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

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

<TABLE>
<CAPTION>
                                                                      NUMBER OF            VALUE OF UNEXERCISED
                                                                 UNEXERCISED OPTIONS      IN-THE-MONEY OPTIONS AT
                                                                 AT FISCAL YEAR END         FISCAL YEAR END (2)
                             SHARES ACQUIRED        VALUE           EXERCISABLE/               EXERCISABLE/
NAME OF INDIVIDUAL            UPON EXERCISE       REALIZED(1)       UNEXERCISABLE              UNEXERCISABLE
--------------------------   -----------------   -------------  ----------------------   --------------------------
<S>                          <C>                 <C>            <C>                      <C>
Yi Ping Chan                        --                 --            50,000/152,800                   0/0
Edward Steele                       --                 --            322,500/10,000                   0/0
April J. Green                      --                 --             30,000/19,380                   0/0
John Dahl                           --                 --               0/50,000                      0/0
John Klecha                         --                 --                  0/0                        0/0
Jack Dromgold                       --                 --                  0/0                        0/0
Robert Weinberg                     --                 --                  0/0                        0/0
</TABLE>

EMPLOYMENT AGREEMENTS

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

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

SEPARATION AND CONSULTING AGREEMENTS

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

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


                                       38
<PAGE>


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

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

EQUITY COMPENSATION PLANS AND 401(K) PLAN

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

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

<TABLE>
<CAPTION>

                                                                          WEIGHTED-AVERAGE         NUMBER OF SECURITIES
                                            NUMBER OF SECURITIES         EXERCISE PRICE OF    REMAINING AVAILABLE FOR EQUITY
                                              TO BE ISSUED UPON             OUTSTANDING             COMPENSATION PLANS
                                           EXERCISE OF OUTSTANDINGS      OPTIONS, WARRANTS       (EXCLUDING SECURITIES IN
            PLAN CATEGORY                OPTION, WARRANTS AND RIGHTS         AND RIGHTS                 COLUMN (A))
---------------------------------------  ----------------------------  --------------------   -------------------------------
<S>                                      <C>                           <C>                    <C>
Equity Compensation Plans approved by             1,027,530                    $3.95                      784,195
   Security Holders

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

1994 PLAN

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


                                       39
<PAGE>


YEAR 2001 PLAN

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

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

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

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

401(K) PLAN

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

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

EXECUTIVE COMPENSATION PHILOSOPHY

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


                                       40
<PAGE>


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

BASE SALARIES

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

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

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

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

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

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

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

INCENTIVE CASH BONUSES

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

LONG TERM COMPENSATION - STOCK OPTION GRANTS

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

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

RELATIONSHIP BETWEEN OUR COMPENSATION POLICIES AND CORPORATE PERFORMANCE

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


                                       41
<PAGE>


COMPENSATION OF CHIEF EXECUTIVE OFFICER

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

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

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

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

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

           THE EXECUTIVE COMPENSATION COMMITTEE

           Harvey Judkowitz, Chairman
           Bernard Appel
           Jay Bauer

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

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


                                       42
<PAGE>


COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN

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

                           [PERFORMANCE GRAPH OMITTED]

<TABLE>
<CAPTION>
                                          1999        2000       2001        2002        2003        2004
                                        ---------   ---------   --------   ---------   ---------   ---------
<S>                                     <C>          <C>        <C>        <C>         <C>         <C>
The Singing Machine Company, Inc.        100.00      225.00     256.00      852.80      375.47       62.40
Dow Jones Consumer Electronics Index     100.00      219.40     131.81      109.14       69.68      112.51
AMEX Market Index                        100.00      141.41     119.30      118.32      113.00      159.70
</TABLE>

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

      o     all directors of the Singing Machine,

      o     all executive officers of the Singing Machine.

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

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

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

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

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

Jeff Barocas
Chief Financial Officer                                       0           *

Joseph Bauer
Chairman                                                981,804(3)     11.15%

Bernard Appel
Director                                                      0           *

Harvey Judkowitz
Director                                                      0           *

John Klecha
Director                                                810,811(4)      9.20%

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

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

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


                                       43
<PAGE>


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

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

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

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

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

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

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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

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

ITEM 14.

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

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

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


                                       44
<PAGE>


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

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

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

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

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


                                       45
<PAGE>


                                     PART IV

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

EXHIBITS

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       46
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       47
<PAGE>


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

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

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

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

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

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

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

14.1  Code of Ethics*

21.1  List of Subsidiaries*

23.1  Consent of Grant Thornton, LLP*

23.2  Consent of Salberg & Co.*

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

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

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

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

*  Filed herewith

Reports on Form 8-K

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

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


                                       48
<PAGE>


                                   SIGNATURES

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

                                          THE SINGING MACHINE COMPANY, INC.

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


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

<TABLE>
<CAPTION>

            SIGNATURE                                      CAPACITY                      DATE
----------------------------------         ------------------------------------    -----------------
<S>                                        <C>                                     <C>

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

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

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

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

/s/ HARVEY JUDKOWITZ                       Director
----------------------------------
Harvey Judkowitz
</TABLE>



                                       49
<PAGE>


                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY

                        CONSOLIDATED FINANCIAL STATEMENTS

                                 MARCH 31, 2004

                        THE SINGING MACHINE COMPANY, INC.
                                 AND SUBSIDIARY




                                       50
<PAGE>


                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY

                          INDEX TO FINANCIAL STATEMENTS


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





                                      F-1
<PAGE>


                        REPORT OF INDEPENDENT REGISTERED
                             PUBLIC ACCOUNTING FIRM


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

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

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

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

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

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

/s/ Grant Thornton LLP

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



                                      F-2
<PAGE>


                          INDEPENDENT AUDITORS' REPORT


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

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

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

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

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

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



                                      F-3
<PAGE>


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

<TABLE>
<CAPTION>

                                                                                  MARCH 31,       MARCH 31,
                                                                                    2004            2003
                                                                                ------------    ------------
<S>                                                                             <C>             <C>
                                              ASSETS
CURRENT ASSETS
Cash and cash equivalents                                                       $    356,342    $    268,264
Restricted Cash                                                                      874,283         838,411
Accounts Receivable, less allowances of $98,000 and $406,000, respectively         3,806,166       5,762,944
Due from manufacturers                                                                95,580       1,091,871
Inventories, net                                                                   5,923,267      25,194,346
Prepaid expense and other current assets                                             783,492       1,449,505
Insurance receivable                                                                 800,000              --
Refundable tax                                                                     1,178,512              --
Deferred tax asset                                                                        --       1,925,612
                                                                                ------------    ------------
           TOTAL CURRENT ASSETS                                                   13,817,642      36,530,953

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

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

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

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


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


                                      F-4
<PAGE>


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


<TABLE>
<CAPTION>
                                                MARCH 31,       MARCH 31,       MARCH 31,
                                                  2004            2003            2002
                                              ------------    ------------    ------------
<S>                                           <C>             <C>             <C>
                                                                              (AS RESTATED)
                                                                                 (NOTE 3)

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

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

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

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

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

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


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


                                      F-5
<PAGE>


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

<TABLE>
<CAPTION>
                                                                                                FOR YEAR ENDING MARCH 31,
                                                                                --------------------------------------------
                                                                                   2004            2003            2002
                                                                                ------------    ------------    ------------
<S>                                                                             <C>            <C>              <C>
                                                                                                                (AS RESTATED)
                                                                                                                  (NOTE 3)
CASH FLOWS FROM OPERATING ACTIVITIES
      Net (loss) earnings                                                       $(22,683,424)   $  1,217,812    $  6,289,065
      Adjustments to reconcile net (loss) earnings to net cash provided by
        (used in) operating activities
      Depreciation and amortization                                                  750,359         622,298         394,456
      Impairment of tooling and Intangible                                           628,405              --              --
      Provision for inventory                                                      3,446,518       3,715,357              --
      Provision for bad debt                                                        (159,676)        393,737          45,078
      Amortization of discount/deferred fees on convertible debentures               909,891              --              --
      Stock compensation expense                                                     632,451              --         171,472
      Deferred taxes                                                               1,925,612      (1,734,194)             --
      Changes in assets and liabilities:
      Accounts Receivable                                                          2,116,454      (2,626,074)     (2,626,329)
      Due from manufacturer                                                          996,291        (603,573)        210,798
      Inventories                                                                 15,824,562     (19,635,351)     (4,460,891)
      Prepaid expenses and other assets                                              666,013      (1,020,895)       (352,373)
      Insurance receivable                                                          (800,000)             --              --
      Other non-current assets                                                     1,204,630        (426,494)        (91,631)
      Accounts payable                                                            (2,901,332)      5,706,769       1,364,158
      Accrued expenses                                                             2,038,499         153,809         199,445
      Customer credits on account                                                  1,178,482         933,002              --
      Current income taxes                                                        (2,551,811)      1,779,117       1,811,439
                                                                                ------------    ------------    ------------
           Net cash provided by (used in) operating activities                     3,221,924     (11,524,680)      2,954,687
                                                                                ------------    ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES
      Purchase of property and equipment                                          (1,266,321)     (1,144,064)       (613,691)
      Proceeds from investment in factor                                                  --              --         933,407
      Proceeds from repayment of related party loans                                      --              --         125,117
      Restricted cash                                                                (35,872)       (324,727)       (513,684)
      Investment in and advances in unconsolidated subsidiary                             --              --         298,900
                                                                                ------------    ------------    ------------
           Net cash (used in) provided by financing activities                    (1,302,193)     (1,468,791)        230,049
                                                                                ------------    ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES
      Borrowings from revolving credit facilities                                 28,863,712      47,825,725      21,856,653
      Repayments to revolving credit facilities                                  (35,646,536)    (41,042,901)    (21,856,653)
      Proceeds from issuance of convertible debentures                             4,000,000              --              --
      Bank Overdraft                                                                (254,364)        316,645              --
      Payment of fees related to convertible debt                                   (255,000)             --              --
      Proceeds from subordinated debt-related parties, net                           600,000         400,000       1,319,190
      Proceeds from exercise of stock options and warrants                           860,535         242,119              --
                                                                                ------------    ------------    ------------
           Net cash (used in) provided by financing activities                    (1,831,653)      7,741,588       1,319,190
                                                                                ------------    ------------    ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                      88,078      (5,251,883)      4,503,926
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                     268,264       5,520,147       1,016,221
                                                                                ------------    ------------    ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                      $    356,342    $    268,264    $  5,520,147
                                                                                ============    ============    ============
SUPPLEMENTAL DISCLOSURES OF CASH
   FLOW INFORMATION:
CASH PAID FOR THE YEAR ENDING MARCH 31, 2004
      Interest                                                                  $    943,018    $    406,126    $    112,123
                                                                                ============    ============    ============
      Income Taxes                                                              $  1,388,804    $    153,849    $    102,415
                                                                                ============    ============    ============
NON-CASH FINANCING ACTIVITIES
      Discounts for warrants issued in connection with and
        beneficial conversion feature of convertible debentures                 $  3,312,362    $         --    $         --
                                                                                ============    ============    ============
      Financing fees in connection with convertible debentures
        issuance, paid in stock and warrants                                    $    409,527    $         --    $         --
                                                                                ============    ============    ============
      Warrants issued in connection with convertible
        debentures amendment                                                    $     30,981    $         --    $         --
                                                                                ============    ============    ============
</TABLE>


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


                                      F-6
<PAGE>


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

<TABLE>
<CAPTION>
                            PREFERRED STOCK            COMMON STOCK                                        DEFERRED
                            ---------------   --------------------------      PAID IN        RETAINED     GUARANTEE
                            SHARES   AMOUNT      SHARES         AMOUNT        CAPITAL        EARNINGS        FEES           TOTAL
                            ------   ------   -----------      ---------    -----------     ----------   -----------     ----------
<S>                         <C>      <C>       <C>            <C>           <C>            <C>            <C>           <C>
Balance at March 31, 2001,      --       --     6,538,680         65,387      3,302,982      5,253,340      (171,472)     8,450,237
   restated

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

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

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

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


                                      F-7
<PAGE>


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

NOTE 1 - SUMMARY OF ACCOUNTING POLICIES

OVERVIEW

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

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

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

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

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

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

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

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


                                      F-8
<PAGE>


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

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

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

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

THE FOLLOWING ARE THE COMPANY'S REMAINING ACCOUNTING POLICIES.

PRINCIPLES OF CONSOLIDATION

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

STOCK SPLITS

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

FOREIGN CURRENCY TRANSLATION

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

CASH AND CASH EQUIVALENTS

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

COMPREHENSIVE EARNINGS (LOSSES)

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


                                      F-9
<PAGE>


INVENTORIES

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

The following table represents the major components of inventory:



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

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


LONG-LIVED ASSETS

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

SHIPPING AND HANDLING COSTS

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

PROPERTY AND EQUIPMENT

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

REVENUE RECOGNITION

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

DUE FROM MANUFACTURER

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


                                      F-10
<PAGE>


CUSTOMER CREDITS ON ACCOUNT

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

STOCK BASED COMPENSATION

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

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

<TABLE>
<CAPTION>

                                                                         FISCAL YEARS ENDED MARCH 31
                                                         -------------------------------------------------------
                                                               2004               2003                 2002
                                                         ---------------     ---------------     ---------------
<S>                                                      <C>                 <C>                 <C>
Net (loss) earnings, as reported                         $   (22,683,424)    $     1,217,812     $     6,289,065
Deductes: Total stock-based employee
  compensation expensed determined under
  fair value based method                                $      (723,058)    $    (1,740,624)    $      (115,489)

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

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

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


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

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


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

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

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



                                      F-11
<PAGE>


ADVERTISING

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

RESEARCH AND DEVELOPMENT COSTS

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

EARNINGS PER SHARE

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

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

<TABLE>
<CAPTION>
                                                            FISCAL YEARS ENDED MARCH 31
                                                   -------------------------------------------
                                                       2004            2003            2002
                                                   ------------    ------------   ------------
                                                                                   (Restated)
<S>                                                <C>             <C>            <C>
Net (loss) earnings                                $(22,683,424)   $  1,217,812   $  6,289,065
(Loss) earnings available to common shareholders   $(22,683,424)   $  1,217,812   $  6,289,065
Weighted average shares outstanding - basic           8,566,116       8,114,330      7,159,142
(Loss) earnings per share - basic                  $      (2.65)   $       0.15   $       0.88

Effect of dilutive securities:

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

  Convertible debentures                                     --              --             --

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


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

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

RECLASSIFICATIONS

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


                                      F-12
<PAGE>


RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

NOTE 2 - GOING CONCERN

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

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

      Operations will be financed using the following methods:

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

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

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

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

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

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


                                      F-13
<PAGE>


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

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

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

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

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

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


                                      F-14
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                 FOR QUARTERS ENDED
                                                 ---------------------------------------------------------------------------------
                                                   06/30/03      06/30/03       09/30/03      09/30/03     12/31/03      12/31/03
                                                   --------      --------       --------      --------     --------      --------
                                                  AS REPORTED   AS AMENDED    AS REPORTED    AS AMENDED   AS REPORTED   AS AMENDED
                                                  -----------   ----------    -----------    ----------   -----------   ----------
                                                  (Unaudited)  (Unaudited)    (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited)
<S>                                              <C>           <C>           <C>          <C>            <C>
Cash flows from operating activities
   Net Income                                    $ (2,317,352) $ (2,317,352) $ (2,974,021) $ (2,974,021) $(13,424,622) $(13,424,622)
      Net Cash Used in Operating Activities           (10,948)      282,757    (4,678,328)   (4,380,280)   (4,998,092)   (4,998,092)
                                                 ------------  ------------  ------------  ------------  ------------  ------------
CASH FLOWS FROM INVESTING ACTIVITIES
      Net cash used in Investing Activities          (299,186)     (322,897)     (157,178)     (186,370)     (434,065)     (462,067)
                                                 ------------  ------------  ------------  ------------  ------------  ------------
CASH FLOWS FROM FINANCING ACTIVITIES
      Net cash provided by Financing Activities       128,282      (141,712)    5,673,244     5,404,388     5,399,850     5,427,852
                                                 ------------  ------------  ------------  ------------  ------------  ------------
DECREASE IN CASH AND CASH EQUIVALENTS                (181,852)     (181,852)      837,738       837,738       (32,307)      (32,307)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD      268,265       268,265       268,265       268,265       268,265       268,265
                                                 ------------  ------------  ------------  ------------  ------------  ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD       $     86,413  $     86,413  $  1,106,003  $  1,106,003  $    235,958  $    235,958
                                                 ============  ============  ============  ============  ============  ============

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


<TABLE>
<CAPTION>
                                                                      FOR YEARS ENDED
                                                 -------------------------------------------------------
                                                   03/31/03      03/31/03       03/31/04      03/31/04
                                                   --------      --------       --------      --------
                                                  AS REPORTED   AS AMENDED    AS REPORTED    AS AMENDED
                                                  -----------   ----------    -----------    ----------
<S>                                              <C>           <C>           <C>          <C>
Cash flows from operating activities
   Net Income                                    $ 1,217,812   $  1,217,812  $(22,683,424) $(22,683,424)
      Net Cash Used in Operating Activities       (11,532,761)  (11,524,660)    3,221,924     3,221,924
                                                 ------------  ------------  ------------  ------------
CASH FLOWS FROM INVESTING ACTIVITIES
      Net cash used in Investing Activities        (1,144,064)   (1,468,791)   (1,266,321)   (1,302,193)
                                                 ------------  ------------  ------------  ------------
CASH FLOWS FROM FINANCING ACTIVITIES
      Net cash provided by Financing Activities     7,424,943     7,741,589    (1,867,525)   (1,831,853)
                                                 ------------  ------------  ------------  ------------
DECREASE IN CASH AND CASH EQUIVALENTS              (5,251,882)   (5,251,882)       88,078        88,078
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD    5,520,147     5,520,147       268,264       268,264
                                                 ------------  ------------  ------------  ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD       $    268,265  $    268,265  $    356,342  $    356,342
                                                 ============  ============  ============  ============

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


                                      F-15
<PAGE>



NOTE 4 - ACCOUNTS RECEIVABLE FACTORING AGREEMENT

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

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

NOTE 5 - PROPERTY AND EQUIPMENT

A summary of property and equipment is as follows:


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

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

Leasehold improvement                    *      103,776       110,841

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

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


* Shorter of remaining term of lease or useful life

NOTE 6 - RESTRICTED CASH

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

NOTE 7 - LOANS AND LETTERS OF CREDIT

CREDIT FACILITY

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

o Overdraft protection facilities ;

o Issuance and negotiation of letters of credit,

o Trust receipts; and

o A Company credit card .

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

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

RELATED PARTY LOANS

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


                                      F-16
<PAGE>


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

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

NOTE 8 - CONVERTIBLE DEBENTURES WITH WARRANT

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

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

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

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

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

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

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

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


                                      F-17
<PAGE>


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


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

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

NOTE 9 - COMMITMENTS AND CONTINGENCIES

LEGAL MATTERS

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

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

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

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

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


                                      F-18
<PAGE>


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

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

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

LEASES

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

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

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

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


EMPLOYMENT AGREEMENTS

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


MERCHANDISE LICENSE AGREEMENTS

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


                                      F-19
<PAGE>


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

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

NOTE 10 - STOCKHOLDERS' EQUITY

COMMON STOCK ISSUANCES

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

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


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


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

         2003                       515,651              $         242,119

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



GUARANTEE FEES

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

EARNINGS PER SHARE

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


                                      F-20
<PAGE>


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



STOCK OPTIONS

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

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

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


<TABLE>
<CAPTION>

                                                  FISCAL 2004               FISCAL 2003                FISCAL 2002
                                           ------------------------   ------------------------   ------------------------
                                                          WEIGHTED                   WEIGHTED                   WEIGHTED
                                                          AVERAGE                    AVERAGE                    AVERAGE
                                            NUMBER OF     EXERCISE    NUMBER OF      EXERCISE    NUMBER OF      EXERCISE
                                            OPTIONS        PRICE       OPTIONS        PRICE        OPTIONS       PRICE
                                           ----------    ----------   ----------    ----------   ----------    ----------
<S>                                        <C>           <C>          <C>           <C>          <C>           <C>
STOCK OPTIONS:

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

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

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

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

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


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

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



                                      F-21
<PAGE>


STOCK WARRANTS

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

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

NOTE 11 - INCOME TAX

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



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


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


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


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

<TABLE>
<CAPTION>

                                                                        2004             2003             2002
                                                                   ---------------  ---------------  ---------------
<S>                                                                <C>              <C>              <C>
                                                                                                           (AS
                                                                                                        RESTATED)

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



                                      F-22
<PAGE>



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

<TABLE>
<CAPTION>

                                              2004           2003           2002
                                           -----------    -----------    -----------
<S>                                        <C>            <C>           <C>
                                                                        (As restated)
Deferred tax assets:
Inventory differences                      $ 2,309,488    $ 1,491,021    $        --
State net operating loss carryforward          502,417        171,019         89,315
Federal net operating loss carryforward      2,425,186             --             --
Hong Kong net operating loss carryforward       98,404             --             --
Hong Kong foreign tax credit                 2,447,746             --             --
AMT credit carryforward                         70,090             --             --
Bad debt reserve                                33,323        137,958          4,087
Reserve for sales returns                      161,726        110,303         55,886
Stock based expense                             13,056             --             --
Charitable contributions                        58,037             --             --
Amortization of reorganization intangible       68,981         28,076         36,400
                                           -----------    -----------    -----------
Total Gross Deferred Assets                  8,175,397      1,938,377        198,744
Less valuation allowance                    (8,160,924)            --             --
Deferred tax liability                       1,938,377             --             --
Depreciation                                   (14,473)       (12,765)        (7,326)
                                           -----------    -----------    -----------
Net Deferred Tax Asset                     $     (0.00)   $ 1,925,612    $   191,418
                                           ===========    ===========    ===========
</TABLE>


NOTE 12 - SEGMENT INFORMATION

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


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


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


                                      F-23
<PAGE>


NOTE 13 - EMPLOYEE BENEFIT PLANS

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

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

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

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

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

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

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

NOTE 15 - QUARTERLY FINANCIAL DATA - UNAUDITED

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



                                      F-24
<PAGE>


<TABLE>
<CAPTION>

                                                                                 BASIC         DILUTED
                                                                               EARNINGS        EARNINGS
                                                             NET EARNINGS      (LOSS)           (LOSS)
                                 SALES       GROSS PROFIT       (LOSS)        PER SHARE       PER SHARE
                             -------------   -------------   -------------   ------------    ------------
<S>                          <C>             <C>             <C>             <C>             <C>
                             (In thousands)  (In thousands)  (In thousands)
2004
First quarter                        7,628           1,726          (2,317)         (0.28)          (0.28)
Second quarter                      32,852           5,420            (657)         (0.08)          (0.08)
Third quarter                       28,690          (2,601)        (10,451)         (1.20)          (1.20)
Fourth quarter                       1,371          (2,727)         (9,259)         (1.09)          (1.09)
                             -------------   -------------   -------------   ------------    ------------
Total                               70,541           1,818         -22,684          (2.65)          (2.65)
                             =============   =============   =============   ============    ============

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

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



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

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


                                      F-25
<PAGE>


                                SUPPLEMENTAL DATA

                                   SCHEDULE II

<TABLE>
<CAPTION>

                                                                                    REDUCTION TO
                                                          BALANCE AT    CHARGED TO    ALLOWANCE     CREDITED TO     BALANCE AT
                                                         BEGINNING OF   COSTS AND        FOR         COSTS AND        END OF
                     DESCRIPTION                            PERIOD       EXPENSES     WRITE OFF      EXPENSES         PERIOD
--------------------------------------------------       -----------   -----------   -----------    -----------    -----------
<S>                                                      <C>           <C>           <C>            <C>            <C>
Year ended March 31, 2004
Reserves deducted from assets to which they apply:
        Allowance for doubtful accounts                  $   405,759   $    70,788   $  (148,074)   $  (230,464)   $    98,009
        Deferred tax valuation allowance                 $        --   $ 8,160,924             $    $              $ 8,160,924
        Inventory reserve                                $ 3,715,357   $ 7,627,926             $    $(4,181,408)   $ 7,161,875

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

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

</TABLE>




                                      F-26